Cantel Medical 10Q 2013 Q2 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 January 31, 2013.

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 February 28, 2013: 27,327,776.

PART I - FINANCIAL INFORMATION

ITEM 1. - FINANCIAL STATEMENTS

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar Amounts in Thousands, Except Share Data)

(Unaudited)

	January 31,			July 31,
	2013			2012
Assets
Current assets:
Cash and cash equivalents	$	26,825		$	30,186
Accounts receivable, net of allowance for doubtful accounts of $827 at January 31 and $1,041 at July 31	52,256			47,977
Inventories:
Raw materials	22,212			21,084
Work-in-process	6,553			6,476
Finished goods	19,890			19,195
Total inventories	48,655			46,755
Deferred income taxes	4,517			3,799
Prepaid expenses and other current assets	5,083			3,321
Income taxes receivable	706			1,854
Total current assets	138,042			133,892
Property and equipment, net	45,781			43,022
Intangible assets, net	76,755			71,311
Goodwill	208,305			183,655
Other assets	2,975			2,932
	$	471,858		$	434,812
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt	$	10,000		$	10,000
Accounts payable	12,733			12,345
Compensation payable	9,431			14,312
Accrued expenses	9,707			10,370
Deferred revenue	9,518			8,114
Total current liabilities	51,389			55,141

Long-term debt	97,000			80,000
Deferred income taxes	23,977			19,894
Acquisition payable	314			2,537
Other long-term liabilities	1,176			1,304

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 75,000,000 shares; January 31 - 29,993,234 shares issued and 27,326,776 shares outstanding; July 31 - 29,997,898 shares issued and 27,100,729 shares outstanding	2,999			3,000
Additional paid-in capital	132,506			127,338
Retained earnings	186,073			167,539
Accumulated other comprehensive income	8,395			8,175
Treasury Stock, at cost; January 31 - 2,666,458 shares; July 31 - 2,897,169 shares	(31,971		)	(30,116		)
Total stockholders’ equity	298,002			275,936
	$	471,858		$	434,812

See accompanying notes.

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollar Amounts in Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended						Six Months Ended
	January 31,						January 31,
	2013			2012			2013			2012

Net sales	$	106,363		$	97,297		$	206,044		$	190,559

Cost of sales	61,212			56,476			117,166			111,788

Gross profit	45,151			40,821			88,878			78,771

Expenses:
Selling	13,723			13,270			27,136			26,193
General and administrative	12,382			12,092			24,430			24,194
Research and development	2,183			2,298			4,477			4,443
Total operating expenses	28,288			27,660			56,043			54,830

Income before interest, other expense and income taxes	16,863			13,161			32,835			23,941

Interest expense	791			1,000			1,437			2,031
Interest income	(16		)	(24		)	(29		)	(54		)
Other expense	—			605			—			605

Income before income taxes	16,088			11,580			31,427			21,359

Income taxes	5,636			4,286			11,399			7,845

Net income	$	10,452		$	7,294		$	20,028		$	13,514

Earnings per common share:
Basic	$	0.38		$	0.27		$	0.74		$	0.50

Diluted	$	0.38		$	0.27		$	0.73		$	0.50

Dividends per common share	$	—		$	—		$	0.06		$	0.05

See accompanying notes.

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollar Amounts in Thousands)

(Unaudited)

	Three Months Ended					Six Months Ended
	January 31,					January 31,
	2013		2012			2013			2012

Net income	$	10,452	$	7,294		$	20,028		$	13,514

Other comprehensive income (loss):
Foreign currency translation, net of tax	64		(53		)	155			(961		)
Unrealized holding gain (loss) on interest rate swaps arising during the period, net of tax	2		—			(9		)	—
Reclassification adjustments for losses on interest rate swaps included in net income during the period, net of tax	40		—			74			—
Total other comprehensive income, net of tax	106		(53		)	220			(961		)

Comprehensive income	$	10,558	$	7,241		$	20,248		$	12,553

See accompanying notes.

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar Amounts in Thousands)

(Unaudited)

	Six Months Ended
	January 31,
	2013			2012

Cash flows from operating activities
Net income	$	20,028		$	13,514
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	3,574			3,394
Amortization	4,840			4,567
Stock-based compensation expense	1,887			2,313
Amortization of debt issuance costs	176			190
Loss on disposal of fixed assets	140			36
Impairment of convertible notes receivable	—			605
Deferred income taxes	(628		)	(871		)
Excess tax benefits from stock-based compensation	(1,868		)	(662		)
Changes in assets and liabilities, net of assets acquired and liabilities assumed:
Accounts receivable	(2,265		)	4,385
Inventories	(4		)	(2,290		)
Prepaid expenses and other current assets	(1,846		)	(1,426		)
Accounts payable and other current liabilities	(8,766		)	(4,550		)
Income taxes receivable	3,783			633
Net cash provided by operating activities	19,051			19,838

Cash flows from investing activities
Capital expenditures	(2,548		)	(2,549		)
Proceeds from disposal of fixed assets	4			—
Acquisition of Gambro Water	—			(1,033		)
Acquisition of the Byrne Medical Business	—			(95,261		)
Acquisition of SPS Business, net of cash acquired	(35,415		)	—
Acquisition of Polyp Trap	(486		)	—
Acquisition of Eagle Pure Water	(870		)	—
Other, net	(94		)	(14		)
Net cash used in investing activities	(39,409		)	(98,857		)

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	37,000			46,941
Repayments under term loan facility	(5,000		)	(5,000		)
Repayments under revolving credit facility	(15,000		)	(9,000		)
Proceeds from exercises of stock options	1,409			1,176
Dividends paid	(1,494		)	(1,258		)
Excess tax benefits from stock-based compensation	1,868			662
Purchases of treasury stock	(1,872		)	(723		)
Net cash provided by financing activities	16,911			82,445

Effect of exchange rate changes on cash and cash equivalents	86			(147		)

(Decrease) increase in cash and cash equivalents	(3,361		)	3,279
Cash and cash equivalents at beginning of period	30,186			18,410
Cash and cash equivalents at end of period	$	26,825		$	21,689

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, 2012 (the “2012 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, 2012 was derived from the audited Consolidated Balance Sheet of Cantel at that date.

Cantel had five principal operating companies at January 31, 2013 and July 31, 2012; Medivators Inc. (“Medivators”), 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, Medivators has two foreign subsidiaries, Medivators B.V. and Medivators Asia/Pacific Ltd., which serve as Medivators’ bases in Europe and Asia/Pacific, respectively, and Crosstex has a newly acquired subsidiary, SPS Medical Supply Corp., as more fully described below and in Note 3 to the Condensed Consolidated Financial Statements.

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

On December 31, 2012, Mar Cor acquired certain net assets of Eagle Pure Water Systems, Inc. (the “Eagle Pure Water Business” or the “Eagle Pure Water Acquisition”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements. The Eagle Pure Water Acquisition had an insignificant effect on our results of operations for the three and six months ended January 31, 2013 due to the small size of this business and is not reflected in our results of operations for the three and six months ended January 31, 2012. The Eagle Pure Water Business is included in our Water Purification and Filtration segment.

On November 1, 2012, Crosstex acquired all the issued and outstanding stock of SPS Medical Supply Corp. (the “SPS Business” or “SPS Medical”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements. Its results of operations are included in the three months ended January 31, 2013 and the portion of the six months ended January 31, 2013 subsequent to its acquisition date, and are not reflected in the three and six months ended January 31, 2012. The SPS Business is included in our Healthcare Disposables segment.

On August 1, 2011, Medivators 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 all periods presented and are included in our Endoscopy segment.

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 January 31, 2013. 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						Six Months Ended
	January 31,						January 31,
	2013			2012			2013			2012

Cost of sales	$	37,000		$	57,000		$	92,000		$	90,000
Operating expenses:
Selling	82,000			113,000			181,000			191,000
General and administrative	802,000			1,199,000			1,594,000			2,012,000
Research and development	8,000			13,000			20,000			20,000
Total operating expenses	892,000			1,325,000			1,795,000			2,223,000
Stock-based compensation before income taxes	929,000			1,382,000			1,887,000			2,313,000
Income tax benefits	(336,000		)	(495,000		)	(676,000		)	(826,000		)
Total stock-based compensation expense, net of tax	$	593,000		$	887,000		$	1,211,000		$	1,487,000

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

Basic	$	0.02		$	0.03		$	0.04		$	0.06

Diluted	$	0.02		$	0.03		$	0.04		$	0.05

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. All of our stock options and stock awards (which consist only of restricted shares) are expected to be deductible for tax purposes, except for certain options and restricted shares granted to employees residing outside of the United States.

All of our stock options and stock awards 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 January 31, 2013, total unrecognized stock-based compensation expense, before income taxes, related to total nonvested stock options and stock awards was $6,318,000 with a remaining weighted average period of 22 months over which such expense is expected to be recognized. The majority of our nonvested awards relate to stock awards.

