Cantel Medical 10Q 2012 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended April 30, 2012.

o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to .

Commission file number: 001-31337

CANTEL MEDICAL CORP.

(Exact name of registrant as specified in its charter)

Delaware		22-1760285
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

150 Clove Road, Little Falls, New Jersey		07424		(973) 890-7220
(Address of principal executive offices)		(Zip code)		(Registrant’s telephone number, including area code)

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer x

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Number of shares of common stock outstanding as of May 31, 2012: 26,998,483.

PART I - FINANCIAL INFORMATION

ITEM 1. - FINANCIAL STATEMENTS

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar Amounts in Thousands, Except Share Data)

(Unaudited)

	April 30,			July 31,
	2012			2011
Assets
Current assets:
Cash and cash equivalents	$	25,027		$	18,410
Accounts receivable, net of allowance for doubtful accounts of $820 at April 30 and $1,096 at July 31	46,302			46,121
Inventories:
Raw materials	21,116			18,649
Work-in-process	6,425			4,727
Finished goods	19,983			16,688
Total inventories	47,524			40,064
Deferred income taxes	3,775			3,645
Prepaid expenses and other current assets	4,033			3,084
Total current assets	126,661			111,324
Property and equipment, net	43,260			34,459
Intangible assets, net	73,640			39,191
Goodwill	183,703			134,770
Other assets	3,055			1,699
	$	430,319		$	321,443
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt	$	10,000		$	—
Accounts payable	11,201			13,218
Compensation payable	10,426			11,758
Accrued expenses	10,245			8,415
Deferred revenue	7,719			6,718
Acquisitions payable	1,100			2,325
Income taxes payable	—			977
Total current liabilities	50,691			43,411

Long-term debt	90,500			24,000
Deferred income taxes	18,324			18,450
Acquisitions payable	3,200			—
Other long-term liabilities	1,222			1,267

Stockholders’ equity:
Preferred Stock, par value $1.00 per share; authorized 1,000,000 shares; none issued	—			—
Common Stock, par value $.10 per share; authorized 30,000,000 shares; April 30 - 29,951,774 shares issued and 26,998,090 shares outstanding; July 31 - 28,737,043 shares issued and 25,910,146 shares outstanding	2,995			2,874
Additional paid-in capital	124,618			109,777
Retained earnings	159,155			138,725
Accumulated other comprehensive income	8,525			9,283
Treasury Stock, at cost; April 30 - 2,953,684 shares; July 31 - 2,826,897 shares	(28,911		)	(26,344		)
Total stockholders’ equity	266,382			234,315
	$	430,319		$	321,443

See accompanying notes.

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollar Amounts in Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2012			2011			2012			2011

Net sales	$	97,238		$	82,619		$	287,797		$	235,633

Cost of sales	54,619			51,317			166,407			144,747

Gross profit	42,619			31,302			121,390			90,886

Expenses:
Selling	14,240			11,505			40,433			31,928
General and administrative	12,388			10,439			36,582			29,863
Research and development	2,217			1,715			6,660			4,779
Total operating expenses	28,845			23,659			83,675			66,570

Income before interest, other expense and income taxes	13,774			7,643			37,715			24,316

Interest expense	897			195			2,928			698
Interest income	(13		)	(24		)	(67		)	(62		)
Other expense	—			—			605			—

Income before income taxes	12,890			7,472			34,249			23,680

Income taxes	4,716			2,424			12,561			7,937

Net income	$	8,174		$	5,048		$	21,688		$	15,743

Earnings per common share:
Basic	$	0.30		$	0.20		$	0.81		$	0.62

Diluted	$	0.30		$	0.19		$	0.80		$	0.61

Dividends per common share	$	—		$	—		$	0.05		$	0.04

See accompanying notes.

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar Amounts in Thousands)

(Unaudited)

	Nine Months Ended
	April 30,
	2012			2011

Cash flows from operating activities
Net income	$	21,688		$	15,743
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	5,129			5,039
Amortization	6,846			4,190
Stock-based compensation expense	3,019			2,553
Amortization of debt issuance costs	282			240
Loss (gain) on disposal of fixed assets	94			(8		)
Impairment of convertible notes receivable	605			—
Deferred income taxes	(1,187		)	(1,195		)
Excess tax benefits from stock-based compensation	(1,315		)	(491		)
Changes in assets and liabilities, net of assets acquired and liabilities assumed:
Accounts receivable	4,012			(11,643		)
Inventories	(2,958		)	(1,056		)
Prepaid expenses and other current assets	(884		)	(899		)
Accounts payable and other current liabilities	(3,691		)	3,601
Income taxes payable	1,213			1,454
Net cash provided by operating activities	32,853			17,528

Cash flows from investing activities
Capital expenditures	(3,860		)	(4,695		)
Proceeds from disposal of fixed assets	—			45
Acquisition of Gambro Water	(1,550		)	(21,630		)
Acquisition of Confirm	(855		)	(7,500		)
Acquisition of the Byrne Medical Business	(95,261		)	—
Other, net	(198		)	(227		)
Net cash used in investing activities	(101,724		)	(34,007		)

Cash flows from financing activities
Borrowings under term loan facility, net of debt issuance costs	49,647			—
Borrowings under revolving credit facility, net of debt issuance costs	46,941			28,000
Repayments under term loan facility	(7,500		)	(7,500		)
Repayments under revolving credit facility	(14,000		)	(11,500		)
Proceeds from exercises of stock options	1,951			1,999
Dividends paid	(1,258		)	(1,029		)
Excess tax benefits from stock-based compensation	1,315			491
Purchases of treasury stock	(1,502		)	(906		)
Net cash provided by financing activities	75,594			9,555

Effect of exchange rate changes on cash and cash equivalents	(106		)	351

Increase (decrease) in cash and cash equivalents	6,617			(6,573		)
Cash and cash equivalents at beginning of period	18,410			22,612
Cash and cash equivalents at end of period	$	25,027		$	16,039

See accompanying notes.

CANTEL MEDICAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles for interim financial reporting and the requirements of Form 10-Q and Rule 10.01 of Regulation S-X. Accordingly, they do not include certain information and note disclosures required by generally accepted accounting principles for annual financial reporting and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Annual Report of Cantel Medical Corp. (“Cantel”) on Form 10-K for the fiscal year ended July 31, 2011 (the “2011 Form 10-K”) and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.

The unaudited interim financial statements reflect all adjustments (of a normal and recurring nature) which management considers necessary for a fair presentation of the results of operations for these periods. The results of operations for the interim periods are not necessarily indicative of the results for the full year.

The Condensed Consolidated Balance Sheet at July 31, 2011 was derived from the audited Consolidated Balance Sheet of Cantel at that date.

Cantel had five principal operating companies at each of April 30, 2012 and July 31, 2011; Minntech Corporation (“Minntech”), Crosstex International, Inc. (“Crosstex”), Mar Cor Purification, Inc. (“Mar Cor”), Biolab Equipment Ltd. (“Biolab”) and Saf-T-Pak, Inc. (“Saf-T-Pak”), all of which are wholly-owned operating subsidiaries. In addition, Minntech had three foreign subsidiaries at each of April 30, 2012 and July 31, 2011; Minntech B.V., Minntech Asia/Pacific Ltd. and Minntech Japan K.K., which serve as Minntech’s bases in Europe, Asia/Pacific and Japan, respectively.

We currently operate our business through seven operating segments: Endoscopy (through Minntech), Water Purification and Filtration (through Mar Cor, Biolab and Minntech), Healthcare Disposables (through Crosstex), Dialysis (through Minntech), Therapeutic Filtration (through Minntech), Specialty Packaging (through Saf-T-Pak) and Chemistries (through Minntech). The Therapeutic Filtration, Specialty Packaging and Chemistries operating segments are combined in the All Other reporting segment for financial reporting purposes.

On August 1, 2011 our Minntech subsidiary acquired the business and substantially all of the assets of Byrne Medical, Inc. (“BMI”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements. The results of operations for the acquired business (the “Byrne Medical Business” or the “Byrne Acquisition”) are included in our results of operations for the three and nine months ended April 30, 2012 and are excluded from the three and nine months ended April 30, 2011. As a result of this acquisition, we expanded our endoscopy product offerings outside of endoscope reprocessing and therefore we have renamed our Endoscope Reprocessing segment to the Endoscopy segment. This change in segment description has no impact upon any reported financial information of this segment.

On February 11, 2011, our Crosstex subsidiary acquired certain net assets of the

sterilization monitoring business of ConFirm Monitoring Systems, Inc. (the “ConFirm Monitoring Business” or the “ConFirm Acquisition”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements. Its results of operations are included in our results of operations for the three and nine months ended April 30, 2012 and the portion of the three and nine months ended April 30, 2011 subsequent to its acquisition date. The ConFirm Acquisition is included in our Healthcare Disposables segment.

On October 6, 2010, our Mar Cor subsidiary acquired from Gambro Renal Products, Inc. (“GRP”) and a Swedish-based affiliate of GRP (collectively, “Gambro”) certain net assets and the exclusive rights in the United States and Puerto Rico to manufacture and sell Gambro’s water treatment products used in the production of water for hemodialysis (the “Gambro Business” or the “Gambro Acquisition”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements. Its results of operations are included in our results of operations for the three and nine months ended April 30, 2012, the three months ended April 30, 2011 and the portion of the nine months ended April 30, 2011 subsequent to its acquisition date. The Gambro Acquisition is included in our Water Purification and Filtration segment.

During February 2012, the Company issued 9,955,000 additional shares of common stock in connection with a three-for-two stock split effected in the form of a 50% stock dividend paid on February 1, 2012 to stockholders of record on January 23, 2012. The effect of the stock split has been recognized retroactively in the stockholders’ equity accounts in the Condensed Consolidated Balance Sheet at July 31, 2011, and in all share data in the Condensed Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Throughout this document, references to “Cantel,” “us,” “we,” “our,” and the “Company” are references to Cantel Medical Corp. and its subsidiaries, except where the context makes it clear the reference is to Cantel itself and not its subsidiaries.

Subsequent Events

We performed a review of events subsequent to April 30, 2012. Based upon that review, no subsequent events occurred that required updating to our Condensed Consolidated Financial Statements or disclosures.

Note 2. Stock-Based Compensation

The following table shows the income statement components of stock-based compensation expense recognized in the Condensed Consolidated Statements of Income:

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2012			2011			2012			2011

Cost of sales	$	51,000		$	31,000		$	141,000		$	101,000
Operating expenses:
Selling	109,000			100,000			300,000			316,000
General and administrative	533,000			733,000			2,545,000			2,114,000
Research and development	13,000			7,000			33,000			22,000
Total operating expenses	655,000			840,000			2,878,000			2,452,000
Stock-based compensation before income taxes	706,000			871,000			3,019,000			2,553,000
Income tax benefits	(247,000		)	(319,000		)	(1,073,000		)	(927,000		)
Total stock-based compensation expense, net of tax	$	459,000		$	552,000		$	1,946,000		$	1,626,000

Decrease in earnings per common share due to stock-based compensation:
Basic	$	0.02		$	0.02		$	0.07		$	0.06
Diluted	$	0.02		$	0.02		$	0.07		$	0.06

The above stock-based compensation expense before income taxes was recorded in the Condensed Consolidated Financial Statements as stock-based compensation expense and an increase to additional paid-in capital. The related income tax benefits were recorded as an increase to long-term deferred income tax assets (which are netted with long-term deferred income tax liabilities) and a reduction to income tax expense. In January 2012, in connection with an employment termination, we were required to accelerate the vesting of certain stock options and restricted shares resulting in an additional $309,000 of stock-based compensation expense recorded in general and administrative expenses in the Condensed Consolidated Statements of Income for the nine months ended April 30, 2012.

All of our stock options and stock awards (which consist only of restricted stock) are subject to graded vesting in which portions of the award vest at different times during the vesting period, as opposed to awards that vest at the end of the vesting period. We recognize compensation expense for awards subject to graded vesting using the straight-line basis over the vesting period, reduced by estimated forfeitures. At April 30, 2012, total unrecognized stock-based compensation expense before income taxes related to total nonvested stock options and stock awards was $5,000,000 with a remaining weighted average period of 19 months over which such expense is expected to be recognized.

We determine the fair value of each stock award using the closing market price of our common stock on the date of grant. Such stock awards are deductible for tax purposes (exclusive of stock awards granted to international employees).

A summary of nonvested stock award activity follows:

			Weighted
	Number of		Average
	Shares		Fair Value

Nonvested stock awards at July 31, 2011	363,892		$	12.02
Granted	346,141		13.83
Canceled	(55,335	)	12.95
Vested	(187,913	)	11.48
Nonvested stock awards at April 30, 2012	466,785		$	13.47

There were no option grants during the three and nine months ended April 30, 2012 and 2011. The aggregate intrinsic value (i.e., the excess market price over the exercise price) of all options exercised was $1,566,000 and $3,413,000 for the three and nine months ended April 30, 2012, respectively, and $1,019,000 and $3,184,000 for the three and nine months ended April 30, 2011, respectively.

A summary of stock option activity follows:

			Weighted
	Number of		Average
	Shares		Exercise Price

Outstanding at July 31, 2011	1,029,312		$	9.70
Canceled	(16,498	)	10.47
Exercised	(322,330	)	9.37
Outstanding at April 30, 2012	690,484		$	9.84

Exercisable at July 31, 2011	572,674		$	8.99

Exercisable at April 30, 2012	505,775		$	9.52

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).

If certain criteria are met when options are exercised or restricted stock becomes vested, the Company is allowed a deduction on its United States income tax return. Accordingly, we account for the income tax effect on such income tax deductions as a reduction of previously recorded long-term deferred income tax assets (which are netted with long-term deferred income tax liabilities) and as a reduction of income taxes payable. Excess tax benefits arise when the ultimate tax effect of the deduction for tax purposes is greater than the tax benefit on stock compensation expense which was determined based upon the award’s fair value at the time the award is granted. The differences noted above between actual tax deductions and the previously recorded long-term deferred income tax assets are recorded as additional paid-in capital. For the nine months ended April 30, 2012 and 2011, such income tax deductions reduced income taxes payable by $2,435,000 and $1,458,000, respectively, and increased additional paid-in capital by $1,315,000 and $491,000, respectively. We classify the cash flows resulting from excess tax benefits as financing cash flows on our Condensed Consolidated Statements of Cash Flows.

Note 3. Acquisitions

Byrne Medical, Inc. Disposable Endoscopy Products Business

On August 1, 2011 our Minntech subsidiary acquired the business and substantially all of the assets of BMI, a privately owned, Texas-based company that designs, manufactures and sells an innovative array of disposable infection control products intended to eliminate the challenges associated with proper cleaning and sterilization of numerous reusable components used in gastrointestinal (GI) endoscopy procedures. Excluding acquisition-related costs of $1,099,000 (of which $626,000 and $473,000 was recorded in general administrative expenses in the nine months ended April 30, 2012 and fiscal 2011, respectively) we paid an aggregate purchase price of $99,361,000 (which reflects a $639,000 decrease resulting from a net asset value adjustment that was recorded as a reduction of goodwill in December 2011), comprised of $89,361,000 in cash and $10,000,000 in shares of Cantel common stock that is subject to both a multi-year lock-up and three-year price floor (described below). After giving effect for the Company’s three-for-two stock split, the stock consideration consisted of 601,685 shares of Cantel common stock and was based on the closing price of Cantel common stock on the NYSE on July 29, 2011 ($16.62). In addition there is up to a $10,000,000 potential cash contingent consideration payable to BMI over two years based on the achievement by the acquired business of certain targeted amounts of gross profit. A portion of the purchase price (including the stock consideration) was placed in escrow as security for indemnification obligations of BMI and its principal stockholder, Mr. Byrne. In addition, we purchased certain land and buildings utilized by the Byrne Medical Business from Byrne Investments LLC, an affiliate of Mr. Byrne, for $5,900,000.

We account for contingent consideration by recording the fair value of contingent consideration as a liability and an increase to goodwill on the date of the acquisition and continually re-measure the liability at each balance sheet date by recording changes in the fair value through our Condensed Consolidated Statements of Income. Accordingly, on August 1, 2011 we increased acquisitions payable and goodwill by $2,700,000 to record our initial estimated fair value of the contingent consideration that would be earned over the two years ending July 31, 2013. At the end of each of the first three quarters in fiscal 2012, we re-measured the fair value of the contingent consideration and recorded changes in fair value as an increase to acquisitions payable and general and administrative expenses in the Condensed Consolidated Financial Statements, thereby increasing the contingent consideration payable to $2,900,000 at April 30, 2012, as more fully described in Note 7 to the Condensed Consolidated Financial Statements.

