10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.   20549

Form 10-Q

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

For the quarterly period ended January 31, 2014.

or

oTransition 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 x	Accelerated filer o
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, 2014: 41,348,810.

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,
	2014			2013
Assets
Current assets:
Cash and cash equivalents	$	19,706		$	34,076
Accounts receivable, net of allowance for doubtful accounts of $1,853 at January 31 and $1,265 at July 31	59,947			52,753
Inventories:
Raw materials	24,069			23,815
Work-in-process	7,557			6,945
Finished goods	24,559			23,407
Total inventories	56,185			54,167
Deferred income taxes	4,078			4,129
Prepaid expenses and other current assets	5,535			4,428
Income taxes receivable	2,512			1,107
Total current assets	147,963			150,660
Property and equipment, net	47,072			46,465
Intangible assets, net	76,476			75,929
Goodwill	218,677			211,618
Other assets	2,997			2,999
	$	493,185		$	487,671
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt	$	—		$	10,000
Accounts payable	14,690			13,322
Compensation payable	8,959			14,032
Accrued expenses	10,870			10,417
Deferred revenue	13,005			11,380
Total current liabilities	47,524			59,151
Long-term debt	74,500			85,000
Deferred income taxes	22,304			21,186
Contingent consideration	5,692			45
Other long-term liabilities	1,147			1,157
Commitments and contingencies	—			—
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 - 45,516,277 shares issued and 41,339,569 shares outstanding; July 31 - 45,181,655 shares issued and 41,138,121 shares outstanding	4,552			4,518
Additional paid-in capital	141,289			134,853
Retained earnings	224,215			203,762
Accumulated other comprehensive income	9,406			10,977
Treasury Stock, at cost; January 31 - 4,176,708 shares; July 31 - 4,043,534 shares	(37,444		)	(32,978		)
Total stockholders’ equity	342,018			321,132
	$	493,185		$	487,671

See accompanying notes.

2

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,
	2014			2013			2014			2013
Net sales	$	119,042		$	106,363		$	237,314		$	206,044
Cost of sales	66,707			61,212			133,480			117,166
Gross profit	52,335			45,151			103,834			88,878
Expenses:
Selling	16,077			13,723			31,841			27,136
General and administrative	15,557			12,382			30,721			24,430
Research and development	2,492			2,183			4,751			4,477
Total operating expenses	34,126			28,288			67,313			56,043
Income before interest and income taxes	18,209			16,863			36,521			32,835
Interest expense	645			791			1,302			1,437
Interest income	(15		)	(16		)	(28		)	(29		)
Income before income taxes	17,579			16,088			35,247			31,427
Income taxes	6,453			5,636			12,936			11,399
Net income	$	11,126		$	10,452		$	22,311		$	20,028
Earnings per common share:
Basic	$	0.27		$	0.26		$	0.54		$	0.49
Diluted	$	0.27		$	0.25		$	0.54		$	0.49
Dividends per common share	$	—		$	—		$	0.05		$	0.04

See accompanying notes.

3

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollar Amounts in Thousands)

(Unaudited)

	Three Months Ended					Six Months Ended
	January 31,					January 31,
	2014			2013		2014			2013
Net income	$	11,126		$	10,452	$	22,311		$	20,028
Other comprehensive (loss) income:
Foreign currency translation, net of tax	(1,401		)	64		(1,674		)	155
Unrealized holding losses on interest rate swaps arising during the period, net of tax	(9		)	2		(30		)	(9		)
Reclassification adjustments to interest expense for losses on interest rate swaps included in net income during the period, net of tax	30			40		60			74
Reclassification adjustments to interest expense for ineffective hedge on interest rate swap included in net income during the period, net of tax	73			—		73			—
Total other comprehensive (loss) income, net of tax	(1,307		)	106		(1,571		)	220
Comprehensive income	$	9,819		$	10,558	$	20,740		$	20,248

See accompanying notes.