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, 2012	472,005		$	13.73
Granted	130,692		25.53
Canceled	(4,664	)	13.54
Vested	(177,268	)	12.91
Nonvested stock awards at January 31, 2013	420,765		$	17.74

For the six months ended January 31, 2013, 35,000 options were granted in October 2012. There were no option grants during the three and six months ended January 31, 2012.

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions for options granted during the six months ended January 31, 2013:

Weighted-Average
Black-Scholes Option	Six Months Ended
Valuation Assumptions	January 31, 2013

Dividend yield	0.37	%
Expected volatility (1)	0.509
Risk-free interest rate (2)	0.67	%
Expected lives (in years) (3)	5.00

(1) Volatility was based on historical closing prices of our common stock.

(2) The U.S. Treasury rate on the expected life at the date of grant.

(3) Based on historical exercise behavior.

These non-qualified options were tax-effected using the Company’s estimated U.S. effective tax rate at the time of grant and had a weighted average fair value of $10.91.

The aggregate intrinsic value (i.e., the excess market price over the exercise price) of all options exercised was $3,224,000 and $3,488,000 for the three and six months ended January 31, 2013 and $1,400,000 and $1,847,000 for the three and six months ended January 31, 2012, respectively.

A summary of stock option activity follows:

			Weighted
	Number of		Average
	Shares		Exercise Price

Outstanding at July 31, 2012	548,823		$	9.86
Granted	35,000		25.56
Canceled	(6,000	)	12.61
Exercised	(185,485	)	10.04
Outstanding at January 31, 2013	392,338		$	11.13

Exercisable at July 31, 2012	364,110		$	9.43

Exercisable at January 31, 2013	357,338		$	9.72

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. However, during the three and six months ended January 31, 2013, we reissued 188,652 and 316,177 shares, respectively, (and 107,269 shares during the fourth quarter of fiscal 2012) from treasury stock for the exercise of stock options and grant of stock awards.

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 in the year of the deduction. 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 was 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 six months ended January 31, 2013 and 2012, such income tax deductions were $2,923,000 and $1,496,000, respectively, and increased additional paid-in capital by $1,868,000 and $662,000, respectively. We classify the cash flows resulting from excess tax benefits as financing cash flows in our Condensed Consolidated Statements of Cash Flows.

Note 3. Acquisitions

Eagle Pure Water Systems, Inc.

On December 31, 2012, we purchased substantially all of the assets of Eagle Pure Water Systems, Inc., a private company with pre-acquisition annual revenues (unaudited) of approximately $500,000 based in the suburbs of Philadelphia, Pennsylvania that provides water treatment services for laboratory, industrial and medical customers. The total consideration for the transaction was $870,000.

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

	Preliminary
Net Assets	Allocation
Current assets:	$	8,000
Property, plant and equipment	70,000
Amortizable intangible assets - (3- year weighted average life):
Customer relationships (3- year life)	150,000
Brand names (3- year life)	18,000
Non-compete agreement (5- year life)	32,000
Current liabilities	(5,000		)
Net assets acquired	$	273,000

There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of $597,000 was assigned to goodwill. Such goodwill, all of which is deductible for income tax purposes, has been included in our Water Purification and Filtration reporting segment.

The principal reasons for the acquisition were the strengthening of our sales and service business by adding Eagle Pure Water’s strategic Philadelphia market presence to enable us to better serve our national customers and to further expand our business into the laboratory and research segments. Such reasons constitute the significant factors that contributed to a purchase price that resulted in recognition of goodwill.

The acquisition of Eagle Pure Water is included in our results of operations for the three and six months ended January 31, 2013 subsequent to its acquisition date, and is not reflected in the three and six months ended January 31, 2012. Pro forma consolidated statements of income data have not been presented due to the insignificant impact of this acquisition.

Polyp Trap

On November 13, 2012 we acquired the intellectual property, inventory, fixed assets and exclusive distribution rights of a polyp trap product line for approximately $486,000. This product line is used principally in the performance of endoscopy procedures for the purpose of safely and efficiently collecting tissue biopsy material. The polyp trap product line will be included in our Medivators procedural product portfolio, which is part of the Endoscopy segment.

This acquisition is included in our results of operations for the three and six months ended January 31, 2013 subsequent to its acquisition date, and is not reflected in the three and six months ended January 31, 2012. Pro forma consolidated statements of income data have not been presented due to the insignificant impact of this acquisition.

SPS Medical Supply Corp.

On November 1, 2012, our Crosstex subsidiary acquired all the issued and outstanding stock of SPS Medical Supply Corp., a private company based in Rochester, New York with pre-acquisition annual revenues (unaudited) of approximately $17,500,000 that manufactures and provides biological and chemical indicators for sterility assurance monitoring services in the acute-care, alternate-care and dental markets. The SPS Business offers a wide-array of products and services that enable healthcare facilities to safely and accurately monitor and verify their

sterilization practices and protocols. Total consideration for the transaction, excluding transaction costs of $157,000, was $32,500,000. In addition, we acquired the SPS manufacturing and warehouse facility in Rochester, NY for approximately $3,500,000 from an affiliate of SPS Medical. The SPS Business is included in our Healthcare Disposables segment.

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

	Preliminary
Net Assets	Allocation
Current assets	$	5,077,000
Property, plant and equipment	3,801,000
Amortizable intangible assets - (9- year weighted average life):
Customer relationships (10- year life)	8,120,000
Brand names (5- year life)	760,000
Technology (4-year life)	500,000
Non-compete agreements (6-year life)	180,000
Other assets	28,000
Current liabilities	(2,784,000		)
Noncurrent deferred income tax liabilities, net	(3,659,000		)
Net assets acquired	$	12,023,000

There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of $23,977,000 was assigned to goodwill. Such goodwill, all of which is not deductible for income tax purposes, has been included in our Healthcare Disposables reporting segment.

The principal reasons for the acquisition were (i) to expand our sterility assurance monitoring product portfolio, (ii) to expand our market share of the dental mail-in biological monitoring industry when combined with our existing monitoring business, (iii) to expand into the acute-care hospital market and alternate care markets, (iv) to increase the likelihood of cross-selling our existing products, (v) to leverage Crosstex’ sales and marketing infrastructure and (vi) the expectation that the acquisition will be accretive to our earnings per share in fiscal 2013 and beyond. Such reasons constitute the significant factors that contributed to a purchase price that resulted in recognition of goodwill.

The acquisition of the SPS Business is included in our results of operations for the three and six months ended January 31, 2013 subsequent to its acquisition date, and is not reflected in the three and six months ended January 31, 2012. The SPS Business contributed $4,662,000 in net sales to the three and six months ended January 31, 2013 and had an insignificant impact to our earnings per share. Pro forma consolidated statements of income data have not been presented due to the insignificant impact of this acquisition relative to our overall results of operations.

Byrne Medical, Inc. Disposable Endoscopy Products Business

On August 1, 2011 our Medivators subsidiary acquired the business and substantially all of the assets of BMI, a privately owned, Texas-based company that designed, manufactured and sold 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 fiscal years 2012 and 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). The purchase price was 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 $10,000,000 in 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. Don 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 acquisition 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. On a quarterly basis subsequent to August 1, 2011, we re-measured the fair value of the contingent consideration and recorded the changes in fair value by decreasing both acquisition payable and general and administrative expenses in the Condensed Consolidated Financial Statements resulting in contingent consideration payable of $1,500,000 at July 31, 2012, which was subsequently reduced to zero at January 31, 2013, as more fully described in Note 6 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 acquisition 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. On a quarterly basis subsequent to August 1, 2011, we re-measured the fair value of the price floor and recorded changes in fair value by decreasing both acquisition payable and general and administrative expenses in the Condensed Consolidated Financial Statements resulting in a price floor liability of $314,000 and $1,037,000 at January 31, 2013 and July 31, 2012, respectively, as more fully described in Note 6 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 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 9 to the Condensed Consolidated Financial Statements.

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:
Accounts receivable	$	4,303,000
Inventory	4,581,000
Other assets	588,000
Property, plant and equipment	10,074,000
Amortizable intangible assets (13-year weighted average life):
Customer relationships (15-year life)	25,300,000
Brand names (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	$	58,689,000

There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of $49,582,000 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.

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 all periods presented. The operations of the Byrne Medical Business are fully included within our Endoscopy segment.

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.

Note 4. Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“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 adopted ASU 2011-05 in our fiscal 2013 first quarter ended October 31, 2012 by including the Condensed Statements of Comprehensive Income as an addition to our Condensed Consolidated Financial Statements. The adoption of this disclosure guidance did not have any impact upon our financial position and results of operations.