Subject to certain conditions and limitations, under the price floor referred to above, we agreed that if the aggregate value of the stock consideration is less than $10,000,000 on July 31, 2014, we will pay to BMI in cash or stock (at our option) an amount equal to the difference between $10,000,000 and the then value of the shares (based on the closing price of Cantel common stock on the NYSE on July 31, 2014). This three-year price floor is a free standing financial instrument that we are required to record as a liability at fair value on the date of acquisition and continually re-measure the liability at each balance sheet date by recording changes in the fair value through our Condensed Consolidated Statements of Income. Accordingly, on August 1, 2011 we increased acquisitions payable and goodwill by $3,000,000 to record our initial estimated fair value of the three-year price floor. The fair value of this liability was determined using the Black-Scholes option valuation model. At the end of each of the first three quarters in fiscal 2012, we re-measured the fair value of the price floor and recorded the change in fair value as a decrease to both acquisitions payable and general and administrative expenses in the

Condensed Consolidated Financial Statements, thereby decreasing the price floor liability to $1,400,000 at April 30, 2012, as more fully described in Note 7 to the Condensed Consolidated Financial Statements.

Additionally, the $10,000,000 stock portion of the purchase price was measured at fair value, which was determined using put option valuation models, to account for the discount for the multi-year lock up feature that prohibits the sellers of the Byrne Medical Business from trading the 601,685 shares of Cantel common stock during the three or four year lock-up period, which period is dependent upon whether BMI’s principal stockholder is employed by us on August 1, 2014. As a result of our valuation, the fair value of the 601,685 shares was determined to be $7,640,000, of which $7,310,000 was considered purchase price and $330,000 was determined to be compensation expense that will be expensed on a straight-line basis over the minimum lock up period of three years. The determinations of fair value using option-pricing models are affected by our stock price and risk free interest rate as well as assumptions regarding a number of subjective variables, including, but not limited to, the expected stock price volatility of our common stock over the expected life of the instrument and the expected dividend yield.

Since we will be continually re-measuring both the contingent consideration liability and the three-year price floor liability at each balance sheet date and recording changes in the respective fair values through our Condensed Consolidated Statements of Income, we will potentially have significant earnings volatility in our future results of operations until the completion of both the two year period relating to the contingent consideration and three year period relating to the price floor.

The components of the purchase price, as explained above, consist of the following:

Cash (including purchase of buildings)	$	95,261,000
Fair value of the Cantel common stock with the multi-year lock-up	7,310,000
Total consideration paid at August 1, 2011	102,571,000
Price floor	3,000,000
Contingent consideration	2,700,000
Total purchase price recorded at August 1, 2011	$	108,271,000

In connection with the acquisition, we acquired certain tangible assets including accounts receivable, inventories and equipment and assumed certain liabilities of BMI including trade payables, sales commissions payable and ordinary course business liabilities.

In conjunction with the acquisition of the Byrne Medical Business and the impending expiration of our existing credit facility, we entered into a $150,000,000 Second Amended and Restated Credit Agreement dated as of August 1, 2011 with our senior lenders to fund the cash consideration paid in and the costs associated with the acquisition, as well as to refinance our existing working capital credit facilities, as more fully described in Note 10 to the Condensed Consolidated Financial Statements.

The purchase price was preliminarily allocated to the assets acquired and assumed liabilities based on estimated fair values as follows:

	Preliminary
Net Assets	Allocation
Current assets:
Accounts receivable	$	4,303,000
Inventory	4,581,000
Other assets	588,000
Property, plant and equipment	10,233,000
Amortizable intangible assets (lives are a preliminary estimate):
Customer relationships (15-year life)	25,300,000
Trade name (10-year life)	2,200,000
Technology (8-year life)	11,900,000
Non-compete agreement (14 year-weighted-average life)	2,000,000
Other assets	105,000
Current liabilities	(2,277,000		)
Other liabilities	(85,000		)
Net assets acquired	$	58,848,000

There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of $49,423,000 was assigned to goodwill. Such goodwill, all of which is deductible for income tax purposes over fifteen years, has been included in our Endoscopy segment.

For the twelve months ended December 31, 2010, BMI’s latest audited fiscal year, BMI generated revenues and gross profit of $34,293,000 and $21,991,000, respectively.

Since the acquisition was completed on the first day of fiscal 2012, the results of operations of the Byrne Medical Business are included in our results of operations for the three and nine months ended April 30, 2012 and are excluded from the three and nine months ended April 30, 2011. As a result of the acquisition, we changed the name of our reporting segment previously known as Endoscope Reprocessing to Endoscopy. The operations of the Byrne Medical Business are fully included within our Endoscopy segment.

For the three and nine months ended April 30, 2012, the Byrne Medical Business added the following to the Endoscopy segment in our Condensed Consolidated Financial Statements:

	Three Months Ended		Nine Months Ended
	April 30, 2012		April 30, 2012

Net sales	$	12,565,000	$	36,204,000

Operating income	$	4,091,000	$	9,571,000

Capital expenditures	$	390,000	$	883,000

Depreciation and amortization	$	1,212,000	$	3,623,000

Excluding non-recurring items directly related to the acquisition, the Byrne Medical Business added $3,696,000 and $9,690,000 to the segment operating income for the three and nine months ended April 30, 2012, respectively. Such non-recurring items include (i) acquisition-related charges of approximately $626,000 which were recorded in general and administrative

expenses in the three months ended October 31, 2011 and (ii) an increase in operating earnings relating to net fair value changes of $395,000 and $507,000 for the three and nine months ended April 30, 2012, respectively, related to the acquisition date inventory, contingent consideration liability and three year price floor liability as further described above. Additionally, the segment operating income for the three and nine months ended April 30, 2012 excludes debt issuance costs relating to the Second Amended and Restated Credit Agreement of approximately $1,412,000, which is being amortized to interest expense over the life of the credit facilities, and interest expense relating to the borrowings under our credit facilities to fund a significant portion of the purchase price.

The principal reasons for the Byrne Acquisition were as follows: (i) the complementary nature of its infection prevention and control business which further expands our business into hospital and outpatient center-based GI endoscopy; (ii) the addition of a market leading, high margin business in a familiar segment in infection prevention and control; (iii) the increase in the percentage of our net sales derived from recurring consumables; (iv) the expectation that the acquisition increases overall corporate gross margin percentage and will be accretive to our future earnings per share; (v) the belief that the endoscopy market will convert from re-using to disposing of certain components in GI endoscopy; and (vi) the opportunity for us to further expand our business into the design, manufacture and distribution of proprietary products. Such reasons constitute the significant factors that contributed to a purchase price that resulted in recognition of goodwill.

Selected unaudited supplemental pro forma consolidated statements of income data for the three and nine months ended April 30, 2012 and 2011 assuming that the Byrne Medical Business was included in our results of operations as of August 1, 2010 (the beginning of our fiscal 2011) are as follows:

	Three Months Ended				Nine Months Ended
	April 30,				April 30,
	2012		2011		2012		2011

Net sales	$	97,238,000	$	92,451,000	$	287,797,000	$	263,463,000
Net income	$	8,174,000	$	5,798,000	$	22,744,000	$	17,155,000
Earnings per share:
Basic	$	0.30	$	0.22	$	0.85	$	0.66
Diluted	$	0.30	$	0.22	$	0.84	$	0.65
Weighted average common shares:
Basic	26,992,000		26,377,000		26,845,000		26,187,000
Diluted	27,282,000		26,723,000		27,148,000		26,502,000

Supplemental pro forma data for the nine months ended April 30, 2012 was adjusted to exclude acquisition-related costs of $626,000 and a fair value adjustment charge of $893,000 related to the step-up in the fair value of inventories. The nine months ended April 30, 2011 supplemental pro forma data was adjusted to include these amounts. In addition, in order to affect the unaudited pro forma consolidated statements of income data for the three and nine months ended April 30, 2011, the operating results of Cantel for the three and nine months ended April 30, 2011 were consolidated with the operating results of the Byrne Medical Business for the three and nine month periods ended March 31, 2011 and were further adjusted to include (i) amortization of intangible assets and depreciation and amortization of property and equipment based upon the preliminary appraised fair values and useful lives of such assets; (ii) interest expense including interest on the senior bank debt at an effective interest rate of 2.98% per annum

and amortization of new debt issuance costs over the life of the credit facilities; (iii) the elimination of certain expenses unrelated to the acquired assets of the Byrne Medical Business; (iv) the elimination of incentive compensation for the former primary owner in excess of incentive compensation consistent with the terms of his new employment contract; (v) a decrease of $38,000 and $104,000, respectively, to general and administrative expense relating to a net change in fair value of the contingent consideration and the three-year price floor solely to reflect the passage of time (the three and nine months ended April 30, 2012 includes a decrease to general and administrative expenses to reflect the actual net fair value adjustment of $395,000 and $1,400,000, respectively, relating to such items as further described above); and (vi) income tax expense calculated using our fiscal 2011 consolidated U.S. effective tax rate. All other operating results reflect actual performance.

This pro forma information is provided for illustrative purposes only, and does not necessarily indicate what the operating results of the combined company might have been had the acquisition actually occurred at the beginning of fiscal 2011, nor does it necessarily indicate the combined company’s future operating results.

ConFirm Monitoring Systems, Inc.

On February 11, 2011, our Crosstex subsidiary acquired the ConFirm Monitoring Business, a private company based in Englewood, Colorado with revenues relating to biological monitoring services for dental and other healthcare customers located primarily in North America. The company offers both a mail-in service and in-office spore test kits for healthcare professionals to verify the performance of their sterilizers in accordance with industry guidelines for daily or weekly testing. The ConFirm Acquisition is included in our Healthcare Disposables segment. Total consideration for the transaction, excluding transaction costs of $52,000, was $7,500,000 plus contingent consideration of up to an additional $1,000,000 based upon achievement of specified sales levels through January 31, 2012.

We account for contingent consideration by recording the fair value of contingent consideration as a liability and an increase to goodwill at the date of the acquisition and continually re-measure the liability at each balance sheet date by recording changes in the fair value through general and administrative expenses in our Condensed Consolidated Statements of Income. Accordingly, on February 11, 2011 we increased acquisitions payable and goodwill by $656,000 to record our initial estimated fair value of the contingent consideration that would be earned by January 31, 2012 and continually re-measured the liability at each balance sheet date thereafter, as further described in Note 7 to the Condensed Consolidated Financial Statements. The changes in estimated fair value during the one year period ended January 31, 2012 were driven by changes in the assumptions pertaining to the achievement of the specified sales levels and the time value of money. Based on actual sales results for the one year period ended January 31, 2012, the final contingent consideration liability was determined to be $855,000 at January 31, 2012 and was paid in March 2012.

The purchase price was allocated to the assets acquired and assumed liabilities based on estimated fair values as follows:

	Final
Net Assets	Allocation
Current assets	$	1,399,000
Property, plant and equipment	93,000
Amortizable intangible assets:
Customer relationships (10-year life)	2,290,000
Trade name (6-year life)	470,000
Technology (5-year life)	110,000
Non-compete agreement (8-year life)	30,000
Current liabilities:
Accounts payable	(244,000		)
Deferred revenue	(1,226,000		)
Net assets acquired	$	2,922,000

There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of $5,234,000 was assigned to goodwill, which is deductible for income tax purposes over fifteen years.

The principal reasons for the acquisition were (i) to expand our sterility assurance product portfolio, (ii) to enable cross-selling of our existing products such as our patent-pending Sure-CheckTM sterilization pouch, (iii) to leverage Crosstex’ sales and marketing infrastructure in the dental arena and (iv) the expectation that the acquisition will be accretive to our future earnings per share beyond fiscal 2011. Such reasons constitute the significant factors that contributed to a purchase price that resulted in recognition of goodwill.

The results of operations for the ConFirm Acquisition are included in our results of operations for the three and nine months ended April 30, 2012 and the portion of the three and nine months ended April 30, 2011 subsequent to its acquisition date. Pro forma consolidated statements of income data have not been presented due to the insignificant impact of this acquisition.

Gambro Business

On October 6, 2010, our Mar Cor subsidiary acquired from Gambro certain net assets and the exclusive rights in the United States and Puerto Rico to manufacture and sell Gambro’s water treatment products used in the production of water for hemodialysis. Immediately following the acquisition, we commenced sales and service of all Gambro water products, components, parts and consumables solely intended for the United States and Puerto Rico markets. The manufacturing of these products has been transitioned into our own manufacturing facility in Plymouth, Minnesota. The Gambro Acquisition expands our Water Purification and Filtration’s annual business in terms of sales, particularly with respect to product and service sales volumes in both existing and new dialysis clinics across the United States and Puerto Rico by 19% (approximately 75% of Gambro Acquisition revenues are from one customer). Total consideration for the transaction, excluding acquisition-related costs of approximately $240,000, was approximately $23,700,000, of which $3,100,000 was paid in six equal quarterly payments ended April 2012. The Gambro Acquisition is included in our Water Purification and Filtration operating segment.

The purchase price was allocated to the assets acquired and assumed liabilities based on estimated fair values as follows:

	Final
Net Assets	Allocation
Current assets (principally inventories)	$	3,080,000
Property, plant and equipment	11,000
Amortizable intangible assets:
Technology (8-year life)	1,170,000
Customer relationships (11.5-year weighted average life)	6,640,000
Non-compete agreement (14-year life)	1,050,000
Current liabilities	(60,000		)
Net assets acquired	$	11,891,000

There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of $11,809,000 was assigned to goodwill, which is deductible for income tax purposes over fifteen years.

The reasons for the acquisition were as follows: (i) the expansion of our water purification product line, particularly in the area of cost effective heat sanitizable water purification equipment; (ii) the opportunity to add an installed equipment base of business into which we can (a) increase service revenue while improving the density and efficiency of the Mar Cor service network and (b) drive a greater portion of recurring consumable sales per clinic; (iii) the potential revenue and cost savings synergies and efficiencies that could be realized through optimizing and combining the acquired assets (including Gambro employees) into Mar Cor; and (iv) the expectation that the acquisition will be accretive to our future earnings per share. Such reasons constitute the significant factors that contributed to a purchase price that resulted in recognition of goodwill.

The results of operations of the Gambro Business are included in our results of operations for the three and nine months ended April 30, 2012, the three months ended April 30, 2011 and the portion of the nine months ended April 30, 2011 subsequent to its acquisition date. Pro forma consolidated statement of income data has not been presented due to the unavailability of pre-acquisition financial statements of the Gambro Business, since the Gambro Business did not maintain separate financial statements related to these purchased assets.

Note 4. Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-08, “Intangibles — Goodwill and Other,” (“ASU 2011-08”), which amends current guidance to allow a company to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The amendment also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of ASU 2011-08 will not have any impact upon our financial position and results of operations.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”), which requires entities to present net income and other comprehensive income in either a single continuous statement or in two

separate, but consecutive, statements of net income and other comprehensive income. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Accordingly, we will adopt ASU 2011-05 in our fiscal 2013 first quarter ending October 31, 2012 by including the Statement of Comprehensive Income as an addition to our Condensed Consolidated Financial Statements. The adoption of this disclosure guidance will not have any impact upon our financial position and results of operations.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” (“ASU 2011-04”). This standard results in a common requirement between the FASB and the International Accounting Standards Board for measuring fair value and disclosing information about fair value measurements. ASU 2011-04 is effective for fiscal years and interim periods beginning after December 15, 2011. Accordingly, we adopted ASU 2011-04 in our third quarter ended April 30, 2012 and applied the disclosure provisions of this ASU in Note 7 of our Condensed Consolidated Financial Statements. The adoption of ASU 2011-04 did not have any impact upon our financial position and results of operations.

In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations, a consensus of the FASB Emerging Issues Task Force,” (“ASU 2010-29”), which addresses the diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for material business combinations. The amendments specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) had occurred at the beginning of the comparable prior annual reporting period only. Additional amendments expand supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective for fiscal years beginning after December 15, 2010 and is applied prospectively to business combinations completed after that date. Accordingly, we adopted ASU 2010-29 on August 1, 2011 and applied the provisions of this ASU to the Byrne Acquisition, as further described in Note 3 to the Condensed Consolidated Financial Statements. The adoption of this updated disclosure guidance did not have any impact upon our financial position and results of operations.

Note 5. Other Comprehensive Income

The Company’s comprehensive income for the three and nine months ended April 30, 2012 and 2011 is set forth in the following table:

	Three Months Ended					Nine Months Ended
	April 30,					April 30,
	2012			2011		2012			2011

Net income	$	8,174,000		$	5,048,000	$	21,688,000		$	15,743,000
Other comprehensive income (loss):
Unrealized loss on interest rate swaps, net of tax	(101,000		)	—		(101,000		)	—
Foreign currency translation	304,000			997,000		(657,000		)	1,342,000
Comprehensive income	$	8,377,000		$	6,045,000	$	20,930,000		$	17,085,000

Note 6. 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 April 30, 2012, all of our derivatives were designated as hedges.

