Derivatives

12 Months Ended

Jul. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

Derivatives

We recognize all derivatives on the balance sheet at fair value. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in the fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the change in fair value of a derivative that is designated as a hedge will be recognized immediately in earnings. As of July 31, 2020 and 2019, all of our derivatives were designated as hedges. We do not hold any derivative financial instruments for speculative or trading purposes.

Foreign Currency

Changes in the value of the Euro, British Pound, Singapore dollar, Canadian dollar, Australian dollar, Chinese Renminbi, Sri Lankan Rupee and Japanese Yen against the U.S. dollar affect our results of operations because certain cash bank accounts, accounts receivable, and liabilities of Cantel and its subsidiaries are denominated and ultimately settled in U.S. dollars or these foreign currencies, but must be converted into each entity’s functional 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 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 $81,677 at July 31, 2020, and seven foreign currency forward contracts with an aggregate notional value of $78,264 at July 31, 2019, which covered certain assets and liabilities that were denominated in currencies other than each entity’s functional currency. These foreign currency forward contracts are continually replaced with new one-month contracts as long as we have significant net assets that are denominated and ultimately settled in currencies other than each entity’s functional currency. For the fiscal years ended July 31, 2020, 2019 and 2018, such forward contracts offset the impact on operations relating to certain assets and liabilities that were denominated in currencies other than each entity’s functional currency. This resulted in an immaterial amount of net currency conversion gains, net of tax, on the hedged items for each of those fiscal years. Gains and losses related to hedging contracts to buy Euros, British Pounds, Canadian dollars, Australian dollars, Singapore dollars and Chinese Renminbi forward are immediately realized within general and administrative expenses due to the short-term nature of such contracts. We do not currently hedge against the impact of fluctuations in the value of the Sri Lankan Rupee and Japanese Yen relative to the U.S. dollar because the overall foreign currency exposures relating to these currencies are currently not deemed significant.

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.

In connection with our interest rate swap transactions, we designate our hedge relationships as cash flow hedges. At inception, we employed the hypothetical derivative method to assess hedge effectiveness. At July 31, 2020, we performed a qualitative analysis of hedge effectiveness and will perform such qualitative analysis in future reporting periods. At July 31, 2020, $5,462 was recorded in accrued expenses and $15,694 was recorded in other long-term liabilities, which represents the fair value of the interest rate swap. As of July 31, 2019, we had an asset of $486 recorded in prepaid expenses and other current assets, and an asset of $2,826 recorded in other assets, which represent the fair value of the interest rate swaps. As these interest rate swaps were accounted for as cash flow hedges, the changes in fair value were recorded in accumulated other comprehensive loss. The fair value of these interest rate swaps is subject to movements in LIBOR and will fluctuate in future periods.