4

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar Amounts in Thousands)

(Unaudited)

	Six Months Ended
	January 31,
	2014			2013
Cash flows from operating activities
Net income	$	22,311		$	20,028
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	3,967			3,574
Amortization	5,245			4,840
Stock-based compensation expense	2,556			1,887
Amortization of debt issuance costs	162			176
Loss on disposal of fixed assets	296			140
Deferred income taxes	575			139
Excess tax benefits from stock-based compensation	(3,297		)	(1,868		)
Changes in assets and liabilities, net of assets acquired and liabilities assumed:
Accounts receivable	(7,190		)	(2,265		)
Inventories	(1,812		)	(4		)
Prepaid expenses and other current assets	(1,225		)	(1,846		)
Accounts payable and other current liabilities	(1,807		)	(8,766		)
Income taxes	1,768			3,016
Net cash provided by operating activities	21,549			19,051
Cash flows from investing activities
Capital expenditures	(4,363		)	(2,548		)
Proceeds from disposal of fixed assets	3			4
Acquisition of Jet Prep, net of cash acquired	(5,332		)	—
Acquisition of Sterilator, net of cash acquired	(2,829		)	—
Acquisition of SPS Business, net of cash acquired	—			(35,415		)
Acquisition of Polyp Trap	—			(486		)
Acquisition of Eagle Pure Water	—			(870		)
Other, net	(319		)	(94		)
Net cash used in investing activities	(12,840		)	(39,409		)
Cash flows from financing activities
Borrowings under revolving credit facility, net of debt issuance costs	—			37,000
Repayments under term loan facility	(5,000		)	(5,000		)
Repayments under revolving credit facility	(15,500		)	(15,000		)
Proceeds from exercises of stock options	207			1,409
Dividends paid	(1,858		)	(1,494		)
Excess tax benefits from stock-based compensation	3,297			1,868
Purchases of treasury stock	(4,057		)	(1,872		)
Net cash (used in) provided by financing activities	(22,911		)	16,911
Effect of exchange rate changes on cash and cash equivalents	(168		)	86
Decrease in cash and cash equivalents	(14,370		)	(3,361		)
Cash and cash equivalents at beginning of period	34,076			30,186
Cash and cash equivalents at end of period	$	19,706		$	26,825

See accompanying notes.

5

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, 2013 (the “2013 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, 2013 was derived from the audited Consolidated Balance Sheet of Cantel at that date.

Cantel had five principal operating companies at January 31, 2014 and July 31, 2013; 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 our bases in Europe and Asia/Pacific, respectively, and Crosstex has a subsidiary, SPS Medical Supply Corp., as more fully described below and in Note 3 to the Condensed Consolidated Financial Statements.

During the fourth quarter of fiscal 2013, we changed our internal reporting processes by combining our Therapeutic Filtration and Chemistries operating segments, previously reported in the Other reporting segment, with our Water Purification and Filtration reporting segment to reflect the way the Company, through its executive management, manages, allocates resources and measures the performance of its businesses. All periods presented have been recast to reflect these changes.

As such, we currently operate our business through five operating segments: Endoscopy (through Medivators), Water Purification and Filtration (through Mar Cor, Biolab and Medivators), Healthcare Disposables (through Crosstex), Dialysis (through Medivators) and Specialty Packaging (through Saf-T-Pak). The Specialty Packaging operating segment comprises the Other reporting segment for financial reporting purposes.

On January 7, 2014, Crosstex’ subsidiary acquired all the issued and outstanding stock of Sterilator Company, Inc. (the “Sterilator Business” or “Sterilator Acquisition”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements. The results of operations of Sterilator, which had an insignificant effect on our consolidated net income due to the small size of this business, are included in the portion of the three and six months ended January 31, 2014 subsequent to its acquisition date and are not reflected in the three and six months ended January 31, 2013. The Sterilator Business is included in our Healthcare Disposables segment.

6

On November 5, 2013, our Medivators B.V. subsidiary acquired all the issued and outstanding capital stock of Jet Prep Ltd. (the “Jet Prep Business” or “Jet Prep Acquisition”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements. The results of operations of Jet Prep, which had an insignificant effect on our consolidated net income due to the small size of this business, are included in the portion of the three and six months ended January 31, 2014 subsequent to its acquisition date and are not reflected in the three and six months ended January 31, 2013. The Jet Prep Business is included in our Endoscopy segment.