Note 5. 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 January 31, 2013, 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 $3,353,000 at January 31, 2013, which covered certain assets and liabilities that were denominated in currencies other than our subsidiaries’ functional currencies. Such contracts expired on February 28, 2013. 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. For the three and six months ended January 31, 2013, such forward contracts substantially offset the impact on operations relating to certain assets and liabilities that were denominated in currencies other than our subsidiaries’ functional currencies resulting in a net currency conversion loss, net of tax, of $29,000 and $44,000, respectively, on the items hedged. For the three and six months ended January 31, 2012, our forward contracts offset the impact on operations relating to certain assets and liabilities that were denominated in currencies other than our subsidiaries’ functional currencies resulting in a net currency conversion gain, net of tax, of $9,000 and $4,000, respectively, on the items hedged. Gains and losses related to 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. 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 9 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 that began August 8, 2012 and ends 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 that began August 8, 2012 and ends 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 Note 6 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 are reclassified from accumulated other comprehensive income to interest expense in the Condensed Consolidated Statements of 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 their obligations under such agreements. At January 31, 2013, our formal assessment concluded that the changes in the fair value of the derivative instruments have been and are expected to be highly effective in the future for the interest rate swap periods that began on August 8, 2012.

Note 6. Fair Value Measurements

Fair Value Hierarchy

We apply the provisions of Accounting Standards Codification (“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 January 31, 2013 and 2012, 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 5 and 9 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 in these interest rate swap agreements during the three and six months ended January 31, 2013 were recorded in accumulated other comprehensive income at January 31, 2013 as shown in the Condensed Consolidated Statements of Comprehensive Income. Amounts are reclassified from accumulated other comprehensive income in the period the hedged transaction affects earnings. Accordingly, during the three and six months ended January 31, 2013, we reclassified $61,000 and $116,000, respectively, from accumulated other comprehensive

income to interest expense in the Condensed Consolidated Statements of Income.

We also had a contingent consideration relating to the acquisition of the sterilization monitoring business of ConFirm Monitoring Systems, Inc. on February 11, 2011. 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 by recording the change in the fair value through our results of operations 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 was adjusted periodically by recording changes in the fair value through our Condensed Consolidated Statements of Income, as shown below in the reconciliation of our liabilities that are measured and recorded at fair value on a recurring basis, driven by the time value of money and changes in the assumptions that were initially used in the valuation. The decrease to the contingent consideration liability was due to the actual gross profit results for the first year and a half of the two-year contingent consideration period, and the reassessment of the weighted probability of the future gross profit projections of the remaining portion of the two year period ending July 31, 2013 and was recorded as decreases to both 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 and the weighted average of such scenarios resulted in a fair value of zero at January 31, 2013. Such fair value would have been higher if we had used different probability factors, future gross profit projections or discount factors. However, given the short period of time until the end of the two year period, it is highly unlikely that any portion of the contingent consideration liability will be earned. Nevertheless, volatility may occur over the next two quarters when 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 is adjusted periodically by recording changes in the fair value through our Condensed Consolidated Statements of Income, as shown below in the reconciliation of our liabilities that are measured and recorded at fair value on a recurring basis, driven by the time value of money and changes in the assumptions that were initially used in the valuation. The decrease to the fair value of the price floor (as determined by the Black-Scholes option valuation model) was recorded as decreases to both acquisition 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 January 31, 2013 was $1.00 lower, the fair value of the price floor would have been approximately $40,000 higher, which would have decreased our operating income by $40,000. Conversely, if our stock price at January 31, 2013 was $1.00 higher, the fair value of the price floor would have been approximately $35,000 lower, which would have increased our operating income by $35,000.

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

	January 31, 2013
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Money markets	$	4,942,000	$	—	$	—	$	4,942,000
Total assets	$	4,942,000	$	—	$	—	$	4,942,000

Liabilities:
Acquisition payable:
Contingent consideration	$	—	$	—	$	—	$	—
Price floor	—		—		314,000		314,000
Total acquisition payable	—		—		314,000		314,000
Other liabilities:
Interest rate swap agreements	—		233,000		—		233,000
Total other liabilities (1)	—		233,000		—		233,000
Total liabilities	$	—	$	233,000	$	314,000	$	547,000

	July 31, 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:
Acquisition payable:
Contingent consideration	$	—	$	—	$	1,500,000	$	1,500,000
Price floor	—		—		1,037,000		1,037,000
Total acquisition payable	—		—		2,537,000		2,537,000
Other liabilities:
Interest rate swap agreements	—		335,000		—		335,000
Total other liabilities (1)	—		335,000		—		335,000
Total liabilities	$	—	$	335,000	$	2,537,000	$	2,872,000

(1) At January 31, 2013 and July 31, 2012, the current portions of the interest swap agreements of $186,000 and $212,000, respectively, are recorded in accrued expenses and the long-term portions of the interest swap agreements of $47,000 and $123,000, respectively, are recorded in other long-term liabilities.

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 six quarters is as follows:

	ConFirm			Byrne			Byrne
	Contingent			Contingent			Price
	Consideration			Consideration			Floor			Total
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 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
Total net unrealized gains included in general and administrative expense in earnings	—			(1,400,000		)	(363,000		)	(1,763,000		)
Transfers into or out of level 3	—			—			—			—
Net purchases, issuances, sales and settlements	—			—			—			—
Balance, July 31, 2012	—			1,500,000			1,037,000			2,537,000
Total net unrealized gains included in general and administrative expense in earnings	—			—			(313,000		)	(313,000		)
Transfers into or out of level 3	—			—			—			—
Net purchases, issuances, sales and settlements	—			—			—			—
Balance, October 31, 2012	—			1,500,000			724,000			2,224,000
Total net unrealized gains included in general and administrative expense in earnings	—			(1,500,000		)	(410,000		)	(1,910,000		)
Transfers into or out of level 3	—			—			—			—
Net purchases, issuances, sales and settlements	—			—			—			—
Balance, January 31, 2013	$	—		$	—		$	314,000		$	314,000

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 first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount before proceeding to step one of the two-step quantitative goodwill impairment test, if necessary. For our quantitative test, we use a two-step process that begins with an estimation of the fair value of the related operating segments by using fair value results of the discounted cash flow methodology, as well as the market multiple and comparable transaction methodologies 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 performs a qualitative assessment, and if a quantitative assessment is necessary, we compare 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 goodwill, intangibles and long-lived assets are classified within Level 3 of the fair value hierarchy on a non-recurring basis. On July 31, 2012, management concluded that none of our long-lived assets, including goodwill and intangibles with indefinite-lives, were impaired and no other events or changes in circumstances have occurred during the six months ended January 31, 2013 that would indicate that the carrying amount of our long-lived assets may not be recoverable.

Disclosure of Fair Value of Financial Instruments

As of January 31, 2013 and July 31, 2012, 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 January 31, 2013 and July 31, 2012, 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 7. 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 lived intangible assets was $2,573,000 and $4,840,000 for the three and six months ended January 31, 2013, respectively, and $2,278,000 and $4,567,000 for the three and six months ended January 31, 2012, 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:

	January 31, 2013
			Accumulated
	Gross		Amortization			Net
Intangible assets with finite lives:
Customer relationships	$	68,764,000	$	(23,230,000	)	$	45,534,000
Technology	21,078,000		(8,525,000		)	12,553,000
Brand names	12,758,000		(7,429,000		)	5,329,000
Non-compete agreements	3,359,000		(568,000		)	2,791,000
Patents and other registrations	1,620,000		(518,000		)	1,102,000
	107,579,000		(40,270,000		)	67,309,000
Trademarks and trade names	9,446,000		—			9,446,000
Total intangible assets	$	117,025,000	$	(40,270,000	)	$	76,755,000

	July 31, 2012
			Accumulated
	Gross		Amortization			Net
Intangible assets with finite lives:
Customer relationships	$	60,271,000	$	(20,421,000	)	$	39,850,000
Technology	20,797,000		(7,590,000		)	13,207,000
Brand names	11,945,000		(6,778,000		)	5,167,000
Non-compete agreements	3,147,000		(404,000		)	2,743,000
Patents and other registrations	1,372,000		(463,000		)	909,000
	97,532,000		(35,656,000		)	61,876,000
Trademarks and trade names	9,435,000		—			9,435,000
Total intangible assets	$	106,967,000	$	(35,656,000	)	$	71,311,000

Estimated amortization expense of our intangible assets for the remainder of fiscal 2013 and the next five years is as follows:

Six month period ending July 31, 2013	$	5,546,000
Fiscal 2014	9,788,000
Fiscal 2015	9,268,000
Fiscal 2016	6,330,000
Fiscal 2017	5,813,000
Fiscal 2018	5,487,000

Goodwill changed during fiscal 2012 and the six months ended January 31, 2013 as follows:

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

Balance, July 31, 2011	$	9,648,000	$	52,074,000		$	55,864,000	$	8,133,000	$	9,051,000		$	134,770,000
Acquisitions	49,582,000		—			—		—		—			49,582,000
Foreign currency translation	—		(309,000		)	—		—		(388,000		)	(697,000		)
Balance, July 31, 2012	59,230,000		51,765,000			55,864,000		8,133,000		8,663,000			183,655,000
Acquisitions	—		597,000			23,977,000		—		—			24,574,000
Foreign currency translation	—		34,000			—		—		42,000			76,000
Balance, January 31, 2013	$	59,230,000	$	52,396,000		$	79,841,000	$	8,133,000	$	8,705,000		$	208,305,000

On July 31, 2012, we performed impairment studies of the Company’s goodwill and indefinite lived trademarks and trade names and concluded that such assets were not 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, 2012, the average fair value of all of our reporting units exceeded book value by substantial amounts, except our Dialysis and Specialty Packaging segments, which had average fair values that exceeded book values by approximately 19% and 24%, respectively. At January 31, 2013, goodwill relating to our Dialysis and Specialty Packaging reporting units were $8,133,000 and $7,181,000, respectively. We believe the most significant assumptions impacting the impairment assessment of Dialysis relate to the projected future operating results and cash flows of this segment, including the impact of the shift from reusable to single-use dialyzers as more fully explained in our “Management Discussion and Analysis” and in “Risk Factors” in our 2012 Form 10-K. We believe the most significant assumptions impacting the impairment assessment 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, future impairment charges may be recorded. On January 31, 2013, management concluded that no events or changes in circumstances have occurred during the three and six months ended January 31, 2013 that would indicate that the carrying amount of our intangible assets and goodwill may not be recoverable.