Changes in the value of (i) the Canadian dollar against the United States dollar, (ii) the Euro against the United States dollar, (iii) the British pound against the United States dollar and (iv) the Singapore dollar against the United States dollar affect our results of operations because a portion of the net assets of our Canadian subsidiaries (which are reported in our Specialty Packaging and Water Purification and Filtration segments) are denominated and ultimately settled in United States dollars, but must be converted into its functional Canadian dollar currency. Furthermore, certain cash bank accounts, accounts receivable, and liabilities of our subsidiaries are denominated and ultimately settled in Euros, British pounds or Singapore dollars, but must be converted into their functional currency.

In order to hedge against the impact of fluctuations in the value of (i) the Canadian dollar relative to the United States dollar, (ii) the Euro relative to the United States dollar, (iii) the British pound relative to the United States dollar and (iv) the Singapore dollar relative to the United States dollar on the conversion of such net assets into the functional currencies, we enter into short-term contracts to purchase Canadian dollars, Euros, British pounds and Singapore dollars forward, which contracts are generally one month in duration. These short-term contracts are designated as fair value hedge instruments. There were three foreign currency forward contracts with an aggregate value of $3,098,000 at April 30, 2012, which covered certain assets and liabilities that were denominated in currencies other than our subsidiaries’ functional currencies. Such contracts expired on May 31, 2012. These foreign currency forward contracts are continually replaced with new one-month contracts as long as we have significant net assets at our subsidiaries that are denominated and ultimately settled in currencies other than their functional currencies. On the items hedged, such forward contracts offset all of the adverse impact on operations relating to certain assets and liabilities that were denominated in currencies other than our subsidiaries’ functional currencies resulting in no gain or loss for the nine months ended April 30, 2012 and a small net currency conversion loss, net of tax, of $4,000 for the three months ended April 30, 2012. For the three and nine months ended April 30, 2011, our forward contracts partially offset such foreign currency impact and resulted in a net currency conversion loss, net of tax, of $54,000 and $139,000, respectively on the items hedged. Gains and losses related to the hedging contracts to buy Canadian dollars, Euros, British pounds and Singapore dollars forward were immediately realized within general and administrative expenses due to the short-term nature of such contracts. We do not hold any derivative financial instruments for speculative or trading purposes.

The interest rate on our outstanding borrowings under our credit facilities is variable and is affected by the general level of interest rates in the United States as well as LIBOR interest rates, as more fully described in Note 10 to the Condensed Consolidated Financial Statements. In order to protect our interest rate exposure in future years, we entered into forward starting interest

rate swap agreements in February 2012 in which we agree to exchange our variable interest cash flows with fixed interest cash flows provided by one of our existing senior lenders. With respect to our Term Loan Facility, the interest rate swap is for the period beginning August 8, 2012 and ending July 31, 2015, initially covering $40,000,000 of borrowings based on one-month LIBOR and thereafter reducing in quarterly $2,500,000 increments consistent with the mandatory repayment schedule, and the fixed interest cash flow is at a one month LIBOR rate of 0.664%. With respect to our Revolving Credit Facility, the interest rate swap is for the period beginning August 8, 2012 and ending January 31, 2014, initially covering $25,000,000 of borrowings based on one-month LIBOR and thereafter reducing semi-annually by increments of $5,000,000, and the fixed interest cash flow is at a one month LIBOR rate of 0.496%. These interest rate swap agreements have been designated as cash flow hedge instruments and have been designed to be effective in offsetting changes in the cash flows related to the hedged borrowings. As more fully described in Notes 5 and 7 of the Condensed Consolidated Financial Statements, we account for the interest rate swap agreements by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in accumulated other comprehensive income. Amounts will be reclassified from accumulated other comprehensive income in the period the hedged transaction affects earnings. At the hedge’s inception and on a regular basis thereafter, a formal assessment is performed to determine whether changes in the fair value or cash flows of the derivative instruments have been highly effective in offsetting changes in cash flows of the hedged items and whether they are expected to be highly effective in the future. This formal assessment includes a comparison of the terms of the interest rate swap agreements and hedged borrowings to ensure they coincide as well as an evaluation of the continued ability of the counterparty to the interest rate swap agreements and the Company to honor its obligations under such agreements. At April 30, 2012, our formal assessment concluded that the changes in the fair value of the derivative instruments are expected to be highly effective in the future for the interest rate swap periods beginning on August 8, 2012.

Note 7. Fair Value Measurements

Fair Value Hierarchy

We apply the provisions of ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”), for our financial assets and liabilities that are re-measured and reported at fair value each reporting period and our nonfinancial assets and liabilities that are re-measured and reported at fair value on a non-recurring basis. We define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three level fair value hierarchy to prioritize the inputs used in valuations, as defined below:

Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3: Unobservable inputs for the asset or liability.

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

As of April 30, 2012 and July 31, 2011, our financial assets that are re-measured at fair value

on a recurring basis include money market funds that are classified as cash and cash equivalents in the Condensed Consolidated Balance Sheets. As there are no withdrawal restrictions, they are classified within Level 1 of the fair value hierarchy and are valued using quoted market prices for identical assets.

Additionally, in order to protect our interest rate exposure in future years, we entered into forward starting interest rate swap agreements in February 2012 in which we agree to exchange our variable interest cash flows with fixed interest cash flows provided by one of our existing senior lenders, as further described in Notes 6 and 10 to the Condensed Consolidated Financial Statements. Our interest rate swap agreements are classified within Level 2 and are valued using discounted cash flow analyses based on the terms of the contracts and the interest rate curves. Changes in fair value during the three months ended April 30, 2012 resulted in a $101,000 loss, net of tax, and was recorded in accumulated other comprehensive income at April 30, 2012. Amounts will be reclassified from accumulated other comprehensive income in the period the hedged transaction affects earnings.

We also had a contingent consideration liability recorded within acquisitions payable relating to the ConFirm Acquisition, as further described in Note 3 to the Condensed Consolidated Financial Statements. The fair value of this liability was based on future sales projections of the ConFirm Monitoring Business under various potential scenarios for the one year period ended January 31, 2012 and weighting the probability of these outcomes. At the date of the acquisition, these cash flow projections were discounted using a rate of 7%. The discount rate was based on the weighted average cost of capital of the acquired business plus a credit risk premium for non-performance risk. This analysis resulted in an initial contingent consideration liability of $656,000, which was subsequently adjusted to $775,000 at July 31, 2011 by recording the change in the fair value through our results of operations during the fourth quarter of our fiscal 2011 and was further adjusted as shown below in the reconciliation of our liabilities that are measured and recorded at fair value on a recurring basis. These fair value measurements were based on significant inputs not observed in the market and thus represented a Level 3 measurement. Based on actual sales results for the one year period ended January 31, 2012, the final contingent consideration liability was determined to be $855,000 at January 31, 2012 and was paid in March 2012.

On August 1, 2011 (the first day of our fiscal 2012), we recorded a $2,700,000 liability for the estimated fair value of contingent consideration and a $3,000,000 liability for the estimated fair value of the three year price floor relating to the Byrne Acquisition, as further described in Note 3 to the Condensed Consolidated Financial Statements. These fair value measurements were based on significant inputs not observed in the market and thus represent Level 3 measurements.

The fair value of the contingent consideration liability was based on future gross profit projections of the Byrne Medical Business under various potential scenarios for the two year period ending July 31, 2013 and weighting the probability of these outcomes. As such, the determination of fair value of the contingent consideration is subjective in nature and highly dependent on future gross profit projections. At the date of the acquisition, these cash flow projections were discounted using a rate of 14%. The discount rate was based on the weighted average cost of capital of the acquired business plus a credit risk premium for non-performance risk. This contingent consideration liability will be adjusted periodically by recording changes in the fair value through our Condensed Consolidated Statements of Income driven by the time value of money and changes in the assumptions that were initially used in the valuations. Accordingly, at April 30, 2012 we re-measured the fair value of the contingent consideration to be $2,900,000. The increase to the contingent consideration liability was due to the accretion of the liability for the time value of money and was

recorded as an increase to acquisition payable and general and administrative expenses in the Condensed Consolidated Financial Statements. The final contingent consideration liability has the potential of being between zero and $10,000,000. However, the different likely scenarios of future gross profit projections used in our fair value determination resulted in total potential contingent consideration payments ranging between $700,000 and $7,000,000 and the weighted average of such scenarios resulted in a fair value of $2,900,000 at April 30, 2012. Such fair value would have been higher or lower if we had used different probability factors, future gross profit projections or discount factors. Given the subjective nature of the assumptions used in the determination of fair value, significant future earnings volatility may occur over the next five quarters until the actual operating results are known and the final contingent consideration liability is determined.

The fair value of the three year price floor liability was determined using the Black-Scholes option valuation model, which is affected by our stock price and risk free interest rate as well as assumptions regarding a number of subjective variables, including, but not limited to, the expected stock price volatility of our common stock over the expected life of the instrument and the expected dividend yield. This liability will be adjusted periodically by recording changes in the fair value through our Condensed Consolidated Statements of Income driven by the time value of money and changes in the assumptions that were initially used in the valuations. Accordingly, at April 30, 2012 we re-measured the fair value of the price floor to be $1,400,000. The decrease to the fair value of the price floor (as determined by the Black-Scholes option valuation model) was recorded as a decrease to acquisitions payable and general and administrative expenses in the Condensed Consolidated Financial Statements and was primarily due to the impact of our stock price being higher than at the time of the acquisition, the life of the price floor being less than three years and changes in the expected stock price volatility. Future changes in these factors, especially changes in our stock price, may result in significant future earnings volatility. For instance, if our stock price at April 30, 2012 was $1.00 lower, the fair value of the price floor would have been approximately $125,000 higher, which would have decreased our operating earnings by $125,000. Conversely, if our stock price at April 30, 2012 was $1.00 higher, the fair value of the price floor would have been approximately $113,000 lower, which would have increased our operating earnings by $113,000.

The fair values of the Company’s financial instruments measured on a recurring basis were categorized as follows:

	April 30, 2012
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Money markets	$	3,916,000	$	—	$	—	$	3,916,000
Total assets	$	3,916,000	$	—	$	—	$	3,916,000

Liabilities:
Acquisitions payable:
Contingent consideration	$	—	$	—	$	2,900,000	$	2,900,000
Price floor	—		—		1,400,000		1,400,000
Total acquisitions payable (1):	—		—		4,300,000		4,300,000
Other liabilities:
Interest rate swap agreements	—		161,000		—		161,000
Total other liabilities (2):	—		161,000		—		161,000
Total liabilities	$	—	$	161,000	$	4,300,000	$	4,461,000

	July 31, 2011
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Money markets	$	3,916,000	$	—	$	—	$	3,916,000
Total assets	$	3,916,000	$	—	$	—	$	3,916,000

Liabilities:
Acquisitions payable:
Contingent consideration	$	—	$	—	$	775,000	$	775,000
Total liabilities (3)	$	—	$	—	$	775,000	$	775,000

(1) At April 30, 2012, the combined total of the current and long-term portions of acquisitions payable in the Condensed Consolidated Balance Sheets equals the fair values of the Company’s financial instruments measured on a recurring basis of $4,300,000.

(2) At April 30, 2012, the current portion of the interest swap agreements of $123,000 is recorded in accrued expenses and the long-term portion of the interest swap agreements of $38,000 is recorded in other long-term liabilities.

(3) At July 31, 2011, the fair value of the Company’s financial instruments measured on a recurring basis of $775,000, combined with the remaining payables for the Gambro Acquisition of $1,550,000, equal the current acquisitions payable in the Condensed Consolidated Balance Sheets.

A reconciliation of our liabilities that are measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) for the last two quarters of fiscal 2011 and the three quarterly periods ended April 30, 2012 is as follows:

	ConFirm			Byrne		Byrne
	Contingent			Contingent		Price
	Consideration			Consideration		Floor			Total
Balance, January 31, 2011	$	—		$	—	$	—		$	—
Total net unrealized (gains)/losses	—			—		—			—
Transfers into or out of level 3	—			—		—			—
Net purchases, issuances, sales and settlements	656,000			—		—			656,000
Balance, April 30, 2011	656,000			—		—			656,000
Total net unrealized (gains)/losses included in general and administrative expense in earnings	119,000			—		—			119,000
Transfers into or out of level 3	—			—		—			—
Net purchases, issuances, sales and settlements	—			—		—			—
Balance, July 31, 2011	775,000			—		—			775,000
Total net unrealized (gains)/losses included in general and administrative expense in earnings	(86,000		)	100,000		(582,000		)	(568,000		)
Transfers into or out of level 3	—			—		—			—
Net purchases, issuances, sales and settlements	—			2,700,000		3,000,000			5,700,000
Balance, October 31, 2011	689,000			2,800,000		2,418,000			5,907,000
Total net unrealized (gains)/losses included in general and administrative expense in earnings	166,000			100,000		(623,000		)	(357,000		)
Transfers into or out of level 3	—			—		—			—
Net purchases, issuances, sales and settlements	—			—		—			—
Balance, January 31, 2012	$	855,000		$	2,900,000	$	1,795,000		$	5,550,000
Total net unrealized (gains)/losses included in general and administrative expense in earnings	—			—		(395,000		)	(395,000		)
Transfers into or out of level 3	—			—		—			—
Net purchases, issuances, sales and settlements	(855,000		)	—		—			(855,000		)
Balance, April 30, 2012	$	—		$	2,900,000	$	1,400,000		$	4,300,000

Assets Measured and Recorded at Fair Value on a Nonrecurring Basis

We re-measure the fair value of certain assets, such as intangible assets, goodwill and long-lived assets, including property and equipment and convertible notes receivable, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and goodwill and intangible assets with indefinite lives are reviewed for impairment at least annually. In performing a review for goodwill impairment, management uses a two-step process that begins with an estimation of the fair value of the related operating segments by using average fair value results of the market multiple and discounted cash flow methodologies, as well as the comparable transaction methodology when applicable. The first step is a review for potential impairment, and the second step measures the amount of impairment, if any. In performing our annual review for indefinite lived intangibles, management compares the current fair value of such assets to their carrying values. With respect to amortizable intangible assets when impairment indicators are present, management determines whether expected future non-discounted cash flows is sufficient to recover the carrying value of the assets; if not, the carrying value of the assets is adjusted to their fair value. With respect to long-lived assets, an assessment is made to determine if the sum of the expected future non-discounted cash flows from the use of the assets and eventual disposition is less than the carrying value. If the sum of the expected non-

discounted cash flows is less than the carrying value, an impairment loss is recognized based on fair value. As the inputs utilized for our periodic impairment assessments are not based on observable market data, but are based on management’s assumptions and estimates, our intangibles, goodwill and long-lived assets are classified within Level 3 of the fair value hierarchy on a non-recurring basis. During our third quarter of fiscal 2012, management updated certain assumptions pertaining to our Specialty Packaging segment’s future operating results and cash flows and performed an interim goodwill impairment assessment, as more fully described in Note 8 to the Condensed Consolidated Financial Statements. On April 30, 2012, management concluded that no other events or changes in circumstances have occurred during the nine months ended April 30, 2012 that would indicate that the carrying amount of our intangible assets, goodwill and long-lived assets may not be recoverable, except for our investment in BIOSAFE, Inc. (“BIOSAFE”) as more fully described in Note 16 to the Condensed Consolidated Financial Statements.

Disclosure of Fair Value of Financial Instruments

As of April 30, 2012 and July 31, 2011, the carrying amounts for cash and cash equivalents (excluding money markets), accounts receivable and accounts payable approximated fair value due to the short maturity of these instruments. We believe that as of April 30, 2012 and July 31, 2011, the fair value of our outstanding borrowings under our credit facilities approximated the carrying value of those obligations since the borrowing rates were at prevailing market interest rates, principally under LIBOR contracts ranging from one to twelve months.

Note 8. Intangible Assets and Goodwill

Our intangible assets with definite lives consist of customer relationships, technology, brand names, non-compete agreements and patents. These intangible assets are being amortized using the straight-line method over the estimated useful lives of the assets ranging from 2-20 years and have a weighted average amortization period of 11 years. Amortization expense related to definite life intangible assets was $2,279,000 and $6,846,000 for the three and nine months ended April 30, 2012, respectively, and $1,465,000 and $4,190,000 for the three and nine months ended April 30, 2011, respectively. Our intangible assets that have indefinite useful lives and therefore are not amortized consist of trademarks and trade names.