On March 22, 2013, Mar Cor entered into an agreement to acquire from Siemens Industry, Inc. and Siemens Canada Limited (collectively, “Siemens”) certain net assets of Siemens’ hemodialysis water business (the “Siemens Water Business” or the “Siemens Water Acquisition”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements. The Siemens Water Acquisition had a nominal impact on our results of operations for the three and six months ended January 31, 2014 due to the size of this business in relation to our overall consolidated results of operations and is not reflected in our results of operations for the three and six months ended January 31, 2013. The Siemens Water Business is included in our Water Purification and Filtration segment.

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, which had an insignificant effect on our results of operations due to the small size of the business, is reflected in our results of operations for the three and six months ended January 31, 2014 and the portion of the three and six months ended January 31, 2013 subsequent to its acquisition date. 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. The results of operations of SPS Medical are included in the three and six months ended January 31, 2014, the three months ended January 31, 2013, and the portion of the six months ended January 31, 2013 subsequent to its acquisition date. The SPS Business is included in our Healthcare Disposables segment.

During July 2013, the Company issued 15,044,000 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 July 12, 2013 to stockholders of record on July 1, 2013. The effect of the stock split has been recognized retroactively in all share data in the Condensed Consolidated Statements of Income, Notes to the Condensed Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

7

Subsequent Events

On March 4, 2014, we entered into a $250,000,000 Third Amended and Restated Credit Agreement with our senior lenders to refinance our working capital credit facilities, as more fully described in Note 9 to the Condensed Consolidated Financial Statements.

We performed a review of events subsequent to January 31, 2014. Based upon that review, no other 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,
	2014			2013			2014			2013
Cost of sales	$	109,000		$	37,000		$	171,000		$	92,000
Operating expenses:
Selling	191,000			82,000			301,000			181,000
General and administrative	1,090,000			802,000			2,054,000			1,594,000
Research and development	18,000			8,000			30,000			20,000
Total operating expenses	1,299,000			892,000			2,385,000			1,795,000
Stock-based compensation before income taxes	1,408,000			929,000			2,556,000			1,887,000
Income tax benefits	(493,000		)	(336,000		)	(905,000		)	(676,000		)
Total stock-based compensation expense, net of tax	$	915,000		$	593,000		$	1,651,000		$	1,211,000

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, and were tax-effected using the Company’s estimated U.S. effective tax rate at the time of grant.

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, 2014, total unrecognized stock-based compensation expense, before income taxes, related to total nonvested stock options and stock awards was $10,187,000 with a remaining weighted average period of 22 months over which such expense is expected to be recognized. Most of our nonvested awards relate to stock awards.

8

We determine the fair value of each stock award using the closing market price of our common stock on the date of grant.

A summary of nonvested stock award activity follows:

			Weighted
	Number of		Average
	Shares		Fair Value
Nonvested stock awards at July 31, 2013	605,767		$	11.96
Granted	247,136		31.84
Canceled	(4,620	)	9.02
Vested	(299,611	)	10.51
Nonvested stock awards at January 31, 2014	548,672		$	21.73

For the six months ended January 31, 2014 and 2013, the Company granted 30,000 and 52,500 options, respectively.

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, 2014 and 2013:

Weighted-Average
Black-Scholes Option	Six Months Ended		Six Months Ended
Valuation Assumptions	January 31, 2014		January 31, 2013
Dividend yield	0.28	%	0.37	%
Expected volatility (1)	42.70	%	50.90	%
Risk-free interest rate (2)	1.44	%	0.67	%
Expected lives (in years) (3)	5.00		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.

For the six months ended January 31, 2014 and 2013, these non-qualified options had a weighted average fair value of $12.08 and $7.27, respectively.

The aggregate intrinsic value (i.e., the excess market price over the exercise price) of all options exercised was $1,748,000 and $2,419,000 for the three and six months ended January 31, 2014 and $3,224,000 and $3,488,000 for the three and six months ended January 31, 2013, respectively.

9

A summary of stock option activity follows:

			Weighted
	Number of		Average
	Shares		Exercise Price
Outstanding at July 31, 2013	403,831		$	8.25
Granted	30,000		31.81
Exercised	(92,106	)	6.69
Outstanding at January 31, 2014	341,725		$	10.74
Exercisable at July 31, 2013	351,331		$	6.94
Exercisable at January 31, 2014	276,725		$	7.66

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 282,978 and 474,266 shares, respectively, 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, 2014 and 2013, income tax deductions of $4,516,000 and $2,923,000, respectively, were generated and increased additional paid-in capital by $3,297,000 and $1,868,000, 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

Sterilator Company, Inc.