Note 8. Warranties

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

	Three Months Ended						Six Months Ended
	January 31,						January 31,
	2013			2012			2013			2012

Beginning balance	$	1,438,000		$	2,167,000		$	1,667,000		$	2,083,000
Provisions	336,000			827,000			703,000			1,780,000
Settlements	(542,000		)	(913,000		)	(1,138,000		)	(1,780,000		)
Foreign currency translation	—			—			—			(2,000		)
Ending balance	$	1,232,000		$	2,081,000		$	1,232,000		$	2,081,000

The warranty provisions and settlements for the three and six months ended January 31, 2013 and 2012 relate principally to the Company’s endoscope reprocessing and water purification equipment. Warranty reserves are included in accrued expenses in the Condensed Consolidated Balance Sheets.

Note 9. Financing Arrangements

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 $916,000 at January 31, 2013.

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 January 31, 2013, the lender’s base rate was 3.25% and the LIBOR rates ranged from 0.20% to 0.87%. The margins applicable to our outstanding borrowings were 0.75% above the lender’s base rate or 1.75% above LIBOR. All of our outstanding borrowings were under LIBOR contracts at January 31, 2013. 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 0.30% at January 31, 2013.

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 that began August 8, 2012 and ends 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 that began August 8, 2012 and ends 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%.

The principal amounts of the Term Loan Facility are to be paid in twenty consecutive quarterly installments of $2,500,000 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 Medivators, Mar Cor, Crosstex, SPS Medical and Strong Dental Products, Inc.) and (ii) a pledge by Cantel of all of the outstanding shares of Medivators, Mar Cor, Crosstex, SPS Medical 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 January 31, 2013, we had $107,000,000 of outstanding borrowings under the New U.S. Credit Agreement, which consisted of $35,000,000 and $72,000,000 under the Term Loan Facility and the Revolving Credit Facility, respectively, and $28,000,000 was available to be borrowed under our Revolving Credit Facility. Subsequent to January 31, 2013, we repaid $7,500,000 under our Revolving Credit Facility resulting in total outstanding borrowings of $99,500,000 at March 8, 2013.

Note 10. 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						Six Months Ended
	January 31,						January 31,
	2013			2012			2013			2012
Numerator for basic and diluted earnings per share:
Net income	$	10,452,000		$	7,294,000		$	20,028,000		$	13,514,000
Less income allocated to participating securities	(160,000		)	(158,000		)	(317,000		)	(270,000		)
Net income available to common stockholders	$	10,292,000		$	7,136,000		$	19,711,000		$	13,244,000

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	26,831,364			26,328,065			26,748,163			26,255,035

Dilutive effect of stock options using the treasury stock method and the average market price for the period	209,336			316,968			225,554			299,160

Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock	27,040,700			26,645,033			26,973,717			26,554,195

Earnings per share attributable to common stock:
Basic earnings per share	$	0.38		$	0.27		$	0.74		$	0.50

Diluted earnings per share	$	0.38		$	0.27		$	0.73		$	0.50

Stock options excluded from weighted average dilutive common shares outstanding because their inclusion would have been antidilutive	35,000			—			—			—

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		Six Months Ended
	January 31,		January 31,
	2013	2012	2013	2012
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock	27,040,700	26,645,033	26,973,717	26,554,195

Participating securities	420,909	598,331	437,085	529,959

Total weighted average number of shares and common stock equivalents attributable to both common stock and participating securities	27,461,609	27,243,364	27,410,802	27,084,154

Note 11. Income Taxes

The consolidated effective tax rate was 36.3% and 36.7% for the six months ended January 31, 2013 and 2012, respectively. The decrease in the consolidated effective tax rate was principally due to Federal tax legislation enacted in January 2013 and the prior year unfavorable impact of recording a loss relating to the impairment of an investment, partially offset by a lower level of deductions in the current year as a percentage of pre-tax income, as described below.

For both the six months ended January 31, 2013 and 2012, approximately 97% of our income before income taxes was generated from our United States operations, which had an overall effective tax rate of 36.8% and 37.3%, respectively. The lower overall effective tax rate for the six months ended January 31, 2013 was principally caused by (i) Federal tax legislation that had expired in December 2011, but was re-enacted in January 2013 that enabled us to claim the research and experimentation tax credit for calendar 2012 and (ii) not recording a tax benefit in the prior year on a loss relating to the impairment of an investment as a result of the uncertainty of utilizing a capital loss tax benefit in the future. Partially offsetting these factors was a lower overall level of tax credits and deductions as a percentage of pre-tax income as the underlying basis for the various credits and deductions did not increase as much as the increase in pre-tax income.

For both the six months ended January 31, 2013 and 2012, approximately 3% of our income before income taxes was generated from our operations in Canada, Singapore and the Netherlands. Collectively, these operations had an overall effective tax rate of 19.8% and 21.9% for the six months ended January 31, 2013 and 2012, respectively. All three of these locations have lower statutory income tax rates compared to the United States.

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, 2011	$	191,000
Lapse of statute of limitations	(67,000		)
Unrecognized tax benefits on July 31, 2012	124,000
Activity during the six months ended January 31, 2013	—
Unrecognized tax benefits on January 31, 2013	$	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. The Company is currently being audited by the Internal Revenue Service for fiscal year 2011.

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 12. Commitments and Contingencies

Long-term contractual obligations

As of January 31, 2013, 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:

	Six Months
	Ending
	July 31,		Year Ending July 31,
	2013		2014		2015		2016		2017		Thereafter		Total
	(Amounts in thousands)
Maturities of the credit facilities	$	5,000	$	10,000	$	10,000	$	10,000	$	72,000	$	—	$	107,000
Expected interest payments under the credit facilities (1)	1,240		2,299		2,058		1,817		5		—		7,419
Minimum commitments under noncancelable operating leases	1,804		3,915		2,508		1,616		1,062		4,534		15,439
Acquisition payable	—		—		314		—		—		—		314
Compensation agreements	1,915		3,163		1,173		350		75		—		6,676
Deferred compensation and other	28		56		56		43		42		63		288
Total contractual obligations	$	9,987	$	19,433	$	16,109	$	13,826	$	73,184	$	4,597	$	137,136

(1) The expected interest payments under both the term and revolving credit facilities reflect interest rates of 2.41% and 2.34%, which was our weighted average interest rate on outstanding borrowings at January 31, 2013 and reflects the impact of our interest rate swap agreements.

Operating leases

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

Acquisition payable

In connection with the Byrne Acquisition, 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 January 31, 2013, we have estimated $314,000 as the fair value of this payable, as more fully described in Notes 3 and 6 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, which defined certain compensation arrangements relating to various employment termination scenarios. In conjunction with the acquisitions of the Byrne Medical Business on August 1, 2011, the SPS Business on November 1, 2012 and the Eagle Pure Water Business on December 31, 2012, we entered into three-year employment agreements with certain executive officers of the acquired businesses.

Deferred compensation and other

Deferred compensation and other includes deferred compensation arrangements for certain former Medivators directors and officers and is recorded in other long-term liabilities. Additionally, deferred compensation and other includes an insurance related claim and minimum commitments under noncancelable capital leases.

Note 13. 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, dialysate 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.

None of our customers accounted for 10% or more of our consolidated net sales during the six months ended January 31, 2013 and 2012, except for DaVita Inc. (“DaVita”) in the current six

month period, which accounted for approximately 10.3%, or approximately $21,290,000, of our consolidated net sales and approximately 25.7% and 36.6% of our net sales in our Water Purification and Filtration and Dialysis segments, respectively.

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. 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.

DaVita and another large dialysis provider accounted for approximately 25.7% and 27.6%, respectively, of our Water Purification and Filtration segment net sales for the six months ended January 31, 2013. Combined, these two customers accounted for approximately 18.2% of our consolidated net sales for the six months ended January 31, 2013.

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. This segment also offers a broad suite of biological and chemical indicators for purposes of sterility assurance monitoring.

Four customers collectively accounted for approximately 57.5% of our Healthcare Disposables segment net sales and approximately 12.4% of our consolidated net sales during the six months ended January 31, 2013.

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.

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 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 2012 Form 10-K.

