Stock-Based Compensation

12 Months Ended

Jul. 31, 2020

Share-based Payment Arrangement [Abstract]

2016 Equity Incentive Plan

On January 7, 2016, we terminated the Cantel Medical Corp. 2006 Equity Incentive Plan (the “2006 Plan”) and adopted the Cantel Medical Corp. 2016 Equity Incentive Plan (the “2016 Plan”). As a result, no further options or awards will be granted under the 2006 Plan. The 2016 Plan provides for the granting of stock options, stock appreciation rights (“SARs”), restricted stock awards, restricted stock units (“RSUs”) and performance-based awards to our employees, independent contractors and consultants. It also provides the flexibility to grant equity-based awards to our non-employee directors. The 2016 Plan does not permit the granting of discounted options or discounted SARs.

The maximum number of shares as to which equity awards may be granted under the 2016 Plan is 1,200,000 shares. The 2016 Plan will terminate on the date of our annual meeting of stockholders following the close of our fiscal year ending in 2025, unless terminated earlier by the Board of Directors. Stock awards under this plan:

•will be granted at the closing market price at the time of the grant,

•will include terms which may not exceed ten years, subject to certain exceptions, and

•may be granted in the form of restricted stock and RSUs, performance awards, or dividends.

Stock awards outstanding under the 2016 Plan are subject to risk of forfeiture solely due to an employment length-of-service restriction, with such restriction lapsing as to one-third of the shares of each of the first three anniversaries of the grant date subject to being employed through such vesting date. At July 31, 2020, 411,715 unvested restricted stock shares were outstanding under the 2016 Plan. No options were outstanding under the 2016 Plan. At July 31, 2020, 516,599 shares are collectively available pursuant to restricted stock and other stock awards, stock options and SARs.

2006 Equity Incentive Plan

A total of 5,591,000 shares of common stock were granted under the 2006 Plan, of which 2,700,000 shares were authorized for issuance pursuant to stock options and SARs and 2,891,000 shares were authorized for issuance pursuant to restricted stock and other stock awards. Restricted stock awards outstanding under this plan are subject to risk of forfeiture solely due to an employment length-of-service restriction, with such restriction lapsing as to one-third of the shares on each of the first three anniversaries of the grant date subject to being employed through such vesting date. At July 31, 2020, options to purchase 15,000 shares of common stock were outstanding, and no unvested restricted stock shares were outstanding under the 2006 Plan.

The following table shows the components of stock-based compensation expense recognized in the consolidated statements of income:


	Year Ended July 31,
	2020		2019		2018
Cost of sales	$	1,255	$	1,010	$	663
Operating expenses:
Selling	2,606		2,428		1,458
General and administrative	7,803		11,828		7,292
Research and development	412		296		202
Total operating expenses	10,821		14,552		8,952
Stock-based compensation expense	$	12,076	$	15,562	$	9,615

Our stock options and time-based stock awards are subject to graded vesting in which portions of the awards vest at different times during the vesting period. We recognize compensation expense for awards subject to graded vesting using the straight-line basis over the vesting period.

In October 2016, we granted for the first time to certain employees both equity awards with performance conditions and equity awards with market conditions. The actual number of equity awards earned and eligible to vest will be determined based on the level of achievement against budgeted revenue and a defined gross profit percentage or based on the level of achievement against budgeted earnings per share, with respect to the awards with performance conditions, and our 3-year relative total stockholder return performance as measured against the S&P Healthcare Equipment Index, with respect to the awards with market conditions. The maximum share attainment of these awards are 200% of the initial granted shares. We recognize compensation expense for the awards with performance conditions using the accelerated attribution method over the requisite service period for each separately vesting portion of the award when it is probable that the performance condition will be achieved. We record expense for the awards that are subject to market conditions ratably over the vesting period regardless of whether the market condition is satisfied.

As of July 31, 2020, total unrecognized stock-based compensation expense, before income taxes, related to total nonvested stock options and restricted stock awards was $18,125 with a remaining weighted average period of 13 months over which such expense is expected to be recognized. The majority of our nonvested awards relate to restricted stock awards. We account for forfeitures as they occur, rather than estimate expected forfeitures over the vesting period.