The Company’s intangible assets consist of the following:

	April 30, 2012
			Accumulated
	Gross		Amortization			Net
Intangible assets with finite lives:
Customer relationships	$	60,286,000	$	(19,140,000	)	$	41,146,000
Technology	20,835,000		(7,049,000		)	13,786,000
Brand names	11,946,000		(6,468,000		)	5,478,000
Non-compete agreements	3,181,000		(357,000		)	2,824,000
Patents and other registrations	1,397,000		(457,000		)	940,000
	97,645,000		(33,471,000		)	64,174,000
Trademarks and trade names	9,466,000		—			9,466,000
Total intangible assets	$	107,111,000	$	(33,471,000	)	$	73,640,000

	July 31, 2011
			Accumulated
	Gross		Amortization			Net
Intangible assets with finite lives:
Customer relationships	$	35,203,000	$	(15,468,000	)	$	19,735,000
Technology	9,849,000		(6,114,000		)	3,735,000
Brand names	9,745,000		(5,539,000		)	4,206,000
Non-compete agreements	2,981,000		(1,919,000		)	1,062,000
Patents and other registrations	1,301,000		(389,000		)	912,000
	59,079,000		(29,429,000		)	29,650,000
Trademarks and trade names	9,541,000		—			9,541,000
Total intangible assets	$	68,620,000	$	(29,429,000	)	$	39,191,000

Estimated amortization expense of our intangible assets for the remainder of fiscal 2012 and the next five years is as follows:

Three month period ending July 31, 2012	$	2,280,000
Fiscal 2013	9,056,000
Fiscal 2014	8,757,000
Fiscal 2015	8,576,000
Fiscal 2016	5,408,000
Fiscal 2017	4,949,000

Goodwill changed during fiscal 2011 and the nine months ended April 30, 2012 as follows:

			Water
			Purification			Healthcare							Total
	Endoscopy		and Filtration			Disposables		Dialysis		All Other			Goodwill

Balance, July 31, 2010	$	9,648,000	$	39,847,000		$	50,630,000	$	8,133,000	$	8,525,000		$	116,783,000
Acquisitions	—		11,809,000			5,234,000		—		—			17,043,000
Foreign currency translation	—		418,000			—		—		526,000			944,000
Balance, July 31, 2011	9,648,000		52,074,000			55,864,000		8,133,000		9,051,000			134,770,000
Acquisition	49,423,000		—			—		—		—			49,423,000
Foreign currency translation	—		(217,000		)	—		—		(273,000		)	(490,000		)
Balance, April 30, 2012	$	59,071,000	$	51,857,000		$	55,864,000	$	8,133,000	$	8,778,000		$	183,703,000

On July 31, 2011, we performed impairment studies of the Company’s goodwill and indefinite lived trademarks and trade names and concluded that such assets were not impaired.

Note 9. Warranties

A summary of activity in the Company’s warranty reserves follows:

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2012			2011			2012			2011

Beginning balance	$	2,081,000		$	1,378,000		$	2,083,000		$	1,181,000
Acquisitions	—			—			—			10,000
Provisions	748,000			863,000			2,528,000			2,148,000
Settlements	(881,000		)	(772,000		)	(2,661,000		)	(1,870,000		)
Foreign currency translation	1,000			2,000			(1,000		)	2,000
Ending balance	$	1,949,000		$	1,471,000		$	1,949,000		$	1,471,000

The warranty provisions and settlements for the three and nine months ended April 30, 2012 and 2011 relate principally to the Company’s endoscopy and water purification products. Warranty reserves are included in accrued expenses in the Condensed Consolidated Balance Sheets.

Note 10. Financing Arrangements

In conjunction with the Byrne Acquisition and the impending expiration of our existing revolving credit facility (“Existing Revolver Facility”), we entered into a $150,000,000 Second Amended and Restated Credit Agreement dated as of August 1, 2011 (the “New U.S. Credit Agreement”) with our existing consortium of senior lenders to fund the cash consideration paid and the costs associated with the acquisition, as well as to refinance our Existing Revolver Facility. The New U.S. Credit Agreement includes (i) a five-year $100,000,000 senior secured revolving credit facility with sublimits of up to $20,000,000 for letters of credit and up to $5,000,000 for swing line loans (the “Revolving Credit Facility”) and (ii) a $50,000,000 senior secured term loan facility (the “Term Loan Facility”). The New U.S. Credit Agreement expires on August 1, 2016. Amounts we repay under the Term Loan Facility may not be reborrowed. Subject to the satisfaction of certain conditions precedent, the Company may from time to time increase the Revolving Credit Facility by an aggregate amount not to exceed $50,000,000 without the consent of the lenders. The senior lenders include Bank of America (the lead bank and administrative agent), PNC Bank, National Association, and Wells Fargo Bank, National Association. Debt issuance costs relating to the New U.S. Credit Agreement were recorded in other assets and are being amortized over the life of the credit facilities. Such unamortized debt issuance costs amounted to approximately $1,156,000 at April 30, 2012.

Borrowings under the New U.S. Credit Agreement bear interest at rates ranging from 0.25% to 2.00% above the lender’s base rate, or at rates ranging from 1.25% to 3.00% above the London Interbank Offered Rate (“LIBOR”), depending upon the Company’s “Consolidated Leverage Ratio,” which is defined as the consolidated ratio of total funded debt to earnings before interest, taxes, depreciation and amortization, and as further adjusted under the terms of the New U.S. Credit Agreement (“Consolidated EBITDA”). At April 30, 2012, the lender’s base rate was 3.25% and the LIBOR rates ranged from 0.60% to 0.90%. The margins applicable to our outstanding borrowings were 1.25% above the lender’s base rate or 2.25% above LIBOR. All of our outstanding borrowings were under LIBOR contracts at April 30, 2012. The New U.S. Credit Agreement also provides for fees on the unused portion of our facilities at rates ranging from 0.25% to 0.50%, depending upon our Consolidated Leverage Ratio; such rate was 0.40% at April 30, 2012.

The principal amounts of the Term Loan Facility are to be paid in twenty consecutive quarterly installments of $2,500,000 each beginning on September 30, 2011. The New U.S. Credit Agreement permits us to make optional prepayments of loans at any time without premium or penalty other than customary LIBOR breakage fees. We are required to make mandatory prepayments of amounts outstanding under the New U.S. Credit Agreement of: (i) 100% of the net proceeds received from certain sales or other dispositions of all or any part of the Company and its subsidiaries’ assets, (ii) 100% of certain insurance and condemnation proceeds received by the Company or any of its subsidiaries, (iii) subject to certain exceptions, 100% of the net cash proceeds received by the Company or any of its subsidiaries from the issuance or occurrence of any indebtedness of the Company or any of its subsidiaries, and (iv) subject to certain exceptions, 100% of the net proceeds of the sale of certain equity.

The New U.S. Credit Agreement contains affirmative and negative covenants reasonably customary for similar credit facilities and is secured by (i) substantially all assets of Cantel and its United States-based subsidiaries (including Minntech, Mar Cor, Crosstex, and Strong Dental Products, Inc.) and (ii) a pledge by Cantel of all of the outstanding shares of Minntech, Mar Cor, Crosstex and Strong Dental owned by Cantel and 65% of the outstanding shares of Cantel’s foreign-based subsidiaries. We are in compliance with all financial and other covenants under the New U.S. Credit Agreement.

On April 30, 2012, we had $100,500,000 of outstanding borrowings under the New U.S. Credit Agreement, which consisted of $42,500,000 and $58,000,000 under the Term Loan Facility and the Revolving Credit Facility, respectively, and $42,000,000 was available to be borrowed under our Revolving Credit Facility. In May, we repaid an additional $4,000,000 under

the Revolving Credit Facility decreasing our total outstanding borrowings to $96,500,000 at May 31, 2012.

Note 11. Earnings Per Common Share

Basic EPS is computed based upon the weighted average number of common shares outstanding during the period. Diluted EPS is computed based upon the weighted average number of common shares outstanding during the period plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the period.

We include participating securities (unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents) in the computation of EPS pursuant to the two-class method. Our participating securities consist solely of unvested restricted stock awards, which have contractual participation rights equivalent to those of stockholders of unrestricted common stock. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities.

The following table sets forth the computation of basic and diluted EPS available to stockholders of common stock (excluding participating securities):

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2012			2011			2012			2011
Numerator for basic and diluted earnings per share:
Net income	$	8,174,000		$	5,048,000		$	21,688,000		$	15,743,000
Less income allocated to participating securities	(145,000		)	(77,000		)	(415,000		)	(227,000		)
Net income available to common stockholders	$	8,029,000		$	4,971,000		$	21,273,000		$	15,516,000

Denominator for basic and diluted earnings per share, as adjusted for participating securities:
Denominator for basic earnings per share - weighted average number of shares outstanding attributable to common stock	26,510,240			25,371,185			26,332,676			25,215,644

Dilutive effect of stock options using the treasury stock method and the average market price for the period	289,943			345,480			302,994			315,501

Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock	26,800,183			25,716,665			26,635,670			25,531,145

Earnings per share attributable to common stock:
Basic earnings per share	$	0.30		$	0.20		$	0.81		$	0.62

Diluted earnings per share	$	0.30		$	0.19		$	0.80		$	0.61

Stock options excluded from weighted average dilutive common shares outstanding because their inclusion would have been antidilutive	—			—			—			88,994

A reconciliation of weighted average number of shares and common stock equivalents attributable to common stock, as determined above, to the Company’s total weighted average number of shares and common stock equivalents, including participating securities, are set forth in the following table:

	Three Months Ended		Nine Months Ended
	April 30,		April 30,
	2012	2011	2012	2011
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock	26,800,183	25,716,665	26,635,670	25,531,145

Participating securities	482,218	404,394	512,599	369,218

Total weighted average number of shares and common stock equivalents attributable to both common stock and participating securities	27,282,401	26,121,059	27,148,269	25,900,363

Note 12. Income Taxes

The consolidated effective tax rate was 36.7% and 33.5% for the nine months ended April

30, 2012 and 2011, respectively. The increase in the consolidated effective tax rate was principally due to the geographic mix of pre-tax income, the unfavorable impact of recording a loss relating to the impairment of an investment and the expiration of Federal tax legislation relating to the research and experimentation tax credit, as described below.

The majority of our income before income taxes was generated from our United States operations, which had an overall effective tax rate of 37.5% and 35.6% for the nine months ended April 30, 2012 and 2011, respectively. The higher overall effective tax rate for the nine months ended April 30, 2012 was principally caused by (i) not recognizing a tax benefit on the loss relating to the impairment of our BIOSAFE investment, as more fully described in Note 16 to the Condensed Consolidated Financial Statements, due to the uncertainty of utilizing a capital loss tax benefit in the future and (ii) no longer being able to claim the research and experimentation tax credit as a result of the December 31, 2011 expiration of Federal tax legislation that had allowed the credit. Approximately 97% of our income before income taxes was generated from our United States operations for the nine months ended April 30, 2012 compared with approximately 90% of our income before income taxes in the prior year period.

Approximately 1% of our income before income taxes was generated from our Canadian operations for the nine months ended April 30, 2012 compared with approximately 6% of our income before income taxes in the prior year period. Our Canadian operations had an overall effective tax rate of 13.2% and 17.1% for the nine months ended April 30, 2012 and 2011, respectively. The low overall effective tax rates for both periods were due to the low corporate tax structure in Canada as well as the recognition of tax benefits upon resolution of income tax uncertainties, as more fully described below.

For the nine months ended April 30, 2012, approximately 2% of our income before income taxes was generated from our operations in Singapore, a country with a low corporate tax structure, compared with approximately 3% of our income before income taxes for the nine months ended April 30, 2011. The overall effective tax rate for our Singapore operation was 14.3% for both the nine months ended April 30, 2012 and 2011.

Our subsidiary in Japan generated a small loss for the nine months ended April 30, 2012 compared with a profit that was approximately 1% of our income before income taxes for the nine months ended April 30, 2011. Due to the existence of net operating loss carryforwards, we recorded no income taxes for the nine months ended April 30, 2011, which had a more favorable impact on our consolidated effective tax rate in the prior year due to the larger profit generated by our Japan subsidiary for the nine months ended April 30, 2011.

The results of operations for our Netherlands subsidiary did not have a significant impact on our overall effective tax rate for the nine months ended April 30, 2012 and 2011 due to the size of income before income taxes generated from this operation.

tax benefits are recognized in our financial statements in future periods, there would not be a significant impact to our overall effective tax rate due to the size of the unrecognized tax benefits in relation to our income before income taxes. We do not expect such unrecognized tax benefits to significantly decrease or increase in the next twelve months.

A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is as follows:

	Unrecognized
	Tax Benefits

Unrecognized tax benefits on July 31, 2010	$	208,000
Increase for current period tax position	124,000
Lapse of statute of limitations	(141,000		)
Unrecognized tax benefits on July 31, 2011	191,000
Lapse of statute of limitations	(67,000		)
Unrecognized tax benefits on April 30, 2012	$	124,000

Generally, the Company is no longer subject to federal, state or foreign income tax examinations for fiscal years ended prior to July 31, 2004.

Our policy is to record potential interest and penalties related to income tax positions in interest expense and general and administrative expense, respectively, in our Condensed Consolidated Financial Statements. However, such amounts have been relatively insignificant due to the amount of our unrecognized tax benefits relating to uncertain tax positions.

Note 13. Commitments and Contingencies

Long-term contractual obligations

As of April 30, 2012, aggregate annual required payments over the remaining fiscal year, the next four years and thereafter under our contractual obligations that have long-term components were as follows:

	Three Months
	Ending
	July 31,		Year Ending July 31,
	2012		2013		2014		2015		2016		Thereafter		Total
	(Amounts in thousands)
Maturities of the credit facilities	$	2,500	$	10,000	$	10,000	$	10,000	$	10,000	$	58,000	$	100,500
Expected interest payments under the credit facilities (1)	750		2,812		2,511		2,210		1,909		5		10,197
Minimum commitments under noncancelable operating leases	993		3,112		2,734		2,146		1,354		5,202		15,541
Deferred compensation and other	92		176		105		36		36		94		539
Acquisitions payable	—		1,100		1,800		1,400		—		—		4,300
Compensation agreements	689		2,495		450		150		150		75		4,009
Total contractual obligations	$	5,024	$	19,695	$	17,600	$	15,942	$	13,449	$	63,376	$	135,086

(1) The expected interest payments under both the term and revolving credit facilities reflect interest rates of 3.01%, which was our weighted average interest rate on outstanding borrowings at April 30, 2012.

Operating leases

Minimum commitments under operating leases include minimum rental commitments for our leased manufacturing facilities, warehouses, office space and equipment.

Deferred compensation and other

Deferred compensation and other includes deferred compensation arrangements for certain former Minntech directors and officers and is recorded in other long-term liabilities. Additionally, deferred compensation and other includes purchase commitments of inventory.

Acquisitions payable

In connection with the Byrne Acquisition, we estimated $2,900,000 at April 30, 2012 as the fair value of contingent consideration payable over two years based on the achievement by the acquired business of certain targeted amounts of gross profit. In addition, we agreed that if the aggregate value of the $10,000,000 of Cantel common stock issued as part of the consideration used to acquire the Byrne Medical Business is less than $10,000,000 on July 31, 2014, we will pay to BMI in cash or stock (at our option) an amount equal to the difference between $10,000,000 and the then value of the shares (based on the closing price of Cantel common stock on the NYSE on July 31, 2014), subject to certain conditions and limitations. Accordingly, at April 30, 2012, we have estimated $1,400,000 as the fair value of this payable, as more fully described in Notes 3 and 7 to the Condensed Consolidated Financial Statements.

Compensation agreements

We have previously entered into various severance contracts with executives of the Company, including our Corporate executive officers and our subsidiary Chief Executive Officers, that defined certain compensation arrangements relating to various employment termination scenarios. In conjunction with the Byrne Acquisition on August 1, 2011, we entered into a three-year employment agreement with an executive officer of the acquired business.

Note 14. Operating Segments

We are a leading provider of infection prevention and control products and services in the healthcare market. Our products include water purification equipment, sterilants, disinfectants and cleaners, specialized medical device reprocessing systems for endoscopy and renal dialysis, disposable infection control products primarily for dental and GI endoscopy markets, diaylsate concentrates and other dialysis supplies, hollow fiber membrane filtration and separation products for medical and non-medical applications, and specialty packaging for the transport and temperature regulation of infectious and biological specimens.

In accordance with FASB ASC Topic 280, “Segment Reporting,” (“ASC 280”), we have determined our reportable business segments based upon an assessment of product types, organizational structure, customers and internally prepared financial statements. The primary factors used by us in analyzing segment performance are net sales and operating income.

The Company’s segments are as follows:

Endoscopy, which includes medical device reprocessing systems, disinfectants, detergents and other supplies used to high-level disinfect flexible endoscopes and other approved devices. Since August 2011, this segment also offers disposable infection control products intended to eliminate the challenges associated with proper cleaning and sterilization of numerous reusable components used in gastrointestinal (GI) endoscopy procedures. Additionally, this segment includes technical maintenance service on its products.

Water Purification and Filtration, which includes water purification equipment design and manufacturing, project management, installation, maintenance, deionization and mixing systems, as well as hollow fiber filter devices and ancillary products for high-purity fluid and separation applications for healthcare (with a large concentration in dialysis), pharmaceutical, biotechnology, research, beverage, semiconductor and other commercial industries. Additionally, this segment includes cold sterilant products used to disinfect high-purity water systems.