Information as to operating segments is summarized below:

	Three Months Ended						Six Months Ended
	January 31,						January 31,
	2013			2012			2013			2012

Net sales:
Endoscopy	$	39,422,000		$	40,379,000		$	76,101,000		$	76,431,000
Water Purification and Filtration	29,543,000			25,585,000			58,626,000			50,550,000
Healthcare Disposables	24,339,000			17,926,000			44,294,000			37,332,000
Dialysis	8,760,000			9,111,000			16,947,000			18,278,000
All Other	4,299,000			4,296,000			10,076,000			7,968,000
Total	$	106,363,000		$	97,297,000		$	206,044,000		$	190,559,000

Operating income:
Endoscopy	$	9,469,000		$	8,457,000		$	17,145,000		$	14,234,000
Water Purification and Filtration	3,489,000			2,879,000			7,397,000			5,562,000
Healthcare Disposables	4,709,000			2,613,000			8,800,000			5,609,000
Dialysis	2,312,000			2,158,000			4,488,000			4,361,000
All Other	355,000			(194,000		)	1,287,000			(505,000		)
	20,334,000			15,913,000			39,117,000			29,261,000
General corporate expenses	(3,471,000		)	(2,752,000		)	(6,282,000		)	(5,320,000		)
Interest expense, net	(775,000		)	(976,000		)	(1,408,000		)	(1,977,000		)
Other expense	—			(605,000		)	—			(605,000		)

Income before income taxes	$	16,088,000		$	11,580,000		$	31,427,000		$	21,359,000

Note 14. 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.

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 six months ended January 31, 2013 compared with the three and six months ended January 31, 2012.

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. 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. This segment also offers a broad suite of biological and chemical indicators for purposes of sterility assurance monitoring.

· 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 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, 2012 (the “2012 Form 10-K”) and our Condensed Consolidated Financial Statements for additional financial information regarding our reporting segments.

Significant Activity

(i) For the three and six months ended January 31, 2013 compared with the three and six months ended January 31, 2012, net sales increased by 9.3% and 8.1%, respectively, and net income increased 43.3% and 48.2%, respectively, to record levels for a three and six month period. We continue to benefit from having a broad portfolio of infection prevention and control products sold into diverse business segments, where approximately 73% 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:

· higher sales and profitability in our Healthcare Disposables segment primarily due to increased demand for our face masks, sterility assurance products and towels, the November 1, 2012 acquisition of SPS Medical Supply Corp., improved gross profit percentage and operating efficiencies,

· improved profitability in our Endoscopy segment due principally to (i) a shift of product mix to higher margin products including increases in sales volume of endoscope reprocessing disinfectant and consumable products as a result of the increased field population of equipment, as well as disposable infection control products used in gastrointestinal (GI) endoscopy procedures as a result of new product introductions, (ii) a favorable change of $1,387,000 and $1,218,000 for the three and six months ended January 31, 2013, compared to the three and six months ended January 31, 2012, respectively, in general and administrative expenses in our Endoscopy segment relating to fair value adjustments of contingent consideration and a price floor financial instrument as further described in Notes 3 and 6 to the Condensed Consolidated Financial Statements, (iii) the inclusion in the six months ended January 31, 2012 of a $893,000 one-time acquisition accounting charge relating to the acquired inventory in the Byrne Acquisition and (iv) lower commission expense,

· improved sales and profitability in our Water Purification and Filtration segment primarily relating to increased sales of our capital equipment, consumables and service in the dialysis industry mainly attributable to new product introductions such as our heat sanitizable water purification systems, which are sold at higher average selling prices and gross margins than the systems with the traditional non-heated sanitization technology,

· improved sales and profitability in our Therapeutic Filtration segment primarily during the first half of the six months ended January 31, 2013 due to the market shortage of certain filters as a result of damage done from an earthquake to the manufacturing facilities of a large competitor,

· the implementation of various cost control initiatives such as the closing of our Japan location in July 2012 as part of our decision to service our Japan customers in a more cost effective manner,

· lower interest expense notwithstanding additional borrowings for the acquisition of the SPS Business, and

· the recording of a tax credit as a result of Federal tax legislation enacted in January 2013.

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 partially 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,

· incurring $778,000 in costs for personnel changes relating to severance and recruiting a Chief Operating Officer during the three months ended January 31, 2013,

· the recording of $322,000 in medical device excise tax in cost of sales relating to January 2013 sales (and will be approximately $4,000,000 on an annual basis based upon our current sales volume) as part of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, which became effective January 2013 and

· decreases in net sales in our Dialysis operating segment, although we have been able to maintain the segment’s profitability for the three and six months ended January 31, 2013 compared with the three and six months ended January 31, 2012.

(ii) We sell our dialysis products to a concentrated number of customers. Sales in our Dialysis segment were adversely impacted by the decrease in demand for our RENATRON® reprocessing equipment and sterilants, as more fully described elsewhere in this MD&A. This reduction in dialysis sales has reduced overall profitability in this segment from historic levels. 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 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 the 2012

Form 10-K.

(iii) In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. The legislation imposes a significant new tax on medical device makers in the form of a 2.3% excise tax on all U.S. medical device sales beginning in January 2013. Since a significant portion of our sales are considered medical device sales under this new legislation, our gross profit percentage is being adversely affected beginning in January 2013, as more fully described elsewhere in this MD&A.

(iv) On December 31, 2012, our Mar Cor subsidiary acquired certain net assets of Eagle Pure Water Systems, Inc. (the “Eagle Pure Water Business” or the “Eagle Pure Water Acquisition”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements.

(v) On November 1, 2012, our Crosstex subsidiary acquired all the issued and outstanding stock of SPS Medical Supply Corp. (the “SPS Business” or “SPS Medical”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements.

(vi) On October 31, 2012, our Board of Directors approved an 18% increase in the semiannual cash dividend to $0.055 per share of outstanding common stock, which was paid on December 14, 2012 to shareholders of record at the close of business on November 14, 2012, as more fully described elsewhere in this MD&A.

(vii) 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. (“Medivators”). The name change was effective on August 1, 2012.

(viii) 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.

(ix) On August 1, 2011, the start of our prior fiscal year, our Medivators 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. Certain components of the acquisition’s purchase price were recorded at fair value and are continually re-measured at each balance sheet date, which has the potential for creating earnings volatility as further described elsewhere in this MD&A and in Notes 3 and 6 to the Condensed Consolidated Financial Statements.

(x) In conjunction with the acquisition of the business and substantially all of the assets of BMI 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, as more fully described elsewhere in this MD&A and in Notes 3 and 9 to the Condensed Consolidated Financial Statements. Additionally, in order to protect our interest rate exposure in future years, we entered into interest rate swap agreements in fiscal 2012, as more fully described elsewhere in this MD&A and in Notes 5 and 9 to the Condensed Consolidated Financial Statements.

Results of Operations

The results of operations described below reflect the operating results of Cantel and its wholly-owned subsidiaries. Since the acquisitions of the SPS Business and the Eagle Pure Water Business were consummated on November 1, 2012 and December 31, 2012, respectively, their results of operations are included in the three and six months ended January 31, 2013 subsequent to their acquisition dates and are not included in our results of operations for the three and six months ended January 31, 2012.

The following discussion should also be read in conjunction with our 2012 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						Six Months Ended
	January 31,						January 31,
	2013			2012			2013			2012
	(Dollar amounts in thousands)						(Dollar amounts in thousands)
	$		%	$		%	$		%	$		%

Endoscopy	$	39,422	37.1	$	40,379	41.5	$	76,101	36.9	$	76,431	40.1
Water Purification and Filtration	29,543		27.8	25,585		26.3	58,626		28.5	50,550		26.5
Healthcare Disposables	24,339		22.9	17,926		18.4	44,294		21.5	37,332		19.6
Dialysis	8,760		8.2	9,111		9.4	16,947		8.2	18,278		9.6
All Other	4,299		4.0	4,296		4.4	10,076		4.9	7,968		4.2
	$	106,363	100.0	$	97,297	100.0	$	206,044	100.0	$	190,559	100.0

Net Sales

Net sales increased by $9,066,000, or 9.3%, to $106,363,000 for the three months ended January 31, 2013 from $97,297,000 for the three months ended January 31, 2012.

Net sales increased by $15,485,000, or 8.1%, to $206,044,000 for the six months ended January 31, 2013 from $190,559,000 for the six months ended January 31, 2012.

The increase in net sales for the three and six months ended January 31, 2013 was principally attributable to increases in sales of healthcare disposables products and water purification and filtration products, and with respect to the six months ended January 31, 2013, therapeutic filtration products (recorded in the All Other reporting segment).

Net sales of healthcare disposables products increased by $6,413,000, or 35.8%, and $6,962,000, or 18.6%, for the three and six months ended January 31, 2013, respectively, compared with the three and six months ended January 31, 2012. Such increases are principally due to the inclusion of $4,662,000 in net sales from the acquired SPS Business on November 1, 2012 and increases in customer demand in the United States for our face masks, sterility assurance products and towels, partially offset by the loss of some private label business as a result of a customer’s decision to purchase certain healthcare disposable products from low cost providers including competitors whose products are manufactured in China and Southeast Asia due to lower overall costs. Changes in selling prices did not have a significant effect on net sales for the three and six months ended January 31, 2013 compared with the three and six months ended

January 31, 2012.