On January 7, 2014, Crosstex’ subsidiary acquired all the issued and outstanding stock of Sterilator Company, Inc., a private company based in Cuba, New York that manufactures biological indicators and supplies for sterility assurance products, which are used to accurately monitor the effectiveness of sterilization processes. The total consideration for the transaction was $2,829,000.

10

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

	Preliminary
Net Assets	Allocation
Current assets	$	538,000
Property, plant and equipment	535,000
Amortizable intangible assets (9- year weighted average life):
Customer relationships (11- year life)	130,000
Technology (8- year life)	510,000
Current liabilities	(321,000		)
Deferred income tax liabilities	(260,000		)
Net assets acquired	$	1,132,000

There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of $1,697,000 was assigned to goodwill. Such goodwill, none of which is deductible for income tax purposes, has been included in our Healthcare Disposables reporting segment.

The principal reasons for this vertical acquisition were to (i) add one of our key long-standing suppliers of biological indicators to our portfolio providing a strategic benefit and cost savings to our overall sterility assurance monitoring business and (ii) strengthen our new product development and overall research and development capabilities. Such reasons constitute the significant factors that contributed to a purchase price that resulted in recognition of goodwill.

The Sterilator Acquisition is included in our results of operations for the portion of the three and six months ended January 31, 2014 subsequent to its acquisition date and is not reflected in the three and six months ended January 31, 2013. This acquisition had an insignificant impact on our results of operations.

Jet Prep Ltd.

On November 5, 2013, our Medivators B.V. subsidiary acquired all the issued and outstanding capital stock of Jet Prep Ltd., a private Israeli company that developed the Jet Prep Flushing Device, a novel single-use irrigation and aspiration catheter to improve visualization during colonoscopy procedures. The device has FDA 510(k) and CE Mark clearances and is ready for immediate commercialization by our global endoscopy sales force. Total consideration for the transaction, excluding transaction costs of $200,000, was $5,332,000 plus estimated contingent consideration of $4,760,000 based on a percentage of sales above a minimum threshold over a seven year period as well as the assumption of an estimated $990,000 contingent obligation payable to the Israeli Government, as further explained below. The Jet Prep Acquisition is included in our Endoscopy segment.

We account for contingent consideration by recording the fair value of contingent consideration as a liability and an increase in 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 November 5, 2013 we increased contingent consideration and goodwill by $4,760,000 to record our initial estimated fair value of the contingent consideration that would be earned over the seven year period ending November 4, 2020, as further explained in Note 6 of the Condensed Consolidated Financial Statements. At January 31, 2014, the estimated fair value remained at $4,760,000 and was recorded in contingent consideration in the Condensed Consolidated Balance Sheets.

11

In connection with the acquisition, we acquired certain ordinary course business assets and liabilities as well as an obligation to repay the Israeli Government for $810,000 of seed funding that was previously granted to Jet Prep. In accordance with the seed funding agreement, the Israeli Government is entitled to a return on their investment that can range from one to six times their total grant based upon specific conditions set forth in the seed funding agreement and applicable Israeli law, including the acceleration of payments if we transfer certain operations of the company or intellectual property outside of Israel. We account for this assumed contingent obligation to the Israeli Government by recording the fair value as a liability and an increase in 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 November 5, 2013 we increased contingent consideration and goodwill by $990,000 to record our initial estimated fair value of the assumed contingent obligation to the Israeli Government that would be earned on a percentage of sales over a forecasted period, as further explained in Note 6 of the Condensed Consolidated Financial Statements. At January 31, 2014, the estimated fair value remained at $990,000, of which $58,000 was recorded in accrued expenses and $932,000 was recorded in contingent consideration.

Since we will be continually re-measuring the contingent consideration liability and the assumed contingent obligation at each balance sheet date and recording changes in the respective fair values through our Condensed Consolidated Statements of Income, we may potentially have significant earnings volatility in our future results of operations until the completion of the seven year period with respect to the contingent consideration and until the assumed contingent obligation is satisfied or until sales of the Jet Prep Ltd. products no longer exist.