Two customers collectively accounted for approximately 46% of our Water Purification and Filtration segment net sales and approximately 16% of our consolidated net sales during the nine months ended April 30, 2012.

Healthcare Disposables, which includes single-use infection prevention and control products used principally in the dental market such as face masks, sterilization pouches, patient towels and bibs, self-sealing sterilization pouches, tray covers, surface barriers including eyewear, aprons and gowns, disinfectants, germicidal wipes, hand care products, gloves, sponges, cotton products, cups, needles and syringes, scalpels and blades, and saliva evacuators and ejectors. Beginning February 2011 this segment also offers both a mail-in service and in-office spore test kits for healthcare professionals to verify the performance of their sterilizers.

Four customers collectively accounted for approximately 62% of our Healthcare Disposables segment net sales and approximately 12% of our consolidated net sales during the nine months ended April 30, 2012.

Dialysis, which includes disinfection/sterilization reprocessing equipment, sterilants, supplies and concentrates related to hemodialysis treatment of patients with acute kidney failure or chronic kidney failure associated with end-stage renal disease. Additionally, this segment includes

technical maintenance service on its products.

One customer accounted for approximately 36% of our Dialysis segment net sales and approximately 10% of our consolidated net sales during the nine months ended April 30, 2012.

All Other

In accordance with quantitative thresholds established by ASC 280, we have combined the Therapeutic Filtration, Specialty Packaging and Chemistries operating segments into the All Other reporting segment.

Therapeutic Filtration, which includes hollow fiber filter devices and ancillary products for use in medical applications that are sold to biotech manufacturers and third-party distributors.

Specialty Packaging, which includes specialty packaging and thermal control products, as well as related compliance training, for the safe transport of infectious and biological specimens and thermally sensitive pharmaceutical, medical and other products.

Chemistries, which includes sterilants, disinfectants, detergents and decontamination services used in various applications for infection prevention and control.

The operating segments follow the same accounting policies used for our Condensed Consolidated Financial Statements as described in Note 2 to the 2011 Form 10-K.

Information as to operating segments is summarized below:

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2012			2011			2012			2011

Net sales:
Endoscopy	$	38,606,000		$	27,311,000		$	115,037,000		$	74,119,000
Water Purification and Filtration	25,955,000			23,298,000			76,505,000			67,973,000
Healthcare Disposables	19,336,000			18,237,000			56,668,000			50,903,000
Dialysis	8,902,000			9,318,000			27,180,000			29,326,000
All Other	4,439,000			4,455,000			12,407,000			13,312,000
Total	$	97,238,000		$	82,619,000		$	287,797,000		$	235,633,000

Operating income:
Endoscopy	$	7,847,000		$	3,540,000		$	22,081,000		$	10,119,000
Water Purification and Filtration	2,818,000			1,626,000			8,380,000			5,241,000
Healthcare Disposables	3,529,000			2,344,000			9,138,000			6,962,000
Dialysis	2,217,000			2,201,000			6,578,000			7,464,000
All Other	132,000			185,000			(373,000		)	1,060,000
	16,543,000			9,896,000			45,804,000			30,846,000
General corporate expenses	(2,769,000		)	(2,253,000		)	(8,089,000		)	(6,530,000		)
Interest expense, net	(884,000		)	(171,000		)	(2,861,000		)	(636,000		)
Other expense	—			—			(605,000		)	—

Income before income taxes	$	12,890,000		$	7,472,000		$	34,249,000		$	23,680,000

Note 15. Legal Proceedings

In the normal course of business, we are subject to pending and threatened legal actions. It is our policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount of anticipated exposure can be reasonably estimated. We do not believe that any of these pending claims or legal actions will have a material effect on our business, financial condition, results of operations or cash flows.

Note 16. Convertible Notes Receivable

In February 2009, we invested an initial $200,000 in a senior subordinated convertible promissory note issued by BIOSAFE, in connection with BIOSAFE’s grant to us of certain exclusive and non-exclusive license rights to BIOSAFE’s antimicrobial additive. BIOSAFE is the owner of a patented and proprietary antimicrobial agent that is built into the manufacturing of end-products to achieve long-lasting microbial protection on such end-products’ surface. As a result of BIOSAFE’s successful raising of a minimum incremental amount of cash following our investment, we invested an additional $300,000 in notes of BIOSAFE in January 2010 bringing the aggregate investment in BIOSAFE notes to $500,000, as obligated under our agreement with BIOSAFE. We are not obligated to invest any additional funds.

The maturity date of the notes, originally June 30, 2011, and extended (through an amendment to the notes in June 2011) to December 31, 2011, was further extended (through an amendment to the notes in December 2011) to December 31, 2012 (“Maturity Date”). As amended, the interest rate of the notes was 8% per annum through June 8, 2011 and is 12% per annum thereafter. The entire principal amount and accrued interest are automatically payable in a newly-created series of preferred stock issued upon the closing of BIOSAFE’s next round financing on or before the Maturity Date (“Next Round Financing”) based on a conversion

formula.

If the Next Round Financing fails to occur by the Maturity Date, the notes, both principal and interest, will be payable in cash and the automatic conversion will no longer apply. Additionally, during the 30-day period following the Maturity Date, we may elect to convert the principal and all accrued interest into shares of common stock of BIOSAFE at a price per share equal to 50% of the fair market value (the “Discount Rate”). The Discount Rate, originally 70% was reduced to 60% in connection with the initial amendment of the notes and further reduced to 50% in connection with the second amendment of the notes. No further interest will accrue if we make such election. As of May 31, 2012, the Next Round Financing has not occurred.

In connection with our investment, we entered into a license agreement with BIOSAFE under which we will pay BIOSAFE a fixed royalty percentage of sales of our products containing BIOSAFE’s antimicrobial formulation.

This investment, together with the accrued interest, is included within other assets in our Condensed Consolidated Balance Sheets at July 31, 2011. At January 31, 2012, we evaluated this investment for potential impairment and determined that repayment of the notes and accrued interest was unlikely primarily due to BIOSAFE’s inability to obtain the Next Round Financing and our assessment of BIOSAFE’s going concern. Accordingly, we deemed the investment, together with accrued interest of $105,000, fully impaired and recorded a loss of $605,000 during our second quarter of fiscal 2012, which was recorded as other expense and a reduction in other assets in the Condensed Consolidated Financial Statements. In addition, due to the inability to currently deduct a capital loss and the uncertainty of utilizing a capital loss tax benefit in the future, a tax benefit was not recognized on the loss relating to the impairment of this investment.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand Cantel Medical Corp. (“Cantel”). The MD&A is provided as a supplement to and should be read in conjunction with our financial statements and the accompanying notes. Our MD&A includes the following sections:

Overview provides a brief description of our business and a summary of significant activity that has affected or may affect our results of operations and financial condition.

Results of Operations provides a discussion of the consolidated results of operations for the three and nine months ended April 30, 2012 compared with the three and nine months ended April 30, 2011.

Liquidity and Capital Resources provides an overview of our working capital, cash flows, contractual obligations, financing and foreign currency activities.

Critical Accounting Policies provides a discussion of our accounting policies that require critical judgments, assumptions and estimates.

Forward-Looking Statements provides a discussion of cautionary factors that may affect future results.

Overview

Cantel is a leading provider of infection prevention and control products and services in the healthcare market, specializing in the following operating segments:

· Endoscopy: Medical device reprocessing systems, disinfectants, detergents and other supplies used to high-level disinfect flexible endoscopes. Beginning in August 2011, this segment also offers disposable infection control products intended to eliminate the challenges associated with proper cleaning and sterilization of numerous reusable components used in gastrointestinal (GI) endoscopy procedures.

· Water Purification and Filtration: Water purification equipment and services, filtration and separation products, and disinfectants for the medical, pharmaceutical, biotech, beverage and commercial industrial markets.

· Healthcare Disposables: Single-use, infection prevention and control products used principally in the dental market including face masks, sterilization pouches, towels and bibs, tray covers, saliva ejectors, germicidal wipes, plastic cups, and disinfectants. Beginning in February 2011 this segment also offers both a mail-in service and in-office spore test kits for healthcare professionals to verify the performance of their sterilizers.

· Dialysis: Medical device reprocessing systems, sterilants/disinfectants, dialysate concentrates and other supplies for renal dialysis.

· Therapeutic Filtration: Hollow fiber membrane filtration and separation technologies for medical applications. (Included in the All Other reporting segment.)

· Specialty Packaging: Specialty packaging and thermal control products, as well as related compliance training, for the transport of infectious and biological specimens and thermally sensitive pharmaceutical, medical and other products. (Included in the All Other reporting segment.)

· Chemistries: Sterilants, disinfectants, detergents and decontamination services used in various applications for infection prevention and control. (Included in the All Other reporting segment.)

Most of our equipment, consumables and supplies are used to help prevent or control the occurrence or spread of infections.

See our Annual Report on Form 10-K for the fiscal year ended July 31, 2011 (the “2011 Form 10-K”) and our Condensed Consolidated Financial Statements for additional financial information regarding our reporting segments.

Significant Activity

(i) For the three and nine months ended April 30, 2012 compared with the three and nine months ended April 30, 2011, net sales increased by 17.7% and 22.1%, respectively, and net income increased by 61.9% and 37.8%, respectively, to a record level of net income for a three and nine month period . We continue to benefit from having a broad portfolio of infection prevention and control products sold into diverse business segments, where approximately 72% of our net sales are attributable to consumable products and service. The primary factors that contributed to this financial performance, as further described elsewhere in this MD&A, were as follows:

· increased sales and net income, inclusive of acquisition related costs, acquisition related fair value adjustments and higher interest expense, as a result of our acquisition of the business and substantially all of the assets of Byrne Medical, Inc. (“BMI”), which is included in our Endoscopy segment, as more fully described in Note 3 to the Condensed Consolidated Financial Statements,

· significant increases in sales volume of endoscope reprocessing consumable products and services as a result of the increased field population of equipment,

· improved sales and profitability in our Water Purification and Filtration segment primarily relating to increased sales of our capital equipment and service in the dialysis industry and the impact of our acquisition of the United States water purification business of Gambro Renal Products, Inc. (“GRP”) and a Swedish-based affiliate of GRP (the “Gambro Business” or the “Gambro Acquisition”) on October 6, 2010, as more fully described in Note 3 to the Condensed Consolidated Financial Statements, and

· improved sales and profitability in our Healthcare Disposables segment primarily due to increased demand for our face masks and the decreasing price of raw materials.

The above factors were partially offset by:

· decreases in sales volume of our endoscope reprocessing equipment as these capital equipment sales were elevated in prior periods as a result of our

participation in a major initiative by the Veterans Administration to upgrade their hospitals’ endoscope reprocessing equipment as well as regulatory issues experienced by a major competitor,

· decreases in net sales and profitability in our Therapeutic Filtration and Dialysis operating segments,

· increased investment in research and development activities and

· the impairment of an investment during our second quarter of fiscal 2012, as more fully described in Note 16 to the Condensed Consolidated Financial Statements and elsewhere in this MD&A.

(ii) We sell our dialysis products to a concentrated number of customers. Sales in our Dialysis segment were adversely impacted by the continued loss of some lower margin dialysate concentrate business as a result of the highly competitive and price sensitive market for such product, as well as the decrease in demand for our Renatron® reprocessing equipment, sterilants and reprocessing supplies, as more fully described elsewhere in this MD&A. This reduction in dialysis sales has reduced overall profitability in this segment. Our market for dialysis reprocessing products is limited to dialysis centers that reuse dialyzers, which market has been decreasing in the United States despite the environmental advantages and our belief that the per-procedure cost of reuse dialyzers is more economical than single-use dialyzers. A further decrease in the market for dialysis concentrate and reprocessing products is likely to result in continued loss of net sales and a lower level of profitability in this segment in the future. See “Risk Factors” in our 2011 Form 10-K for a discussion of our Dialysis segment.

(iii) On August 1, 2011 our Minntech subsidiary acquired the business and substantially all of the assets of BMI, as more fully described in Note 3 to the Condensed Consolidated Financial Statements. Certain components of the acquisition’s purchase price were recorded at fair value and will be continually re-measured at each balance sheet date, which has the potential for creating earnings volatility in the future as further described elsewhere in this MD&A and in Notes 3 and 7 to the Condensed Consolidated Financial Statements.

(iv) In conjunction with the acquisition of the business and substantially all of the assets of BMI (the “Byrne Medical Business” or the “Byrne Acquisition”) and the impending expiration of our existing credit facility, we entered into a $150,000,000 Second Amended and Restated Credit Agreement dated as of August 1, 2011 with our senior lenders to fund the cash consideration paid and the costs associated with the acquisition, as well as to refinance our working capital credit facilities under an existing credit agreement, as more fully described elsewhere in this MD&A and in Notes 3 and 10 to the Condensed Consolidated Financial Statements.

(v) In order to more fully capitalize on the strength of the Medivators brand name currently used in our endoscopy business, we decided to change the name of Minntech Corporation to Medivators Inc. The name change will take legal effect on August 1, 2012. The Minntech name in our foreign subsidiaries will also be changed to Medivators.

(vi) In our prior fiscal year, we acquired the Gambro Business on October 6, 2010 and the sterilization monitoring business of ConFirm Monitoring Systems, Inc. (the “ConFirm Monitoring Business” or the “ConFirm Acquisition”) on February 11, 2011, as more fully described in Note 3 to the Condensed Consolidated Financial Statements.

(vii) The Company issued 9,955,000 additional shares of common stock in connection with a three-for-two stock split effected in the form of a 50% stock dividend paid on February 1, 2012 to stockholders of record on January 23, 2012, as more fully described elsewhere in this MD&A.

(viii) On October 21, 2011, we announced an increase in the semiannual cash dividend to $0.0467 per share ($0.07 per share on a pre-split basis) of outstanding common stock, which was paid on January 31, 2012 to shareholders of record at the close of business on January 17, 2012, as more fully described elsewhere in this MD&A.

Results of Operations

The results of operations described below reflect the operating results of Cantel and its wholly-owned subsidiaries.

Since the acquisition of the Byrne Medical Business was completed on August 1, 2011, its results of operations are included in our results of operations for the three and nine months ended April 30, 2012 and are excluded from the three and nine months ended April 30, 2011.

Since the acquisition of the ConFirm Monitoring Business was consummated on February 11, 2011, its results of operations are included in our results of operations for the three and nine months ended April 30, 2012 and the portion of the three and nine months ended April 30, 2011 subsequent to its acquisition date.

Since the Gambro Acquisition was completed on October 6, 2010, its results of operations are included in our results of operations for the three and nine months ended April 30, 2012, the three months ended April 30, 2011 and the portion of the nine months ended April 30, 2011 subsequent to its acquisition date.

The following discussion should also be read in conjunction with our 2011 Form 10-K.

The following table gives information as to the net sales and the percentage to the total net sales for each of our reporting segments:

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2012			2011			2012			2011
	(Dollar Amounts in Thousands)
	$		%	$		%	$		%	$		%

Endoscopy	$	38,606	39.7	$	27,311	33.0	$	115,037	40.0	$	74,119	31.5
Water Purification and Filtration	25,955		26.7	23,298		28.2	76,505		26.6	67,973		28.9
Healthcare Disposables	19,336		19.9	18,237		22.1	56,668		19.7	50,903		21.6
Dialysis	8,902		9.1	9,318		11.3	27,180		9.4	29,326		12.4
All Other	4,439		4.6	4,455		5.4	12,407		4.3	13,312		5.6
	$	97,238	100.0	$	82,619	100.0	$	287,797	100.0	$	235,633	100.0

Net Sales

Net sales increased by $14,619,000, or 17.7%, to $97,238,000 for the three months ended April 30, 2012 from $82,619,000 for the three months ended April 30, 2011.

Net sales increased by $52,164,000, or 22.1%, to $287,797,000 for the nine months ended April 30, 2012 from $235,633,000 for the nine months ended April 30, 2011.

The increase in net sales for the three and nine months ended April 30, 2012 was principally attributable to increases in sales of endoscopy products and services, water purification and filtration products and service and healthcare disposables products, partially offset by decreases in sales of dialysis products, and with the respect to the nine months ended April 30, 2012 therapeutic filtration products.