Net sales of water purification and filtration products and services increased by $3,958,000, or 15.5%, and $8,076,000, or 16.0%, for the three and six months ended January 31, 2013, respectively, compared with the three and six months ended January 31, 2012, primarily due to (i) an increase in demand for our water purification capital equipment, consumables and service in the dialysis industry mainly attributable to new product introductions such as our heat sanitizable water purification systems which are also sold at higher average selling prices than systems with the traditional non-heated sanitization technology and (ii) price increases on certain water purification products and services, which favorably impacted net sales for the three and six months ended January 31, 2013 by approximately $270,000 and $1,160,000, respectively.

Net sales in the All Other reporting segment were comparable for the three months ended January 31, 2013 compared with the three months ended January 31, 2012, and increased by $2,108,000, or 26.5%, for the six months ended January 31, 2013 compared with the six months ended January 31, 2012. The increase for the six months ended January 31, 2013 was primarily the result of an increase of $1,712,000 in net sales in our Therapeutic Filtration operating segment due to elevated demand, both in the United States and internationally, for our hemoconcentrator products (a device used to concentrate red blood cells and remove excess fluid from the bloodstream during open-heart surgery) and 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) as a result of a market shortage of these filters due to damage done from an earthquake to the manufacturing facilities of a large competitor. During the three months ended January 31, 2013, this elevated level of filter sales returned to a similar level that existed in prior periods as our competitor regained its full manufacturing capabilities. 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 six months ended January 31, 2013 compared with the three and six months ended January 31, 2012.

Net sales of endoscopy products and services decreased by $957,000, or 2.4%, for the three months ended January 31, 2013, compared with the three months ended January 31, 2012, and were comparable for the six months ended January 31, 2013 and 2012. The decrease for the three months ended January 31, 2013 was primarily due to a decrease in demand for our endoscope reprocessing equipment as demand had been elevated in the prior year period, as well as overall lower selling prices of approximately $345,000, partially offset by increases in demand in the United States for (i) our disinfectants, service and consumables due to the increase in the installed base of endoscope reprocessing equipment and (ii) our new product introductions of valves and hybrid tubing procedural products (disposable infection control products used in gastrointestinal (GI) endoscopy procedures). Demand for our endoscope reprocessing equipment had been elevated during the second half of fiscal 2011 and the first half of fiscal 2012 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, which are sold at higher margins, to continue to benefit as we further continue to increase the installed base of endoscope reprocessing equipment.

Net sales of dialysis products and services decreased by $351,000, or 3.9%, and $1,331,000, or 7.3%, for the three and six months ended January 31, 2013, respectively, compared with the three and six months ended January 31, 2012, due to decreases in demand in the United States (including a decrease from our largest dialysis customer, DaVita, Inc. (“DaVita”)) for our RENATRON® dialyzer reprocessing equipment and sterilants and international demand for our dialysate concentrate product (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). 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 Medical Care, the largest dialysis provider chain in the United States and 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 regional 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 reprocessing products is likely to result in continued loss of net sales and a lower level of profitability and operating cash flow in this segment in the future as well as potential future impairments of long-lived assets. 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 six months ended January 31, 2013 compared with the three and six months ended January 31, 2012.

Gross profit

Gross profit increased by $4,330,000, or 10.6%, to $45,151,000 for the three months ended January 31, 2013 from $40,821,000 for the three months ended January 31, 2012. Gross profit as a percentage of net sales for the three months ended January 31, 2013 and 2012 was 42.4% and 42.0%, respectively.

Gross profit increased by $10,107,000, or 12.8%, to $88,878,000 for the six months ended January 31, 2013 from $78,771,000 for the six months ended January 31, 2012. Gross profit as a percentage of net sales for the six months ended January 31, 2013 and 2012 was 43.1% and 41.3%, respectively.

Gross profit as a percentage of net sales for the three and six months ended January 31, 2013 increased compared with the three and six months ended January 31, 2012 primarily due to (i) more favorable sales mix due to increases in sales volume of certain products that carry higher gross margin percentages than each segment’s prior year period’s overall gross profit percentages such as our face masks and sterility assurance products (including sales of products relating to the newly acquired SPS Business) in our Healthcare Disposables segment, new heat sanitizable water purification systems in our Water Purification and Filtration segment, disinfectants in our Endoscopy segment and filters in our Therapeutic Filtration segment and decreases in sales volume of lower margin products such as endoscope reprocessing equipment in our Endoscopy segment, (ii) the inclusion in the prior six month period ended January 31, 2012 of a $893,000 one-time acquisition accounting charge relating to the acquired inventory in the Byrne Acquisition, (iii) increases in selling prices on certain products primarily in our Water Purification and Filtration segment and (iv) a decrease in warranty expense per unit relating to our endoscope

reprocessing equipment. These factors were partially offset by $417,000 in severance related charges as part of our cost reduction initiatives, lower selling prices of our Endoscopy procedural products as a result of increased competition and new sales to Group Purchasing Organization (GPOs) which typically receive discounted selling prices as a result of their purchasing volume, $322,000 in medical device excise taxes for the month of January 2013 and a $177,000 one-time acquisition accounting charge relating to the acquired inventory in the November 1, 2012 acquisition of the SPS Business.

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. The legislation imposes a significant new tax on medical device makers in the form of a 2.3% excise tax on all U.S. medical device sales beginning in January 2013. Since a significant portion of our sales are considered medical device sales under this new legislation, we began recording the excise tax in cost of sales in January 2013 thereby adversely affecting our gross profit percentage. Based upon current sales volume, this new tax will be approximately $4,000,000 on an annual basis. Although we are implementing further cost reductions and revenue enhancement initiatives to partially offset this new excise tax, we cannot provide any assurances that we will be successful in significantly reducing the impact of this tax on our business. Additionally, other elements of this legislation could meaningfully change the way health care is developed and delivered and may materially impact numerous aspects of our business in the future. See “Risk Factors” in our 2012 Form 10-K.

Furthermore, 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 further price competition in certain of our segments such as Healthcare Disposables (due to a more competitive environment as well as competition from products manufactured in China and Southeast Asia, as explained below), Endoscopy (primarily when selling to Group Purchasing Organization (GPOs) and other price competitive sales) and Dialysis (relating to the market shift from reusable to single-use dialyzers as explained above) or (iii) if raw materials and distribution costs increase and we are unable to implement price increases. Some of our competitors manufacture certain healthcare disposable products in China and Southeast Asia due to lower overall costs despite expensive shipping costs. Although we believe the quality of our healthcare disposable products, which are generally produced in the United States, are superior, 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 $453,000, or 3.4%, to $13,723,000 for the three months ended January 31, 2013 from $13,270,000 for the three months ended January 31, 2012. For the six months ended January 31, 2013, selling expenses increased by $943,000, or 3.6%, to $27,136,000 from $26,193,000 for the six months ended January 31, 2012. For the three and six months ended January 31, 2013, these increases were primarily due to the inclusion of selling expenses relating to the November 1, 2012 acquisition of the SPS Business and increased investments to further develop and support our sales team such as hiring additional sales personnel primarily in our Water Purification and Filtration and Endoscopy segments, funding increased travel budgets and providing annual raises, partially offset by approximately $290,000 and $780,000, respectively, in lower commissions due to a change in the structure of our Endoscopy sales commission plan as well as less sales of higher commission products.

Selling expenses as a percentage of net sales were 12.9% and 13.6% for the three months

ended January 31, 2013 and 2012, respectively, and 13.2% and 13.7% for the six months ended January 31, 2013 and 2012, respectively.

General and administrative expenses increased by $290,000, or 2.4%, to $12,382,000 for the three months ended January 31, 2013, from $12,092,000 for the three months ended January 31, 2012, primarily due to the inclusion of general and administrative expenses of the acquired SPS Business on November 1, 2012, approximately $470,000 in higher compensation expense primarily relating to annual salary raises, higher incentive compensation, employee benefit costs and recruiting costs associated with the hiring of our new Chief Operating Officer and $232,000 in higher bad debt expense. These increases were partially offset by a favorable change of $1,553,000 relating to fair value adjustments of contingent consideration and a price floor financial instrument as further described in Notes 3 and 6 to the Condensed Consolidated Financial Statements and the prior year recording of $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 increased by $236,000, or 1.0%, to $24,430,000 for the six months ended January 31, 2013, from $24,194,000 for the six months ended January 31, 2012, primarily due to the inclusion of general and administrative expenses of the acquired SPS Business on November 1, 2012, approximately $905,000 in higher compensation expense primarily relating to annual salary raises, higher incentive compensation, employee benefit costs and recruiting costs associated with the hiring of our new Chief Operating Officer and $321,000 in higher bad debt expense. These increases were partially offset by a favorable change of $1,298,000 relating to fair value adjustments of contingent consideration and a price floor financial instrument as further described in Notes 3 and 6 to the Condensed Consolidated Financial Statements, the prior year inclusion of $626,000 in acquisition related expenses relating to the Byrne Acquisition and the prior year recording of $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 11.6% and 12.4% for the three months ended January 31, 2013 and 2012, respectively, and 11.9% and 12.7% for the six months ended January 31, 2013 and 2012, respectively.