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

	Preliminary
Net Assets	Allocation
Current assets	$	64,000
Property, plant and equipment	65,000
Amortizable intangible asset - Technology (7- year life):	5,050,000
Current liabilities	(100,000		)
Deferred income tax liabilities	(345,000		)
Net assets acquired	$	4,734,000

There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of $6,348,000 was assigned to goodwill. Such goodwill, none of which is deductible for income tax purposes, has been included in our Endoscopy reporting segment.

The principal reasons for the acquisition were (i) to address a market need for an effective technology that improves colonoscopy visualization through the use of irrigation and suction, (ii) to expand our endoscopy product portfolio further bolstering the Medivators brand in the gastrointestinal suite, (iii) to further expand our research and development capability by adding accomplished engineers to our existing research and development team and (iv) the expectation that the acquisition will be accretive to our earnings per share in fiscal 2015 and beyond.

The Jet Prep Acquisition is included in our results of operations for the portion of the three and six months ended January 31, 2014 subsequent to its acquisition date and is not reflected in the three and six months ended January 31, 2013. Since commercialization of this Jet Prep Flushing Device has just begun, this acquisition has not yet generated any sales and had an insignificant impact on our results of operations.

12

Siemens’ Hemodialysis Water Business

On March 22, 2013, Mar Cor and Siemens entered into an asset purchase agreement under which Mar Cor acquired certain net assets of Siemens’ hemodialysis water business primarily consisting of customer service agreements for over 600 dialysis customers in the United States and Canada. Such service agreements had contributed over $9 million in revenue to Siemens in calendar year 2012 (unaudited) and were assigned from Siemens to Mar Cor on an individual customer by customer basis to ensure a seamless transition. The acquisition date of the Siemens Water Business was July 30, 2013, which is when the majority of the customer service agreements were transferred and therefore control of the business had been achieved. The total consideration for the transaction, excluding transaction costs of $362,000, was $8,300,000, which was paid on March 22, 2013.

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	$	728,000
Property, plant and equipment	231,000
Amortizable intangible assets:
Customer relationships (12- year life)	4,310,000
Current liabilities	(415,000		)
Net assets acquired	$	4,854,000

There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of $3,446,000 was assigned to goodwill. Such goodwill, all of which is deductible for income tax purposes, is included in our Water Purification and Filtration reporting segment.

The principal reasons for the acquisition were as follows: (i) the opportunity to increase service revenue and profitability of the Mar Cor service network due to improved operating leverage, (ii) the expansion of Mar Cor’s North American footprint into new geographies, (iii) the opportunity to sell capital equipment and recurring consumables to new customers and (iv) the expectation that the acquisition will be accretive to our earnings per share beyond fiscal 2013.

The Siemens Water Acquisition had an insignificant effect on our results of operations for the three and six months ended January 31, 2014 due to the size of this business in relation to our overall consolidated results of operations and is not reflected in our results of operations for the three and six months ended January 31, 2013. The Siemens Water Business is included in our Water Purification and Filtration segment.

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.

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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	$	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, is 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, 2014 and the portion of the three and six months ended January 31, 2013 subsequent to its acquisition date. This acquisition had an insignificant impact on our results of operations.

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 $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 is 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, 2014 and the portion of the three and six months ended January 31, 2013 subsequent to its acquisition date. This acquisition had an insignificant impact on our results of operations.

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

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costs of $157,000, was $32,500,000. In addition, we acquired the SPS manufacturing and warehouse facility in Rochester, New York 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:

	Final
Net Assets	Allocation
Current assets	$	4,810,000
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	$	11,756,000

There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of $24,244,000 was assigned to goodwill. Such goodwill, none of which is 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. 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, 2014 and the portion of the three and six months ended January 31, 2013 subsequent to its acquisition date.

Note 4.Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” (“ASU 2013-11”), which requires that a liability related to an unrecognized tax benefit be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 is expected to have no impact on our financial condition, results of operations or cash flows.

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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, 2014, all of our derivatives were designated as hedges, except for our remaining interest rate swap agreement, as further explained below. We do not hold any derivative financial instruments for speculative or trading purposes.