Net sales of endoscopy products and services increased by $11,295,000, or 41.4%, and $40,918,000, or 55.2%, for the three and nine months ended April 30, 2012, respectively, compared with the three and nine months ended April 30, 2011, primarily due to (i) net sales for the three and nine months ended April 30, 2012 of $12,565,000 and $36,204,000, respectively, due to the acquisition of the Byrne Medical Business on August 1, 2011 and (ii) increases in demand in the United States for our disinfectants, service, consumables and equipment accessories due to the significant increase in the installed base of endoscope reprocessing equipment. Partially offsetting this increase was a decrease in demand for our endoscope reprocessing equipment during the six month period ended April 30, 2012. Demand for our endoscope reprocessing equipment had been elevated during the second half of fiscal 2011 and the three months ended October 31, 2011 due to our previous investments in new product offerings and sales and marketing programs as well as regulatory issues experienced by a major competitor, all of which enabled us to increase our sales of endoscope reprocessing equipment including successfully participating in a major initiative beginning in the second half of fiscal 2011 by the Veterans Administration to upgrade their hospitals’ endoscope reprocessing equipment. Beginning in our second quarter of fiscal 2012, this elevated level of capital equipment sales gradually decreased to a similar level that existed prior to the second half of fiscal 2011. However, we expect disinfectants, service, consumables and equipment accessories to continue to benefit from the increased installed base of endoscope reprocessing equipment.

Changes in selling prices did not have a significant effect on net sales for the three and nine months ended April 30, 2012 compared with the three and nine months ended April 30, 2011.

Net sales of water purification and filtration products and services increased by $2,657,000, or 11.4%, and $8,532,000, or 12.6%, for the three and nine months ended April 30, 2012, respectively, compared with the three and nine months ended April 30, 2011, primarily due to (i) increases in demand for our water purification capital equipment and service in the dialysis industry, (ii) incremental net sales attributable to the prior year acquisition of the Gambro Business on October 6, 2010 and (iii) higher selling prices of our water purification products and services, which favorably impacted net sales for the three and nine months ended April 30, 2012 by approximately $356,000 and $1,516,000, respectively. Partially offsetting these increases was a decrease in demand for capital equipment used for commercial and industrial applications.

Net sales of healthcare disposables products increased by $1,099,000, or 6.0%, and $5,765,000, or 11.3%, for the three and nine months ended April 30, 2012, respectively, compared with the three and nine months ended April 30, 2011, principally due to (i) incremental net sales of approximately $697,000 and $2,902,000 for the three and nine months ended April 30, 2012, respectively, attributable to the prior year acquisition of the ConFirm Monitoring Business on February 11, 2011, (ii) higher selling prices, which favorably impacted net sales for the three and nine months ended April 30, 2012 by approximately $391,000 and $1,312,000, respectively, and (iii) an increase in customer demand for our face masks.

Net sales of dialysis products and services decreased by 4.5% and 7.3% for the three and nine months ended April 30, 2012, respectively, compared with the three and nine months ended April 30, 2011 primarily due to (i) the expected adverse impact of losing some dialysate concentrate business (a concentrated acid or bicarbonate used to prepare dialysate, a chemical solution that draws waste products from a patient’s blood through a dialyzer membrane during hemodialysis treatment) from domestic customers as a result of the highly competitive and price sensitive market for this lower margin commodity product and (ii) a decrease in demand in the United States (including a decrease from our largest dialysis customer, DaVita, Inc. (“DaVita”)) for our Renatron dialyzer reprocessing equipment, sterilants and reprocessing supplies. Due to sales price decreases by some of our competitors, we expect a continued decrease in net sales of our lower margin dialysate concentrate product in the future as we elect not to pursue unprofitable concentrate sales. Furthermore, Fresenius Medical Care (“Fresenius”), the largest dialysis provider chain in the United States, manufactures dialysate concentrate themselves and no longer purchases that product from us. Our market for dialysis reprocessing products is limited to dialysis centers that reuse dialyzers, which market has been decreasing in the United States despite the environmental advantages and our belief that the per-procedure cost of reuse dialyzers is more economical than single-use dialyzers. The shift from reusable to single-use dialyzers is principally due to the lowering cost of single-use dialyzers, the ease of using a dialyzer one time, and the commitment of Fresenius, a manufacturer of single-use dialyzers, to convert dialysis clinics performing reuse to single-use facilities. In addition, DaVita has been evaluating the economics and other factors associated with single-use versus reuse on a market-by-market basis. This evaluation has resulted in the conversion by DaVita of certain clinics from reuse to single-use and in many cases the opening of new clinics as single-use clinics. A further decrease in the market for dialysis concentrate and reprocessing products is likely to result in continued loss of net sales and a lower level of profitability in this segment in the future. Additionally, our Dialysis segment is highly dependent upon DaVita as a customer and any further shift by this customer away from reuse would have a material adverse effect on our Dialysis segment net sales. Changes in selling prices of our dialysis products did not have a significant effect on net sales for the three

and nine months ended April 30, 2012 compared with the three and nine months ended April 30, 2011.

Net sales in the All Other reporting segment was comparable for the three months ended April 30, 2012 compared with the three months ended April 30, 2011, and decreased by $905,000, or 6.8%, for the nine months ended April 30, 2012 compared with the nine months ended April 30, 2011. The decrease was primarily the result of a decrease of $877,000 in net sales in our Therapeutic Filtration operating segment due to (i) a decrease in domestic and international demand for our hemofilter products (a device used to perform hemofiltration in a slow, continuous blood filtration therapy used to control fluid overload and acute renal failure in unstable, critically ill patients who cannot tolerate the rapid filtration rates of conventional hemodialysis) and (ii) a reduction in higher margin sales in the United States of filters manufactured by us on an OEM basis for a single customer’s hydration system as a result of our customer phasing out the use of our filters in the prior year. Increases in selling prices of our therapeutic filtration, specialty packaging and chemistries products did not have a significant effect on net sales in the All Other segment for the three and nine months ended April 30, 2012 compared with the three and nine months ended April 30, 2011.

Gross profit

Gross profit increased by $11,317,000, or 36.2%, to $42,619,000 for the three months ended April 30, 2012 from $31,302,000 for the three months ended April 30, 2011. Gross profit as a percentage of net sales for the three months ended April 30, 2012 and 2011 was 43.8% and 37.9%, respectively.

Gross profit increased by $30,504,000, or 33.6%, to $121,390,000 for the nine months ended April 30, 2012 from $90,886,000 for the nine months ended April 30, 2011. Gross profit as a percentage of net sales for the nine months ended April 30, 2012 and 2011 was 42.2% and 38.6%, respectively.

Gross profit as a percentage of net sales for the three and nine months ended April 30, 2012 increased compared with the three and nine months ended April 30, 2011 primarily due to (i) the acquisition of the Byrne Medical Business, which products carry a higher gross profit percentage, (ii) more favorable sales mix due to increases in sales volume of certain higher margin products (such as sterilants in our Endoscopy segment and face masks in our Healthcare Disposables segment) and decreases in sales volume of lower margin products (such as endoscope reprocessing equipment in our Endoscopy segment), (iii) improved gross margins in our Water Purification and Filtration segment as a result of the full integration of the Gambro Business into our Minnesota manufacturing facility, (iv) increases in selling prices in our Water Purification and Filtration and Healthcare Disposables segments, and (v) a decrease in raw materials costs primarily in our Healthcare Disposables segment during our third quarter of fiscal 2012 due to the decreasing price of oil.

We cannot provide assurances that our gross profit percentage will not be adversely affected in the future (i) by uncertainties associated with our product mix, (ii) by price competition in certain of our segments such as Healthcare Disposables, Endoscopy and Dialysis, (iii) if raw materials and distribution costs increase and we are unable to implement price increases or (iv) by the impact of legislation relating to the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act which provides for a 2.3% annual excise tax on the sales of certain medical devices in the United States commencing in January

2013. Additionally, despite expensive shipping costs, some of our competitors manufacture certain healthcare disposable products in China and Southeast Asia due to lower overall costs. Although we believe the quality of our healthcare disposable products, which are generally produced in the United States, are superior to similar products produced in China and Southeast Asia, we may experience significant pricing pressure that would adversely affect our gross profit in the future in our Healthcare Disposables segment as a result of low cost competition from products produced in China and Southeast Asia.

Operating Expenses

Selling expenses increased by $2,735,000, or 23.8%, to $14,240,000 for the three months ended April 30, 2012 from $11,505,000 for the three months ended April 30, 2011. For the nine months ended April 30, 2012, selling expenses increased by $8,505,000, or 26.6%, to $40,433,000 from $31,928,000 for the nine months ended April 30, 2011. These increases were primarily due to the inclusion of $2,954,000 and $8,102,000 of selling expenses relating to the Byrne Medical Business for the three and nine months ended April 30, 2012, respectively.

Selling expenses as a percentage of net sales were 14.6% and 13.9% for the three months ended April 30, 2012 and 2011, respectively, and 14.0% and 13.5% for the nine months ended April 30, 2012 and 2011, respectively. The increase in our selling expense as a percentage of net sales was primarily attributable to the inclusion of the higher selling cost structure of the Byrne Medical Business operation.

General and administrative expenses increased by $1,949,000, or 18.7%, to $12,388,000 for the three months ended April 30, 2012, from $10,439,000 for the three months ended April 30, 2011, primarily due to (i) the inclusion of $1,427,000 of general and administrative expenses relating to the Byrne Medical Business, which includes approximately $902,000 in amortization of intangible assets and a $395,000 reduction in expenses relating to fair value adjustment of a price floor financial instrument as further described in Notes 3 and 7 to the Condensed Consolidated Financial Statements and (ii) approximately $448,000 in compensation expense (exclusive of the acquired Byrne Medical Business) relating to annual salary raises, higher incentive compensation and employee benefit costs, partially offset by lower stock-based compensation expense.

General and administrative expenses increased by $6,719,000, or 22.5%, to $36,582,000 for the nine months ended April 30, 2012, from $29,863,000 for the nine months ended April 30, 2011, primarily due to (i) the inclusion of $5,000,000 of general and administrative expenses relating to the Byrne Medical Business, which includes approximately $2,711,000 in amortization of intangible assets, $626,000 in acquisition related expenses and a $1,400,000 reduction in expenses relating to fair value adjustments of contingent consideration and a price floor financial instrument as further described in Notes 3 and 7 to the Condensed Consolidated Financial Statements and (ii) approximately $1,785,000 in compensation expense (exclusive of the acquired Byrne Medical Business) relating to annual salary raises, higher incentive compensation, additional administrative personnel, employee benefit costs and stock-based compensation expense, including $309,000 in additional stock-based compensation related to an employment termination which required us to accelerate the vesting of certain stock options and restricted shares.

General and administrative expenses as a percentage of net sales were 12.7% and 12.6% for the three months ended April 30, 2012 and 2011, respectively, and 12.7% for both the nine months ended April 30, 2012 and 2011.

Research and development expenses (which include continuing engineering costs) increased by $502,000, or 29.3%, to $2,217,000 for the three months ended April 30, 2012 from $1,715,000 for the three months ended April 30, 2011. For the nine months ended April 30, 2012, research and development expenses increased by $1,881,000, or 39.4%, to $6,660,000 from $4,779,000 for the nine months ended April 30, 2011. These increases were primarily due to development work on certain new products in our Endoscopy segment.

Interest

Interest expense increased by $702,000 to $897,000 for the three months ended April 30, 2012 from $195,000 for the three months ended April 30, 2011. For the nine months ended April 30, 2012, interest expense increased by $2,230,000 to $2,928,000, from $698,000 for the nine months ended April 30, 2011. These increases were primarily due to increases in average outstanding borrowings and average interest rates relating to the August 1, 2011 acquisition of the Byrne Medical Business, as further described elsewhere in this MD&A and in Notes 3 and 10 to the Condensed Consolidated Financial Statements.

Interest income decreased by $11,000 to $13,000 for the three months ended April 30, 2012, from $24,000 for the three months ended April 30, 2011. For the nine months ended April 30, 2012, interest income increased by $5,000 to $67,000, from $62,000 for the nine months ended April 30, 2011.

Other expense

In our second quarter of fiscal 2012, a $605,000 loss was recorded in other expense relating to the impairment of our investment in senior subordinated convertible promissory notes issued by BIOSAFE, Inc. (“BIOSAFE”), as more fully described elsewhere in this MD&A.

Income taxes

The consolidated effective tax rate was 36.7% and 33.5% for the nine months ended April 30, 2012 and 2011, respectively. The increase in the consolidated effective tax rate was principally due to the geographic mix of pre-tax income, the unfavorable impact of recording a loss relating to the impairment of an investment and the expiration of Federal tax legislation relating to the research and experimentation tax credit, as described below.

The majority of our income before income taxes was generated from our United States operations, which had an overall effective tax rate of 37.5% and 35.6% for the nine months ended April 30, 2012 and 2011, respectively. The higher overall effective tax rate for the nine months ended April 30, 2012 was principally caused by (i) not recognizing a tax benefit on the loss relating to the impairment of our BIOSAFE investment, as more fully described elsewhere in this MD&A, due to the uncertainty of utilizing a capital loss tax benefit in the future and (ii) no longer being able to claim the research and experimentation tax credit as a result of the December 31, 2011 expiration of Federal tax legislation that had allowed the credit. Approximately 97% of our income before income taxes was generated from our United States operations for the nine months ended April 30, 2012 compared with approximately 90% of our income before income taxes in the prior year period.

Approximately 1% of our income before income taxes was generated from our Canadian operations for the nine months ended April 30, 2012 compared with approximately 6% of our

income before income taxes in the prior year period. Our Canadian operations had an overall effective tax rate of 13.2% and 17.1% for the nine months ended April 30, 2012 and 2011, respectively. The low overall effective tax rates for both periods were due to the low corporate tax structure in Canada as well as the recognition of tax benefits upon resolution of income tax uncertainties, as more fully described below.

We record liabilities for an unrecognized tax benefit when a tax benefit for an uncertain tax position is taken or expected to be taken on a tax return, but is not recognized in our Condensed Consolidated Financial Statements because it does not meet the more-likely-than-not recognition threshold that the uncertain tax position would be sustained upon examination by the applicable taxing authority. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the tax authorities. Any adjustments upon resolution of income tax uncertainties are recognized in our results of operations. However, if our unrecognized tax benefits are recognized in our financial statements in future periods, there would not be a significant impact to our overall effective tax rate due to the size of the unrecognized tax benefits in relation to our income before income taxes. We do not expect such unrecognized tax benefits to significantly decrease or increase in the next twelve months.

A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is as follows:

	Unrecognized
	Tax Benefits

Unrecognized tax benefits on July 31, 2010	$	208,000
Increase for current period tax position	124,000
Lapse of statute of limitations	(141,000		)
Unrecognized tax benefits on July 31, 2011	191,000
Lapse of statute of limitations	(67,000		)
Unrecognized tax benefits on April 30, 2012	$	124,000

Generally, the Company is no longer subject to federal, state or foreign income tax examinations for fiscal years ended prior to July 31, 2004.

Stock-Based Compensation

The following table shows the income statement components of stock-based compensation expense recognized in the Condensed Consolidated Statements of Income:

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2012			2011			2012			2011

Cost of sales	$	51,000		$	31,000		$	141,000		$	101,000
Operating expenses:
Selling	109,000			100,000			300,000			316,000
General and administrative	533,000			733,000			2,545,000			2,114,000
Research and development	13,000			7,000			33,000			22,000
Total operating expenses	655,000			840,000			2,878,000			2,452,000
Stock-based compensation before income taxes	706,000			871,000			3,019,000			2,553,000
Income tax benefits	(247,000		)	(319,000		)	(1,073,000		)	(927,000		)
Total stock-based compensation expense, net of tax	$	459,000		$	552,000		$	1,946,000		$	1,626,000

Decrease in earnings per common share due to stock-based compensation:

Basic	$	0.02		$	0.02		$	0.07		$	0.06
Diluted	$	0.02		$	0.02		$	0.07		$	0.06

The above stock-based compensation expense before income taxes was recorded in the Condensed Consolidated Financial Statements as stock-based compensation expense and an

increase to additional paid-in capital. The related income tax benefits were recorded as an increase to long-term deferred income tax assets (which are netted with long-term deferred income tax liabilities) and a reduction to income tax expense. In January 2012, in connection with an employment termination, we were required to accelerate the vesting of certain stock options and restricted shares resulting in an additional $309,000 of stock-based compensation expense recorded in general and administrative expenses in the Condensed Consolidated Statements of Income for the nine months ended April 30, 2012. The decrease in stock-based compensation expense for the three months ended April 30, 2012 compared with the three months ended April 30, 2011 was due to two employment terminations.

The stock-based compensation expense recorded in the Condensed Consolidated Financial Statements may not be representative of the effect of stock-based compensation expense in future periods due to the level of awards issued in past years (which level may not be similar in the future), modifications of existing awards, accelerated vesting related to certain employment terminations and assumptions used in determining estimated forfeitures. We determine the fair value of each stock award using the closing market price of our common stock on the date of grant. If the market price of our common stock increases or factors change and we employ different assumptions in the application of Accounting Standards Codification (“ASC”) Topic 718, “Compensation — Stock Compensation,” (“ASC 718”), the compensation expense that we would record for future stock awards may differ significantly from what we have recorded in the current period.