Research and development expenses (which include continuing engineering costs) decreased by $115,000 to $2,183,000 for the three months ended January 31, 2013 from $2,298,000 for the three months ended January 31, 2012. For the six months ended January 31, 2013, research and development expenses increased by $34,000 to $4,477,000, from $4,443,000 for the six months ended January 31, 2012.

Operating Income by Segment

The following table gives information as to the amount of operating income, as well as operating income as a percentage of net sales, for each of our reporting segments.

	Three Months Ended										Six Months Ended
	January 31,										January 31,
	2013					2012					2013					2012
	(Dollar amounts in thousands)										(Dollar amounts in thousands)
	Operating			% of		Operating			% of		Operating			% of		Operating			% of
	Income			Net sales		Income			Net sales		Income			Net sales		Income			Net sales
Endoscopy	$	9,469		24.0	%	$	8,457		20.9	%	$	17,145		22.5	%	$	14,234		18.6	%
Water Purification and Filtration	3,489			11.8	%	2,879			11.3	%	7,397			12.6	%	5,562			11.0	%
Healthcare Disposables	4,709			19.3	%	2,613			14.6	%	8,800			19.9	%	5,609			15.0	%
Dialysis	2,312			26.4	%	2,158			23.7	%	4,488			26.5	%	4,361			23.9	%
All Other	355			8.3	%	(194		)	-4.5	%	1,287			12.8	%	(505		)	-6.3	%
Operating income	20,334			19.1	%	15,913			16.4	%	39,117			19.0	%	29,261			15.4	%
General corporate expenses	(3,471		)			(2,752		)			(6,282		)			(5,320		)
Income before interest, other expense and income taxes	$	16,863		15.9	%	$	13,161		13.5	%	$	32,835		15.9	%	$	23,941		12.6	%

The Endoscopy segment’s operating income increased by $1,012,000, or 12.0%, and $2,911,000, or 20.5%, for the three and six months ended January 31, 2013, respectively, compared with the three and six months ended January 31, 2012, primarily due to (i) a favorable change of $1,387,000 and $1,218,000, respectively, in general and administrative expenses relating to fair value adjustments of contingent consideration and a price floor financial instrument as further described in Notes 3 and 6 to the Condensed Consolidated Financial Statements, (ii) the inclusion in the six months ended January 31, 2012 of a $893,000 one-time acquisition accounting charge relating to the acquired inventory in the Byrne Acquisition, (iii) increases in demand in the United States for our disinfectants, service, consumables and disposable procedural GI products, which are all higher margin products, (iv) lower commission expense and (v) lower warranty expense per unit relating to our endoscopy reprocessing equipment, partially offset by (i) a decrease in demand for our endoscope reprocessing equipment, (ii) lower selling prices of disposable procedural products, (iii) additional investments in our sales team, (iv) the recording of severance costs in January 2013 and (v) the recording of new medical device excise taxes in January 2013, as explained above.

The Water Purification and Filtration segment’s operating income increased by $610,000, or 21.2%, and $1,835,000, or 33.0%, for the three and six months ended January 31, 2013, respectively, compared with the three and six months ended January 31, 2012, primarily due to an increase in demand for our water purification capital equipment, consumables and service in the dialysis industry mainly attributable to new product introductions such as our heat sanitizable water purification systems, which are sold at higher selling prices and gross margins compared with our products with the traditional non-heated sanitization technology, as well as price increases on certain products, partially offset by an increase in selling expenses due to the expansion of our sales team, as explained above.

The Healthcare Disposables segment’s operating income increased by $2,096,000, or 80.2%, and $3,191,000, or 56.9%, for the three and six months ended January 31, 2013, respectively, compared with the three and six months ended January 31, 2012, primarily due to an

increase in demand for certain products, the acquisition of the SPS Business on November 1, 2012, improved gross profit percentage and operating efficiencies, as explained above.

The Dialysis segment’s operating income was comparable for the three and six months ended January 31, 2013, compared with the three and six months ended January 31, 2012, primarily due to a decrease in net sales of sterilants and RENATRON® dialyzer reprocessing equipment, which are the higher margin products in this segment, offset by a decrease in sales and marketing expense and general and administrative expense as a result of various cost control initiatives such as the allocation of certain internal resources to other segments as well as the closing of our Japan location in July 2012 as part of our decision to service our Japan customers in a more cost effective manner.

Operating income in our All Other reporting segment increased by $549,000 and $1,792,000 for the three and six months ended January 31, 2013, respectively, compared with the three and six months ended January 31, 2012, due to increases in operating income of our Therapeutic Filtration operating segment of $524,000 and $1,523,000, respectively, as a result of elevated demand for our filters, as explained above, as well as the implementation of various cost control initiatives such as changes in the management structure and the closing of our Japan location in July 2012 as part of our decision to service our Japan customers in a more cost effective manner.

General corporate expenses relate to certain unallocated corporate costs primarily related to executive management personnel and being a publicly traded company. The increase in such costs for the three and six months ended January 31, 2013, compared with January 31, 2012, is primarily due to the addition of internal and external resources including the hiring of a Chief Operating Officer in November 2012.

Interest

Interest expense decreased by $209,000 to $791,000 for the three months ended January 31, 2013, from $1,000,000 for the three months ended January 31, 2012. For the six months ended January 31, 2013, interest expense decreased by $594,000 to $1,437,000 from $2,031,000 the six months ended January 31, 2012, primarily due to a decrease in average outstanding borrowings.

Interest income decreased by $8,000 to $16,000 for the three months ended January 31, 2013, from $24,000 for the three months ended January 31, 2012. For the six months ended January 31, 2013, interest income decreased by $25,000 to $29,000, from $54,000 for the six months ended January 31, 2012.

Other expense

For the three and six months ended January 31, 2012, a $605,000 loss was recorded in other expense relating to the impairment of our investment in a company that was developing a patented and proprietary antimicrobial agent.

Income taxes

level of deductions in the current year as a percentage of pre-tax income, as described below.

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, 2011	$	191,000
Lapse of statute of limitations	(67,000		)
Unrecognized tax benefits on July 31, 2012	124,000
Activity during the six months ended January 31, 2013	—
Unrecognized tax benefits on January 31, 2013	$	124,000

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						Six Months Ended
	January 31,						January 31,
	2013			2012			2013			2012

Cost of sales	$	37,000		$	57,000		$	92,000		$	90,000
Operating expenses:
Selling	82,000			113,000			181,000			191,000
General and administrative	802,000			1,199,000			1,594,000			2,012,000
Research and development	8,000			13,000			20,000			20,000
Total operating expenses	892,000			1,325,000			1,795,000			2,223,000
Stock-based compensation before income taxes	929,000			1,382,000			1,887,000			2,313,000
Income tax benefits	(336,000		)	(495,000		)	(676,000		)	(826,000		)
Total stock-based compensation expense, net of tax	$	593,000		$	887,000		$	1,211,000		$	1,487,000

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

Basic	$	0.02		$	0.03		$	0.04		$	0.06

Diluted	$	0.02		$	0.03		$	0.04		$	0.05

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 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. 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 January 31, 2013, total unrecognized stock-based compensation expense before income taxes related to total nonvested stock options and stock awards was $6,318,000 with a remaining weighted average period of 22 months over which such expense is expected to be recognized. The majority of our nonvested awards relate to stock awards.

Liquidity and Capital Resources

Working capital

At January 31, 2013, our working capital was $86,653,000, compared with $78,751,000 at July 31, 2012. This increase was primarily due to the significant growth in operating income, as more fully explained elsewhere in this MD&A, and the November 1, 2012 acquisition of the SPS Business, which contributed total working capital of $2,293,000 on the date of the acquisition.

Cash flows from operating activities

Net cash provided by operating activities was $19,051,000 and $19,838,000 for the six months ended January 31, 2013 and 2012, respectively. For the six months ended January 31, 2013, 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 income taxes receivable (due to the timing associated with tax payments), 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 accounts receivable (primarily due to strong sales in the three months ended January 31, 2013) and prepaid expenses and other current assets (due primarily to the timing associated with insurance payments).

For the six months ended January 31, 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).

Cash flows from investing activities

Net cash used in investing activities was $39,409,000 and $98,857,000 for the six months ended January 31, 2013 and 2012, respectively. For the six months ended January 31, 2013, the net cash used in investing activities was primarily for the acquisition of the SPS Business and to a lesser extent, capital expenditures. For the six months ended January 31, 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.

Cash flows from financing activities

Net cash provided by financing activities was $16,911,000 and $82,445,000 for the six months ended January 31, 2013 and 2012, respectively. For the six months ended January 31, 2013, the net cash provided by financing activities was primarily due to borrowings under our revolving credit facility relating to the acquisition of the SPS Business, partially offset by repayments under our credit facilities. For the six months ended January 31, 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.