Changes in the value of (i) the Euro against the United States dollar, (ii) the Canadian dollar against the United States dollar, (iii) the Singapore dollar against the United States dollar and (iv) the British pound 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 United States dollars, Canadian dollars, Euros, Singapore dollars or British pounds, but must be converted into their functional currency.

In order to hedge against the impact of fluctuations in the value of (i) the Euro relative to the United States dollar, (ii) the Singapore dollar relative to the United States dollar and (iii) the British pound 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 Euros, Singapore dollars and British pounds forward, which contracts are one month in duration. These short-term contracts are designated as fair value hedge instruments. There were two foreign currency forward contracts with an aggregate value of $6,264,000 at January 31, 2014, which covered certain assets and liabilities that were denominated in currencies other than our subsidiaries’ functional currencies. Such contracts expired on February 28, 2014. 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, 2014, 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 $34,000 and $96,000, respectively, on the items hedged. 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.  Gains and losses related to hedging contracts to buy Euros, Singapore dollars and British pounds forward are immediately realized within general and administrative expenses due to the short-term nature of such contracts. We do not currently hedge against the impact of fluctuations in the value of the Canadian dollar relative to the United States dollar because the currency impact on our Canadian and United States subsidiaries’ assets closely offset the currency impact on our Canadian and United States subsidiaries’ liabilities effectively minimizing realized gains and losses.

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. Such interest rate swap agreements were designated as cash flow hedge instruments and were designed to be

16

effective in offsetting changes in the cash flows related to the hedged borrowings. 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 was for the period that began August 8, 2012 and ended January 31, 2014, initially covering $25,000,000 of borrowings based on one-month LIBOR and thereafter reduced semi-annually by increments of $5,000,000, and the fixed interest cash flow was at a one month LIBOR rate of 0.496%. As more fully described in Note 6 to the Condensed Consolidated Financial Statements, we account for the interest rate swap agreements by initially 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, 2014, our formal assessment concluded that the changes in the fair value of both derivative instruments that began on August 8, 2012 have been highly effective. However, the remaining derivative instrument at January 31, 2014, which relates solely to our Term Loan Facility, was determined to be ineffective at January 31, 2014 due to the modifications to our credit facilities in March 2014, as more fully described in Note 9 to the Condensed Consolidated Financial Statements. Accordingly, the fair value of the interest rate swap agreement of $113,000 relating to our Term Loan Facility was recognized in interest expense in the Condensed Consolidated Statements of Income for the three and six months ended January 31, 2014 and future changes in the fair value of the derivative instrument will be recognized immediately in interest expense.

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.

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

As of January 31, 2014 and 2013, 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.

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 agreed 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 the interest rate swap agreements relating to our Revolving Credit Facility during the three and six months ended January 31, 2014 and 2013 were recorded in accumulated other comprehensive income in the Condensed Consolidated Statements of Comprehensive Income. Amounts were reclassified from accumulated other comprehensive income in the period the hedged transaction affected earnings. Similarly, changes in fair value in the interest rate swap agreement relating to our Term Loan Facility during the three and six months ended January 31, 2014 and 2013 were recorded in accumulated other comprehensive income in the Condensed Consolidated Statements of Comprehensive Income until January 31, 2014, at which time the interest rate swap agreement was determined to be ineffective and the remaining fair value of the derivative instrument was recognized in interest expense, as further explained in Note 5 to the Condensed Consolidated Financial Statements.

On November 5, 2013, we recorded a $4,760,000 liability for the estimated fair value of contingent consideration and a $990,000 liability for the estimated fair value of an assumed contingent obligation payable to the Israeli Government relating to the Jet Prep 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 values of the contingent consideration liability and assumed contingent obligation were based on percentages of future sales projections of the Jet Prep Business, above a minimum threshold with respect to the contingent consideration, under various potential scenarios over a seven year period ending November 4, 2020 and weighting the probability of these outcomes.  As such, the determinations of fair values of these contingent liabilities are subjective in nature and highly dependent on future sales projections.  At the date of the acquisition, these cash flow projections were discounted using a rate of 11.5%. 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. These two liabilities will be adjusted periodically by recording changes in the fair value through our Condensed Consolidated Statements of Income driven by the time value of money and changes in the assumptions that were initially used in the valuations. Due to the structure of the acquisition, any such adjustments through our Condensed Consolidated Statements of Income will not be tax effected except for amounts in excess of $810,000 with respect to the assumed contingent obligation, therefore impacting our effective tax rate. At January 31, 2014, the estimated fair value of the contingent consideration and assumed contingent obligation remained at $4,760,000 and $990,000, respectively.