All of our stock options and stock awards (which consist only of restricted shares) are subject to graded vesting in which portions of the award vest at different times during the vesting period, as opposed to awards that vest at the end of the vesting period. We recognize compensation expense for awards subject to graded vesting using the straight-line basis over the vesting period, reduced by estimated forfeitures. At April 30, 2012, total unrecognized stock-based compensation expense before income taxes related to total nonvested stock options and stock awards was $5,000,000 with a remaining weighted average period of 19 months over which such expense is expected to be recognized.

Liquidity and Capital Resources

Working capital

At April 30, 2012, our working capital was $75,970,000, compared with $67,913,000 at July 31, 2011.

Cash flows from operating activities

Net cash provided by operating activities was $32,853,000 and $17,528,000 for the nine months ended April 30, 2012 and 2011, respectively. For the nine months ended April 30, 2012, the net cash provided by operating activities was primarily due to net income (after adjusting for depreciation, amortization, stock-based compensation expense and deferred taxes) and a decrease in accounts receivable (due to strong collections of receivables in the Endoscopy segment), partially offset by a decrease in accounts payable and other current liabilities (due primarily to the timing associated with incentive compensation and vendor payments) and increases in inventories (due to planned strategic increases in stock levels of certain products primarily in our Endoscopy and Water Purification and Filtration segments).

For the nine months ended April 30, 2011, the net cash provided by operating activities was primarily due to net income (after adjusting for depreciation, amortization, stock-based compensation expense and deferred taxes) and an increase in accounts payable and other current liabilities (due primarily to the timing associated with vendor payments), partially offset by an increase in accounts receivable (primarily due to strong sales of Endoscopy products and services and Healthcare Disposables products in the three months ended April 30, 2011).

Cash flows from investing activities

Net cash used in investing activities was $101,724,000 and $34,007,000 for the nine months ended April 30, 2012 and 2011, respectively. For the nine months ended April 30, 2012, the net cash used in investing activities was primarily for the acquisition of the Byrne Medical Business and to a lesser extent, capital expenditures. For the nine months ended April 30, 2011, the net cash used in investing activities was primarily for the acquisitions of Gambro Water and ConFirm as well as capital expenditures.

Cash flows from financing activities

Net cash provided by financing activities was $75,594,000 and $9,555,000 for the nine months ended April 30, 2012 and 2011, respectively. For the nine months ended April 30, 2012, the net cash provided by financing activities was due primarily to borrowings under our credit facilities relating to the acquisition of the Byrne Medical Business, partially offset by repayments under our credit facilities. For the nine months ended April 30, 2011, the net cash provided by financing activities was due primarily to borrowings under our revolving credit facility relating to the Gambro Water and ConFirm acquisitions, partially offset by repayments under our credit facilities.

Dividends

On October 21, 2011, we announced an increase in the semiannual cash dividend to $0.0467 per share ($0.07 per share on a pre-split basis) of outstanding common stock, which was paid on January 31, 2012 to shareholders of record at the close of business on January 17, 2012. Future declaration of dividends and the establishment of future record and payment dates are subject to the final determination of the Company’s Board of Directors.

On February 1, 2012, the Company issued 9,955,000 additional shares of common stock in connection with a three-for-two stock split effected in the form of a 50% stock dividend paid on February 1, 2012 to stockholders of record on January 23, 2012.

Long-term contractual obligations

	Three Months
	Ending
	July 31,		Year Ending July 31,
	2012		2013		2014		2015		2016		Thereafter		Total
	(Amounts in thousands)
Maturities of the credit facilities	$	2,500	$	10,000	$	10,000	$	10,000	$	10,000	$	58,000	$	100,500
Expected interest payments under the credit facilities (1)	750		2,812		2,511		2,210		1,909		5		10,197
Minimum commitments under noncancelable operating leases	993		3,112		2,734		2,146		1,354		5,202		15,541
Deferred compensation and other	92		176		105		36		36		94		539
Acquisitions payable	—		1,100		1,800		1,400		—		—		4,300
Compensation agreements	689		2,495		450		150		150		75		4,009
Total contractual obligations	$	5,024	$	19,695	$	17,600	$	15,942	$	13,449	$	63,376	$	135,086

New U.S. Credit Agreement

Association. Debt issuance costs relating to the New U.S. Credit Agreement were recorded in other assets and are being amortized over the life of the credit facilities. Such unamortized debt issuance costs amounted to approximately $1,156,000 at April 30, 2012.

Borrowings under the New U.S. Credit Agreement bear interest at rates ranging from 0.25% to 2.00% above the lender’s base rate, or at rates ranging from 1.25% to 3.00% above the London Interbank Offered Rate (“LIBOR”), depending upon the Company’s “Consolidated Leverage Ratio,” which is defined as the consolidated ratio of total funded debt to earnings before interest, taxes, depreciation and amortization, and as further adjusted under the terms of the New U.S. Credit Agreement (“Consolidated EBITDA”). At May 31, 2012, the lender’s base rate was 3.25% and the LIBOR rates ranged from 0.24% to 0.90%. The margins applicable to our outstanding borrowings were 1.25% above the lender’s base rate or 2.25% above LIBOR. All of our outstanding borrowings were under LIBOR contracts at May 31, 2012. The New U.S. Credit Agreement also provides for fees on the unused portion of our facilities at rates ranging from 0.25% to 0.50%, depending upon our Consolidated Leverage Ratio; such rate was 0.40% at May 31, 2012.

On April 30, 2012, we had $100,500,000 of outstanding borrowings under the New U.S.

Credit Agreement, which consisted of $42,500,000 and $58,000,000 under the Term Loan Facility and the Revolving Credit Facility, respectively, and $42,000,000 was available to be borrowed under our Revolving Credit Facility. In May, we repaid an additional $4,000,000 under the Revolving Credit Facility decreasing our total outstanding borrowings to $96,500,000 at May 31, 2012.

Operating leases

Minimum commitments under operating leases include minimum rental commitments for our leased manufacturing facilities, warehouses, office space and equipment.

Deferred compensation and other

Acquisitions payable

Compensation agreements

We have previously entered into various severance contracts with executives of the Company, including our Corporate executive officers and our subsidiary Chief Executive Officers, that defined certain compensation arrangements relating to various employment termination scenarios. In conjunction with the acquisition of the Byrne Medical Business on August 1, 2011, we entered into a three-year employment agreement with an executive officer of the acquired business.

Convertible Note Receivable

The maturity date of the notes, originally June 30, 2011, and extended (through an amendment to the notes in June 2011) to December 31, 2011, was further extended (through an amendment to the notes in December 2011) to December 31, 2012 (“Maturity Date”). As amended, the interest rate of the notes is 8% per annum through June 8, 2011 and is 12% per annum thereafter. The entire principal amount and accrued interest are automatically payable in a newly-created series of preferred stock issued upon the closing of BIOSAFE’s next round financing on or before the Maturity Date (“Next Round Financing”) based on a conversion formula.

Financing needs

Although most of our operating segments generate significant cash from operations, our Endoscopy, Healthcare Disposables, Dialysis and Water Purification and Filtration segments are the largest generators of cash. At April 30, 2012, we had a cash balance of $25,027,000, of which $3,726,000 was held by foreign subsidiaries. Such foreign cash is needed by our foreign subsidiaries for working capital purposes. Accordingly, such amount is considered to be indefinitely reinvested and unavailable for repatriation.

We believe that our current cash position, anticipated cash flows from operations and the funds available under our New U.S. Credit Agreement will be sufficient to satisfy our cash operating requirements for the foreseeable future based upon our existing operations, particularly given that we historically have not needed to borrow for working capital purposes. At May 31, 2012, $46,000,000 was available under our New U.S. Credit Agreement. In addition, subject to the satisfaction of certain conditions precedent, the Company may from time to time increase the New U.S. Credit Agreement by an aggregate amount not to exceed $50,000,000 without the consent of the lenders.

Foreign currency

The financial statements of our Canadian subsidiaries are translated using the accounting policies described in Note 2 to the 2011 Form 10-K and therefore are impacted by changes in the Canadian dollar exchange rate. Additionally, changes in the value of the Canadian dollar against the United States dollar affect our results of operations because a portion of our Canadian subsidiaries’ inventories and operating costs (which are reported in the Water Purification and Filtration and Specialty Packaging segments) are purchased in the United States and a significant amount of their sales are to customers in the United States.

Changes in the value of the Euro, British pound and Singapore dollar against the United States dollar affect our results of operations because certain cash bank accounts, accounts receivable and liabilities of our subsidiaries are denominated and ultimately settled in Euros, British pounds or Singapore dollars but must be converted into their functional currency. Furthermore, the financial statements of our Netherlands subsidiary are translated using the accounting policies described in Note 2 of the 2011 Form 10-K and therefore are impacted by changes in the Euro exchange rate relative to the United States dollar.

In order to hedge against the impact of fluctuations in the value of (i) the Canadian dollar relative to the United States dollar, (ii) the Euro relative to the United States dollar, (iii) the British pound relative to the United States dollar and (iv) the Singapore dollar relative to the United States dollar on the conversion of such net assets into the functional currencies, we enter into short-term contracts to purchase Canadian dollars, Euros, British pounds and Singapore dollars forward, which contracts are generally one month in duration. These short-term contracts are designated as fair value hedges. There were three foreign currency forward contracts with an aggregate value of $3,853,000 at May 31, 2012, which cover certain assets and liabilities that were denominated in currencies other than our subsidiaries’ functional currencies. Such contracts expire on June 30, 2012. These foreign currency forward contracts are continually replaced with new one-month contracts as long as we have significant net assets at our subsidiaries that are denominated and ultimately settled in currencies other than their functional currencies. In accordance with ASC 815, “Derivatives and Hedging” (“ASC 815”), such foreign currency forward contracts are designated as hedges. Gains and losses related to these hedging contracts to buy Canadian dollars, Euros, British pounds and Singapore dollars forward are immediately realized within general and administrative expenses due to the short-term nature of such contracts. For the three and nine months ended April 30, 2012, such forward contracts offset the impact on operations related to certain assets and liabilities that are denominated in currencies other than our subsidiaries’ functional currencies.

Changes in the value of the Japanese yen relative to the United States dollar during the three and nine months ended April 30, 2012, compared with the three and nine months ended April 30, 2011, did not have a significant impact upon either our results of operations or the translation of our balance sheet, primarily due to the fact that our Japanese subsidiary accounts for a relatively small portion of consolidated net sales, net income and net assets.

Overall, fluctuations in the rates of currency exchange had an insignificant impact upon our net income for the three and nine months ended April 30, 2012 compared with the three and nine months ended April 30, 2011.

For purposes of translating the balance sheet at April 30, 2012 compared with July 31, 2011, the total of the foreign currency movements resulted in a foreign currency translation loss of $657,000, net of tax, for the nine months ended April 30, 2012, thereby decreasing stockholders’ equity.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we continually evaluate our estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Condensed Consolidated Financial Statements.

Revenue Recognition

Revenue on product sales is recognized as products are shipped to customers and title passes. The passing of title is determined based upon the FOB terms specified for each shipment. With respect to endoscopy, dialysis, therapeutic, specialty packaging and chemistries products, shipment terms are generally FOB origin for common carrier and FOB destination when our distribution fleet is utilized (except for one large customer in dialysis whereby all products are shipped FOB destination). With respect to water purification and filtration and healthcare disposable products, shipment terms may be either FOB origin or destination. Customer acceptance for the majority of our product sales occurs at the time of delivery. With respect to a portion of water purification and filtration product sales, equipment is sold as part of a system for which the equipment is functionally interdependent or the customer’s purchase order specifies “ship-complete” as a condition of delivery; revenue recognition on such sales is deferred until all equipment has been delivered, or post-delivery obligations such as installation has been substantially fulfilled such that the products are deemed functional by the end-user.

A portion of our endoscopy, water purification and filtration and dialysis sales are recognized as multiple element arrangements, whereby revenue is allocated to the equipment and installation components based upon vendor specific objective evidence, which includes comparable historical transactions of similar equipment and installation sold as stand-alone components. If vendor-specific objective evidence of selling price is not available, we allocate revenue to the elements of the bundled arrangement using the estimated selling price method in order to qualify the components as separate units of accounting. Revenue on the equipment component is recognized as the equipment is shipped to customers and title passes. Revenue on the installation component is recognized when the installation is complete.

A portion of our healthcare disposables sales relating to the mail-in spore test kit is

recorded as deferred revenue when initially sold. We recognized the revenue on these test kits using an estimate based on historical experience of the amount of time that elapses from the point of sale to when the kit is returned to us and we communicate to the customer the results of the required laboratory test. The related cost of the kits are recorded in inventory and recognized in cost of sales as the revenue is earned.

Revenue on service sales is recognized when repairs are completed at the customer’s location or when repairs are completed at our facilities and the products are shipped to customers. With respect to certain service contracts in our Endoscopy and Water Purification and Filtration operating segments, service revenue is recognized on a straight-line basis over the contractual term of the arrangement. All shipping and handling fees invoiced to customers, such as freight, are recorded as revenue (and related costs are included within cost of sales) at the time the sale is recognized.

None of our sales contain right-of-return provisions. Customer claims for credit or return due to damage, defect, shortage or other reason must be pre-approved by us before credit is issued or such product is accepted for return. No cash discounts for early payment are offered except with respect to a small portion of our sales of dialysis, healthcare disposable and water purification and filtration products and certain prepaid packaging products. We do not offer price protection, although advance pricing contracts or required notice periods prior to implementation of price increases exist for certain customers with respect to many of our products. With respect to certain of our dialysis, healthcare disposables, water purification and filtration and endoscopy customers, rebates are provided; such rebates, which consist primarily of volume rebates, are provided for as a reduction of sales at the time of revenue recognition and amounted to $1,002,000 and $2,894,000 for the three and nine months ended April 30, 2012, and $866,000 and $2,191,000 for the three and nine months ended April 30, 2011, respectively. The increase in rebates for the three and nine months ended April 30, 2012 is primarily due to increased sales volume in our Endoscopy segment. Such allowances are determined based on estimated projections of sales volume for the entire rebate periods. If it becomes known that sales volume to customers will deviate from original projections, the rebate provisions originally established would be adjusted accordingly.

The majority of our dialysis products are sold to end-users; the majority of therapeutic filtration products and healthcare disposable products are sold to third party distributors; water purification and filtration products and services are sold directly and through third-party distributors to hospitals, dialysis clinics, pharmaceutical and biotechnology companies and other end-users; our endoscopy products and services are sold primarily to distributors internationally and directly to hospitals and other end-users in the United States; specialty packaging products are sold to third-party distributors, medical research companies, laboratories, pharmaceutical companies, hospitals, government agencies and other end-users; and chemistries products and services are sold to medical products and service companies, laboratories, pharmaceutical companies, hospitals and other end-users. Sales to all of these customers follow our revenue recognition policies.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consist of amounts due to us from normal business activities. Allowances for doubtful accounts are reserves for the estimated loss from the inability of customers to make required payments. We use historical experience as well as current market information in determining the estimate. While actual losses have historically been within

management’s expectations and provisions established, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Alternatively, if certain customers paid their delinquent receivables, reductions in allowances may be required.

Inventories

Inventories consist of raw materials, work-in-process and finished products which are sold in the ordinary course of our business and are stated at the lower of cost (first-in, first-out) or market. In assessing the value of inventories, we must make estimates and judgments regarding reserves required for product obsolescence, aging of inventories and other issues potentially affecting the saleable condition of products. In performing such evaluations, we use historical experience as well as current market information. With few exceptions, the saleable value of our inventories has historically been within management’s expectation and provisions established, however, rapid changes in the market due to competition, technology and various other factors could have an adverse effect on the saleable value of our inventories, resulting in the need for additional reserves.

Goodwill and Intangible Assets

Certain of our identifiable intangible assets, including customer relationships, technology, brand names, non-compete agreements and patents, are amortized using the straight-line method over their estimated useful lives which range from 2 to 20 years. Additionally, we have recorded goodwill and trademarks and trade names, all of which have indefinite useful lives and are therefore not amortized. All of our intangible assets and goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and goodwill and intangible assets with indefinite lives are reviewed for impairment at least annually. Our management is responsible for determining if impairment exists and considers a number of factors, including third-party valuations, when making these determinations.