We determine the fair value of each time-based stock award and performance-based stock award by using the closing market price of our common stock on the date of grant. We determine the fair value of each stock award with market conditions using a Monte Carlo simulation on the date of grant using the following assumptions:


	2020		2019
Volatility of common stock	30.73	%	27.54	%
Average volatility of peer companies	36.28	%	36.55	%
Average correlation coefficient of peer companies	24.63	%	27.18	%
Risk-free interest rate	1.49	%	2.93	%

A summary of nonvested stock award activity for fiscal 2020, 2019 and 2018 follows:


	Number of Time-based Shares	Number of Performance-based Shares	Number of Market-based Shares	Number of Total Shares	Weighted Average Fair Value
Nonvested stock awards at August 1, 2017	196,818	16,235	9,245	222,298	$	66.28
Granted	94,309	17,486	10,465	122,260	$	101.74
Vested⁽¹⁾	(115,943)	(5,845)	—	(121,788)	$	60.25
Forfeited	(6,864)	(1,800)	(2,000)	(10,664)	$	95.09
Nonvested stock awards at July 31, 2018	168,320	26,076	17,710	212,106	$	88.87
Granted	188,431	35,981	25,320	249,732	$	85.16
Vested⁽¹⁾	(105,516)	(13,327)	(5,265)	(124,108)	$	80.44
Forfeited	(16,371)	(8,520)	(5,686)	(30,577)	$	96.54
Nonvested stock awards at July 31, 2019	234,864	40,210	32,079	307,153	$	88.99
Granted	233,701	—	47,967	281,668	$	68.71
Vested⁽¹⁾	(121,852)	(8,954)	(3,462)	(134,268)	$	87.14
Forfeited	(28,011)	(2,082)	(12,745)	(42,838)	$	82.59
Nonvested stock awards at July 31, 2020	318,702	29,174	63,839	411,715	$	76.29

_______________________________________________

(1)The aggregate fair value of all nonvested stock awards which vested was approximately $11,701, $9,985 and 7,338 in fiscal 2020, 2019 and 2018, respectively.

A summary of stock option activity for fiscal 2020, 2019 and 2018 follows:


	Number of shares	Weighted Average Exercise Price		Weighted Average Contractual Life Remaining	Aggregate Intrinsic Value
Outstanding at August 1, 2017	122,500	$	29.36
Exercised	(52,500)	$	17.04
Outstanding at July 31, 2018	70,000	$	38.60
Exercised	(30,000)	$	31.81
Outstanding at July 31, 2019	40,000	$	43.70
Exercised	(25,000)	$	36.70
Outstanding at July 31, 2020	15,000	$	55.36	0.2 years	$	—
Exercisable at July 31, 2020 (out of the money)	15,000	$	55.36	0.2 years	$	—

In fiscal 2019 and 2018, 5,000 and 13,333, respectively, options vested, with an aggregate fair value of approximately $277 and $226, respectively. At July 31, 2020, 2019 and 2018, there were 15,000, 40,000 and 70,000, respectively, outstanding options with an aggregate fair value of $0, $1,943 and $3,788, respectively. At July 31, 2020 and 2019, all of the outstanding options had vested or were expected to vest in future periods.

We do not currently have a publicly announced stock repurchase program. All of the shares purchased during fiscal 2020, 2019 and 2017 represent shares surrendered relating to cashless exercises of stock options and to pay employee withholding taxes

due upon the vesting of restricted stock or the exercise of stock options. In fiscal 2020, 2019 and 2017, such purchases amounted to 58,858, 54,176 and 72,058 shares at a total average price per share of $69.03, $87.51 and $98.16, respectively.

Upon exercise of stock options or grant of stock awards, we typically issue new shares of our common stock as opposed to using treasury shares. Additionally, all options were considered to be deductible for tax purposes in the valuation model. Such non-qualified options were tax-effected using our estimated U.S. effective tax rate at the time of grant. All of our stock options and restricted stock awards are expected to be deductible for tax purposes, except for certain stock awards granted to employees residing outside of the U.S., and were tax-effected using our estimated U.S. effective tax rate at the time of grant.

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 described above. For fiscal 2020, income tax deductions of $2,083 were generated, of which $2,642 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 in income tax expense. For fiscal 2019, income tax deductions of $2,592 were generated, of which $2,008 were recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax benefits of $584 were recorded as a reduction in income tax expense. For fiscal 2018, income tax deductions of $4,161 were generated, of which $1,988 were recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax benefits of $2,173 were recorded as a reduction in income tax expense.