Dividends

On October 31, 2012, our Board of Directors approved an 18% increase in the semiannual cash dividend to $0.055 per share of outstanding common stock, which was paid on December 14, 2012 to shareholders of record at the close of business on November 14, 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

	Six Months
	Ending
	July 31,		Year Ending July 31,
	2013		2014		2015		2016		2017		Thereafter		Total
	(Amounts in thousands)
Maturities of the credit facilities	$	5,000	$	10,000	$	10,000	$	10,000	$	72,000	$	—	$	107,000
Expected interest payments under the credit facilities (1)	1,240		2,299		2,058		1,817		5		—		7,419
Minimum commitments under noncancelable operating leases	1,804		3,915		2,508		1,616		1,062		4,534		15,439
Acquisition payable	—		—		314		—		—		—		314
Compensation agreements	1,915		3,163		1,173		350		75		—		6,676
Deferred compensation and other	28		56		56		43		42		63		288
Total contractual obligations	$	9,987	$	19,433	$	16,109	$	13,826	$	73,184	$	4,597	$	137,136

New U.S. Credit Agreement

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 $916,000 at January 31, 2013.

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 February 28, 2013, the lender’s base rate was 3.25% and the LIBOR rates ranged from 0.20% to 0.87%. The margins applicable to our outstanding borrowings were 0.75% above the lender’s base rate or 1.75% above LIBOR. All of our outstanding borrowings were under LIBOR contracts at February 28, 2013. 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 0.30% at February 28, 2013.

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 Medivators, Mar Cor, Crosstex, SPS Medical and Strong Dental Products, Inc.) and (ii) a pledge by Cantel of all of the outstanding shares of Medivators, Mar Cor, Crosstex, SPS Medical 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 January 31, 2013, we had $107,000,000 of outstanding borrowings under the New U.S. Credit Agreement, which consisted of $35,000,000 and $72,000,000 under the Term Loan Facility and the Revolving Credit Facility, respectively. Subsequent to January 31, 2013, we repaid $7,500,000 under our Revolving Credit Facility resulting in total outstanding borrowings of $99,500,000 at March 8, 2013 and $35,500,000 was available to be borrowed under our Revolving Credit Facility.

Operating leases

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

Acquisition payable

Compensation agreements

Deferred compensation and other

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 January 31, 2013, we had a cash balance of $26,825,000, of which $3,956,000 was held by foreign subsidiaries. Such foreign cash is needed by our foreign subsidiaries for working capital purposes and is currently 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 March 8, 2013, $35,500,000 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 2012 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.

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 $3,073,000 at February 28, 2013, which cover certain assets and liabilities that were denominated in currencies other than our subsidiaries’ functional currencies. Such contracts expire on March 31, 2013. 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. 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 six months ended January 31, 2013, such forward contracts substantially offset the impact on operations related to certain assets and liabilities that are denominated in currencies other than our subsidiaries’ functional currencies.

Overall, fluctuations in the rates of currency exchange had an insignificant impact upon our net income for the three and six months ended January 31, 2013 compared with the three and six months ended January 31, 2012.

For purposes of translating the balance sheet at January 31, 2013 compared with July 31, 2012, the total of the foreign currency movements resulted in a foreign currency translation gain of $155,000, net of tax, for the six months ended January 31, 2013, thereby increasing 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 recognize 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 is 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, except a small portion of our sterility assurance products in our Healthcare Disposables segment. In addition to a restocking fee and payment of freight by the customer, such returns must be undamaged, returned within 90 days and meet certain other criteria before products are accepted for return. As historical returns of these products have been rare, we currently do not record an allowance for product returns. 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 $1,120,000 and $2,281,000 for the three and six months ended January 31, 2013, respectively, and $949,000 and $1,892,000 for the three and six months ended January 31, 2012, respectively. 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.

Our endoscopy products and services are sold primarily to distributors internationally and directly to hospitals and other end-users in the United States; 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; the majority of our healthcare disposable products are sold to third party distributors and with respect to some of our sterility assurance products, to hospitals, surgery centers, physician and dental offices, dental schools, medical research companies, laboratories and other end-users; the majority of our dialysis products are sold to dialysis clinics and hospitals; the majority of therapeutic filtration products are sold to third party distributors; 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.

On July 31, 2012, we adopted Accounting Standards 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 more likely than not that the fair value of the reporting unit is less than the carrying amount before proceeding to step one of the two-step quantitative goodwill impairment test, if necessary. At July 31, 2012, because we determined through qualitative factors that the fair values of our Water Purification and Filtration and Healthcare Disposables segments were unlikely to be less than the carrying value, we did not proceed to step one of the two-step quantitative goodwill impairment test for those two segments. We performed step one of the two-step quantitative goodwill impairment test for Endoscopy (due to the increase in assets related to the Byrne Acquisition), Dialysis, Therapeutic Filtration, Chemistries (due to the decrease in operating income in the Dialysis, Therapeutic Filtration and Chemistries segments in fiscal 2012 compared with fiscal 2011) and Specialty Packaging (due to a change in assumptions used in the previous projection of future operating results). In performing a detailed quantitative 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 fair value results of the discounted cash flow methodology, as well as the market multiple and comparable transaction methodologies when applicable. The first step is a review for potential impairment, and the second step measures the amount of impairment, if any.

On July 31, 2012, we adopted ASU 2012-02, “Intangibles — Goodwill and Other,” (“ASU 2012-02”), which further expanded the use of a qualitative assessment to indefinite-lived intangible assets to determine whether further impairment testing is necessary. Accordingly, in performing our annual review for indefinite lived intangibles, management first assesses qualitative factors to determine whether it is more likely than not that the fair value of such assets is less than the carrying values, and if necessary, performs a quantitative analysis comparing the current fair value of our indefinite lived intangibles 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, 2012, 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, 2012, the average fair value of all of our reporting units exceeded book value by substantial amounts, except our Dialysis and Specialty Packaging segments, which had average fair values that exceeded book values by approximately 19% and 24%, respectively. At January 31, 2013, goodwill relating to our Dialysis and Specialty Packaging reporting units were $8,133,000 and $7,181,000, respectively. We believe the most significant assumptions impacting the impairment assessment of Dialysis relate to the projected future operating results and cash flows of this segment, including the impact of the shift from reusable to single-use dialyzers as more fully explained elsewhere in this MD&A and in “Risk Factors” in our 2012 Form 10-K. We believe the most significant assumptions impacting the impairment assessment 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, future impairment charges may be recorded. On January 31, 2013, management concluded that no events or changes in circumstances have occurred during the three and six months ended January 31, 2013 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 January 31, 2013, 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.

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. 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 0.4% 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

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 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.

Medical Device Taxes

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 imposes significant new taxes on medical device makers in the form of a 2.3% excise tax on all U.S. medical device sales beginning in January 2013. A significant portion of our sales are considered medical device sales under this new legislation. We calculate medical device excise taxes based on the latest available regulations and recognize the excise taxes in cost of sales at the time the medical device revenue is recognized in our Condensed Consolidated Statements of Income. For the three and six months ended January 31, 2012, we recorded excise taxes of $322,000 in cost of sales relating to the month of January 2013. The regulations regarding the calculations of the medical device taxes have yet to be fully finalized, are complicated in nature and certain aspects can be subject to interpretation. Although we have made all reasonable efforts to record accurate excise taxes, the determination of the tax requires us to make certain assumptions and estimates. Actual taxes for the period could differ from original estimates requiring adjustments to our Condensed Consolidated Financial Statements.

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 Byrne acquisition which fair value was determined using an option valuation model, as further described in Notes 3 and 6 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 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

· 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 impact of U.S. health care reform legislation and other health care policy changes, including the imposition of significant new taxes on medical device makers in the form of a 2.3% excise tax on U.S. medical device sales beginning in January 2013

· 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 2012 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 2012 Form 10-K.

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 2012 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 six months ended January 31, 2013, compared with the three and six months ended January 31, 2012, upon our net income and stockholders’ equity.

Overall, fluctuations in the rates of currency exchange had an insignificant impact on our net income for the three and six months ended January 31, 2013, compared with the three and six months ended January 31, 2012, and stockholders’ equity from July 31, 2012 to January 31, 2013.

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.

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.

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 2012 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 November 1, 2012 we acquired the SPS 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 Crosstex 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 SPS Business will be fully integrated into Crosstex’ existing internal control structure by October 2013.

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 2012 Form 10-K. The risk factors disclosed in Part I, Item 1A to our 2012 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

November	2,327	$	26.36	—	—
December	14,851	29.27		—	—
January	6,326	31.65		—	—
Total	23,504	$	29.62	—	—

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.INS - XBRL Instance Document

101.SCH - XBRL Extension Schema Document

101.CAL - XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF - XBRL Taxonomy Definition Linkbase Document

101.LAB - XBRL Taxonomy Extension Label Linkbase Document

101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document

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: March 12, 2013


	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-Q2013 Q2 Quarterly report

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