Accounting rules permit a company to carry forward a detailed determination of a reporting unit’s fair value from one year to the next if the following criteria are met: (i) the assets and liabilities of each reporting unit have not changed significantly from the prior year, (ii) the fair value of each reporting unit in the prior year significantly exceeded the carrying value, and (iii) the likelihood that the carrying value of each reporting unit this year would be less than the fair value is remote. At July 31, 2011, because these criteria were met for certain of our reporting units, we carried forward the results of our July 31, 2010 fair value estimates for our Endoscopy, Healthcare Disposables, Dialysis and Therapeutic Filtration operating segments and performed detailed reviews on the Water Purification and Filtration (due to the increase in assets related to the Gambro Acquisition), Specialty Packaging (due to its fair value exceeding it carrying value by only a modest amount in the prior year) and Chemistries (since this operating segment was newly created in fiscal 2010) operating segments. In performing a detailed review for goodwill impairment, management uses a two-step process that begins with an estimation of the fair value of the related operating segments by using average fair value results of the market multiple and discounted cash flow methodologies, as well as the comparable transaction methodology when applicable. The first step is a review for potential impairment, and the second step measures the amount of impairment, if any. In performing our annual review for indefinite lived intangibles, management compares the current fair value of such assets to their carrying values. With respect to amortizable intangible assets when impairment indicators are present, management would

determine whether expected future non-discounted cash flows would be sufficient to recover the carrying value of the assets; if not, the carrying value of the assets would be adjusted to their fair value. On July 31, 2011, management concluded that none of our intangible assets or goodwill was impaired.

While the results of these annual reviews have historically not indicated impairment, impairment reviews are highly dependent on management’s projections of our future operating results and cash flows (which management believes to be reasonable), discount rates based on the Company’s weighted average cost of capital and appropriate benchmark peer companies. Assumptions used in determining future operating results and cash flows include current and expected market conditions and future sales forecasts. Subsequent changes in these assumptions and estimates could result in future impairment. Although we consistently use the same methods in developing the assumptions and estimates underlying the fair value calculations, such estimates are uncertain by nature and can vary from actual results. At July 31, 2011, the average fair value of all of our reporting units exceeded book value by substantial amounts, except our Specialty Packaging segment, which had an average fair value that exceeded book value by approximately 28% at July 31, 2011.

During our third quarter of fiscal 2012, management updated certain assumptions pertaining to our Specialty Packaging segment’s future operating results and cash flows. As these assumptions differed from the assumptions used at July 31, 2011, we performed an interim goodwill impairment assessment with respect to our Specialty Packaging segment at April 30, 2012 and concluded that the average fair value of our Specialty Packaging reporting unit exceeded book value by approximately 24%. Goodwill relating to our Specialty Packaging reporting unit was $7,254,000 at April 30, 2012. Additionally, we also performed an interim assessment at April 30, 2012 of the indefinite lives trademarks and trade names for our Specialty Packaging segment and concluded that no impairment existed. We believe the most significant assumptions impacting the impairment assessments of Specialty Packaging relate to an assumed compounded annual sales growth of 14% and future operating efficiencies included in our projections of future operating results and cash flows of this segment, which forecasts are in excess of historical run rates. If future operating results and cash flows are substantially less than our projections, a future impairment charge may be recorded. On April 30, 2012, management concluded that no other events or changes in circumstances have occurred during the nine months ended April 30, 2012 that would indicate that the carrying amount of our intangible assets and goodwill may not be recoverable.

Long-Lived Assets

We evaluate the carrying value of long-lived assets including property, equipment and other assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An assessment is made to determine if the sum of the expected future non-discounted cash flows from the use of the assets and eventual disposition is less than the carrying value. If the sum of the expected non-discounted cash flows is less than the carrying value, an impairment loss is recognized based on fair value. Our historical assessments of our long-lived assets have not differed significantly from the actual amounts realized. However, the determination of fair value requires us to make certain assumptions and estimates and is highly subjective. On April 30, 2012, management concluded that no events or changes in circumstances have occurred that would indicate that the carrying amount of our long-lived assets may not be recoverable, with the exception of the impairment of our BIOSAFE investment, as more fully described elsewhere in this MD&A.

Warranties

We provide for estimated costs that may be incurred to remedy deficiencies of quality or performance of our products at the time of revenue recognition. Most of our products have a one year warranty, although a majority of our endoscopy equipment in the United States carries a warranty period of up to fifteen months. We record provisions for product warranties as a component of cost of sales based upon an estimate of the amounts necessary to settle existing and future claims on products sold. The historical relationship of warranty costs to products sold is the primary basis for the estimate. A significant increase in third party service repair rates, the cost and availability of parts or the frequency of claims could have a material adverse impact on our results for the period or periods in which such claims or additional costs materialize. Management reviews its warranty exposure periodically and believes that the warranty reserves are adequate; however, actual claims incurred could differ from original estimates, requiring adjustments to the reserves.

Stock-Based Compensation

We account for stock options and stock awards in which stock compensation expense is recognized for any option or stock award grant based upon the award’s fair value. All of our stock options and stock awards (which consist only of restricted stock) are subject to graded vesting in which portions of the award vest at different times during the vesting period, as opposed to awards that vest at the end of the vesting period. We recognize compensation expense for awards subject to graded vesting using the straight-line basis, reduced by estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience.

The stock-based compensation expense recorded in our Condensed Consolidated Financial Statements may not be representative of the effect of stock-based compensation expense in future periods due to the level of awards issued in past years (which level may not be similar in the future), modifications to existing awards, accelerated vesting related to certain employment terminations and assumptions used in determining fair value, expected lives and estimated forfeitures. We determine the fair value of each stock award using the closing market price of our common stock on the date of grant. We estimate the fair value of each option grant on the date of grant using the Black-Scholes option valuation model. The determination of fair value using an option-pricing model is affected by our stock price as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the expected option life (which is determined by using the historical closing prices of our common stock), the expected dividend yield (which historically has been 0% and is now approximately 0.2% as we began paying dividends in January 2010), and the expected option life (which is based on historical exercise behavior). If factors change and we employ different assumptions in future periods, the compensation expense that we would record may differ significantly from what we have recorded in the current period.

Legal Proceedings

believe that any of these pending claims or legal actions will have a material adverse effect on our business, financial condition, results of operations or cash flows.

Income Taxes

We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities also include items recorded in conjunction with the purchase accounting for business acquisitions as well as net operating loss carryforwards. We regularly review our deferred tax assets for recoverability and establish a valuation allowance, if necessary, based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. Although realization is not assured, management believes it is more likely than not that the recorded deferred tax assets, as adjusted for valuation allowances, will be realized. Additionally, deferred tax liabilities are regularly reviewed to confirm that such amounts are appropriately stated. A review of our deferred tax items considers known future changes in various income tax rates, principally in the United States. If the income tax rate were to change in the future, particularly in the United States and to a lesser extent Canada, our items of deferred tax could be materially affected. All of such evaluations require significant management judgments.

Business Combinations

Acquisitions require significant estimates and judgments related to the fair value of assets acquired and liabilities assumed. We determine fair value based on the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Certain liabilities and reserves are subjective in nature. We reflect such liabilities and reserves based upon the most recent information available. In conjunction with our acquisitions, such subjective liabilities and reserves principally include contingent consideration, certain income tax and sales and use tax exposures, including tax liabilities related to our foreign subsidiaries, as well as reserves for accounts receivable, inventories and warranties. We account for contingent consideration relating to business combinations that occurred subsequent to July 31, 2009 in accordance with ASC 805, “Business Combinations,” which requires us to record the fair value of contingent consideration as a liability and an increase to goodwill at the date of the acquisition and continually re-measure the liability at each balance sheet date by recording changes in the fair value through our Condensed Consolidated Statements of Income. We determine the fair value of contingent consideration based on future operating projections under various potential scenarios and weight the probability of these outcomes. Similarly, other components of an acquisition’s purchase price can be required to be recorded at fair value at the date of the acquisition and continually re-measured at each balance sheet date, such as the three year price floor relating to the acquisition of the Byrne Medical Business which fair value was determined using a option

valuation model, as further described in Notes 3 and 7 to the Condensed Consolidated Financial Statements. The ultimate settlement of liabilities relating to business combinations may be for amounts which are materially different from the amounts initially recorded and may cause volatility in our results of operations.

Costs Associated with Exit or Disposal Activities

We recognize costs associated with exit or disposal activities, such as costs to terminate a contract, the exit or disposal of a business, or the early termination of a leased property, by recognizing the liability at fair value when incurred, except for certain one-time termination benefits, such as severance costs, for which the period of recognition begins when a severance plan is communicated to employees.

Inherent in the calculation of liabilities relating to exit and disposal activities are significant management judgments and estimates, including estimates of termination costs, employee attrition and the interest rate used to discount certain expected net cash payments. Such judgments and estimates are reviewed by us on a regular basis. The cumulative effect of a change to a liability resulting from a revision to either timing or the amount of estimated cash flows is recognized by us as an adjustment to the liability in the period of the change.

Other Matters

We do not have any off balance sheet financial arrangements, other than future commitments under operating leases and executive severance and license agreements.

Forward Looking Statements

This quarterly report on Form 10-Q contains “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 and releases issued by the Securities and Exchange Commission (the “SEC”) and within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are based on current expectations, estimates, or forecasts about our businesses, the industries in which we operate, and the beliefs and assumptions of management; they do not relate strictly to historical or current facts. We have tried, wherever possible, to identify such statements by using words such as “expect,” “anticipate,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,” “may,” “could,” and variations of such words and similar expressions. In addition, any statements that refer to predictions or projections of our future financial performance, anticipated growth 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 including, among other things, the following:

· the increasing market share of single-use dialyzers relative to reuse dialyzers in the United States

· our continuing loss of dialysate concentrate business

· our dependence on a concentrated number of customers in three of our largest segments

· severity of flu outbreaks and level of urgency developed by customers with respect to pandemic preparedness

· the volatility of fuel and oil prices on our raw materials and distribution costs

· the acquisition of new businesses and successfully integrating and operating such businesses

· the adverse impact of increased competition on selling prices and our ability to compete effectively

· foreign currency exchange rate fluctuations and trade barriers

· the impact of significant government regulation on our businesses

You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the foregoing items to be a complete list of all potential risks or uncertainties. See “Risk Factors” in our 2011 Form 10-K for a discussion of the above risk factors and certain additional risk factors that you should consider before investing in the shares of our common stock.

All forward-looking statements herein speak only as of the date of this report. 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.

For these statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Foreign Currency Market Risk

A portion of our products in all of our business segments are exported to and imported from a variety of geographic locations, and our business could be materially and adversely affected by the imposition of trade barriers, fluctuations in the rates of exchange of various currencies, tariff increases and import and export restrictions, affecting all of such geographies including but not limited to the United States, Canada, the European Union, the United Kingdom and the Far East.

A portion of our Canadian subsidiaries’ inventories and operating costs (which are reported in the Water Purification and Filtration and Specialty Packaging segments) are purchased in the United States and a significant amount of their sales are to customers in the United States. The businesses of our Canadian subsidiaries could be materially and adversely affected by the imposition of trade barriers, fluctuations in the rate of currency exchange, tariff increases and import and export restrictions between the United States and Canada. Changes in the value of the Canadian dollar against the United States dollar also affect our results of operations because certain net assets of our Canadian subsidiaries are denominated and ultimately settled in United States dollars but must be converted into their functional currency. Additionally, the financial statements of our Canadian subsidiaries are translated using the accounting policies described in Note 2 to the 2011 Form 10-K. Fluctuations in the rates of currency exchange between the United States dollar and the Canadian dollar had an insignificant impact for the three and nine months ended April 30, 2012, compared with the three and nine months ended April 30, 2011, upon our net income and had an adverse impact upon stockholders’ equity, as described in our MD&A.

Changes in the value of the Euro, British pound and Singapore dollar against the United

States dollar affect our results of operations because certain cash bank accounts, accounts receivable and liabilities of our subsidiaries are denominated and ultimately settled in Euros, British pounds or Singapore dollars but must be converted into their functional currency. Furthermore, the financial statements of our Netherlands subsidiary are translated using the accounting policies described in Note 2 of the 2011 Form 10-K and therefore are impacted by changes in the Euro exchange rate relative to the United States dollar. Fluctuations in the rates of currency exchange between the United States dollar and the Euro, British pound and Singapore dollar did not have a significant overall impact for the three and nine months ended April 30, 2012, compared with the three and nine months ended April 30, 2011, upon our net income and stockholders’ equity.

The functional currency of Minntech’s Japan subsidiary is the Japanese yen. Changes in the value of the Japanese yen relative to the United States dollar during the three and nine months ended April 30, 2012, compared with the three and nine months ended April 30, 2011, did not have a significant impact upon either our results of operations or the translation of the balance sheet, primarily due to the fact that our Japanese subsidiary accounts for a relatively small portion of consolidated net sales, net income and net assets.

Overall, fluctuations in the rates of currency exchange had an insignificant impact on our net income for the three and nine months ended April 30, 2012, compared with the three and nine months ended April 30, 2011, and an adverse impact upon stockholders’ equity primarily due to the decrease in the value of the Canadian dollar relative to the United States dollar from July 31, 2011 to April 30, 2012.

Interest Rate Market Risk

We have United States credit facilities for which the interest rate on outstanding borrowings is variable. Substantially all of our outstanding borrowings are under LIBOR contracts. Therefore, interest expense is affected by the general level of interest rates in the United States as well as LIBOR interest rates.

Additionally, we amended our credit facilities on August 1, 2011, as described elsewhere in Liquidity and Capital Resources. Due to current market conditions, the modification of our credit facilities resulted in an increase of our margins above the lender’s base rate and LIBOR,

which will adversely affect our results of operations in the future since the level of outstanding borrowings have increased significantly due to the Byrne Medical Business acquisition on August 1, 2011.

In order to protect our interest rate exposure in future years, we entered into forward starting interest rate swap agreements in February 2012 in which we agree to exchange our variable interest cash flows with fixed interest cash flows provided by one of our existing senior lenders. With respect to our Term Loan Facility, the interest rate swap is for the period beginning August 8, 2012 and ending July 31, 2015, initially covering $40,000,000 of borrowings based on one-month LIBOR and thereafter reducing in quarterly $2,500,000 increments consistent with the mandatory repayment schedule, and the fixed interest cash flow is at a one month LIBOR rate of 0.664%. With respect to our Revolving Credit Facility, the interest rate swap is for the period beginning August 8, 2012 and ending January 31, 2014, initially covering $25,000,000 of borrowings based on one-month LIBOR and thereafter reducing semi-annually by increments of $5,000,000, and the fixed interest cash flow is at a one month LIBOR rate of 0.496%. Therefore, we are substantially protected from exposure associated with increasing LIBOR rates in future years. As such, our interest rate exposure is limited to the outstanding portion of our Revolving Credit Facility in excess of $25,000,000. Based on our outstanding Revolving Credit Facility balance of $54,000,000 at May 31, 2012, a 100 basis point increase in average LIBOR interest rates would result in incremental annual interest expense of $290,000. However, we also maintain a cash balance of $25,027,000 at April 30, 2012 which is maintained in cash or invested in low return cash equivalents such as United States money market funds with leading banking institutions. An increase in interest rates would generate additional interest income, which would partially offset the adverse impact of additional interest expense.

Market Risk Sensitive Transactions

Additional information related to market risk sensitive transactions is contained in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our 2011 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES.

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that the design and operation of these disclosure controls and procedures were effective and designed to ensure that material information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports is (i) recorded, processed, summarized and reported within the time periods specified by the SEC and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

We have evaluated our internal controls over financial reporting and determined that no changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting, except as described below.

On August 1, 2011, we acquired the Byrne Medical Business, as more fully described in Note 3 to the Condensed Consolidated Financial Statements. During the initial transition period following the acquisition, we enhanced our internal control process at our Minntech subsidiary to ensure that all financial information related to this acquisition was properly reflected in our Condensed Consolidated Financial Statements. We expect that all aspects of the Byrne Medical Business will be fully integrated into Minntech’s existing internal control structure by July 31, 2012.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our 2011 Form 10-K. The risk factors disclosed in Part I, Item 1A to our 2011 Form 10-K, in addition to the other information set forth in this report, could materially affect our business, financial condition, or results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table represents information with respect to purchases of common stock made by the Company during the current quarter:

				Total number of shares	Maximum number of
Month		Average		purchased as part of	shares that may yet
of	Total number of	price paid		publicly announced	be purchased under
Purchase	shares purchased	per share		plans or programs	the program

February	39,353	$	21.92	—	—
March	6,275	23.32		—	—
April	1,039	23.39		—	—
Total	46,667	$	22.14	—	—

The Company does not currently have a repurchase program. All of the shares purchased during the current quarter represent shares surrendered to the Company 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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

31.1	-	Certification of Principal Executive Officer.

31.2	-	Certification of Principal Financial Officer.

32	-	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	-	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets at April 30, 2012 and July 31, 2011, (ii) the Condensed Consolidated Statements of Operations for the three and nine months ended April 30, 2012 and 2011, (iii) the Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2012 and 2011 and (iv) the Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CANTEL MEDICAL CORP.


Date: June 11, 2012


	By:	/s/ Andrew A. Krakauer
		Andrew A. Krakauer,
		President and Chief Executive Officer
		(Principal Executive Officer)


	By:	/s/ Craig A. Sheldon
		Craig A. Sheldon,
		Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)


	By:	/s/ Steven C. Anaya
		Steven C. Anaya,
		Vice President and Controller

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Cantel Medical (CMD) 10-Q2012 Q3 Quarterly report

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