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The actual contingent consideration and assumed contingent obligation have the potential of being between zero and a percentage of unlimited sales that could occur until the completion of the seven year period with respect to the contingent consideration liability and until the assumed contingent obligation is satisfied in full, or until the sales of the Jet Prep Ltd. products no longer exist. However, with respect to the contingent consideration, the different likely scenarios of future sales projections used in our fair value determination resulted in total potential future contingent consideration payments ranging between zero and approximately $12,000,000 and the weighted average present value of such scenarios resulted in a fair value of $4,760,000 at January 31, 2014. With respect to the assumed contingent obligation, the different likely scenarios of future sales projections used in our fair value determination resulted in total potential future payments ranging between zero and approximately $2,430,000 and the weighted average present value of such scenarios resulted in a fair value of $990,000 at January 31, 2014. Such fair value amounts would have been higher or lower if we had used different probability factors, future sales projections or discount factors. Given the subjective nature of the assumptions used in the determinations of fair value, we may potentially have significant earnings volatility in our future results of operations.

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 a three year price floor relating to the August 1, 2011 acquisition of the endoscopy procedural product business of Byrne Medical, Inc. (the “Byrne Medical Business” or the “Byrne Acquisition”). 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 ended 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. Based on actual gross profit results for the two year period ended July 31, 2013, contingent consideration was not earned.

After giving effect for the Company’s three-for-two stock splits, the stock portion of the consideration paid for the Byrne Acquisition consisted of 902,528 shares of Cantel common stock and was based on the closing price of Cantel common stock on the NYSE on July 29, 2011 ($11.08). Subject to certain conditions and limitations, under a three year price floor, 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 the sellers 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 recorded as a liability at fair value on the date of acquisition. The 902,528 shares of Cantel common stock were (i) placed in escrow at the time of the acquisition as security for certain indemnification obligations of the sellers and (ii) subjected to a multi-year lock-up feature prohibiting the sellers from selling or otherwise transferring the shares. In November 2013, one-third of the shares were released from escrow and the lock-up feature. Likewise, the three year price floor was modified to exclude the released shares and reduce the $10,000,000 value guaranty by one-third to $6,666,666.

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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 a decrease to accrued expenses or other long-term liabilities 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.

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

	January 31, 2014
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Money markets	$	3,993,000	$	—	$	—	$	3,993,000
Total assets	$	3,993,000	$	—	$	—	$	3,993,000
Liabilities:
Accrued expenses:
Assumed contingent obligation	$	—	$	—	$	58,000	$	58,000
Interest rate swap agreement	—		94,000		—		94,000
Total accrued expenses	—		94,000		58,000		152,000
Contingent consideration:
Contingent consideration	—		—		4,760,000		4,760,000
Assumed contingent obligation	—		—		932,000		932,000
Other long-term liabilities:
Interest rate swap agreement	—		19,000		—		19,000
Total liabilities	$	—	$	113,000	$	5,750,000	$	5,863,000

	July 31, 2013
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Money markets	$	4,241,000	$	—	$	—	$	4,241,000
Total assets	$	4,241,000	$	—	$	—	$	4,241,000
Liabilities:
Accrued expenses:
Interest rate swap agreements	$	—	$	133,000	$	—	$	133,000
Total accrued expenses	—		133,000		—		133,000
Other long-term liabilities:
Price floor	—		—		45,000		45,000
Interest rate swap agreements	—		29,000		—		29,000
Total other long-term liabilities	—		29,000		45,000		74,000
Total liabilities	$	—	$	162,000	$	45,000	$	207,000

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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:

									Jet Prep
	Byrne			Byrne			Jet Prep		Assumed
	Contingent			Price			Contingent		Contingent
	Consideration			Floor			Consideration		Obligation		Total
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		)
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		)
Balance, January 31, 2013	—			314,000			—		—		314,000
Total net unrealized gains included in general and administrative expense in earnings	—			(59,000		)	—		—		(59,000		)
Balance, April 30, 2013	—			255,000			—		—		255,000
Total net unrealized gains included in general and administrative expense in earnings	—			(210,000		)	—		—		(210,000		)
Balance, July 31, 2013	—			45,000			—		—		45,000
Total net unrealized gains included in general and administrative expense in earnings	—			(44,000		)	—		—		(44,000		)
Balance, October 31, 2013	—			1,000			—		—		1,000
Total net unrealized gains included in general and administrative expense in earnings	—			(1,000		)	—		—		(1,000		)
Net purchases, issuances, sales and settlements	—			—			4,760,000		990,000		5,750,000
Balance, January 31, 2014	$	—		$	—		$	4,760,000	$	990,000	$	5,750,000

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, equipment and other assets, 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. 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 are 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

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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, 2013, 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, 2014 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, 2014 and July 31, 2013, 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, 2014 and July 31, 2013, 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 $2,619,000 and $5,245,000 for the three and six months ended January 31, 2014, respectively, and $2,573,000 and $4,840,000 for the three and six months ended January 31, 2013, respectively. Our intangible assets that have indefinite useful lives, and therefore are not amortized, consist of trademarks and trade names.

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The Company’s intangible assets consist of the following:

	January 31, 2014
			Accumulated
	Gross		Amortization			Net
Intangible assets with finite lives:
Customer relationships	$	71,949,000	$	(28,068,000	)	$	43,881,000
Technology	25,954,000		(10,203,000		)	15,751,000
Brand names	12,680,000		(8,738,000		)	3,942,000
Non-compete agreements	3,129,000		(633,000		)	2,496,000
Patents and other registrations	1,867,000		(702,000		)	1,165,000
	115,579,000		(48,344,000		)	67,235,000
Trademarks and trade names	9,241,000		—			9,241,000
Total intangible assets	$	124,820,000	$	(48,344,000	)	$	76,476,000

	July 31, 2013
			Accumulated
	Gross		Amortization			Net
Intangible assets with finite lives:
Customer relationships	$	72,142,000	$	(25,379,000	)	$	46,763,000
Technology	21,006,000		(9,642,000		)	11,364,000
Brand names	12,680,000		(8,045,000		)	4,635,000
Non-compete agreements	3,159,000		(541,000		)	2,618,000
Patents and other registrations	1,768,000		(606,000		)	1,162,000
	110,755,000		(44,213,000		)	66,542,000
Trademarks and trade names	9,387,000		—			9,387,000
Total intangible assets	$	120,142,000	$	(44,213,000	)	$	75,929,000

Estimated amortization expense of our intangible assets for the remainder of fiscal 2014 and the next five years is as follows:

Six month period ending July 31, 2014	$	5,513,000
Fiscal 2015	11,025,000
Fiscal 2016	7,786,000
Fiscal 2017	7,210,000
Fiscal 2018	6,933,000
Fiscal 2019	6,610,000

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Goodwill changed during fiscal 2013 and the six months ended January 31, 2014 as follows:

			Water
			Purification			Healthcare							Total
	Endoscopy		and Filtration			Disposables		Dialysis		Other			Goodwill
Balance, July 31, 2012	$	59,230,000	$	53,288,000		$	55,864,000	$	8,133,000	$	7,140,000		$	183,655,000
Acquisitions	—		4,043,000			24,244,000		—		—			28,287,000
Foreign currency translation	—		(152,000		)	—		—		(172,000		)	(324,000		)
Balance, July 31, 2013	59,230,000		57,179,000			80,108,000		8,133,000		6,968,000			211,618,000
Acquisitions	6,348,000		—			1,697,000		—		—			8,045,000
Foreign currency translation	—		(456,000		)	—		—		(530,000		)	(986,000		)
Balance, January 31, 2014	$	65,578,000	$	56,723,000		$	81,805,000	$	8,133,000	$	6,438,000		$	218,677,000

On July 31, 2013, 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, 2013, the average fair value of all of our reporting units exceeded book value by substantial amounts, except our Specialty Packaging segment, which had an average estimated fair value that approximated book value. At January 31, 2014, goodwill relating to our Specialty Packaging reporting unit was $6,438,000. We believe the most significant assumptions impacting the impairment assessment of Specialty Packaging relate to an assumed compounded annual sales growth of 10.7% and future operating efficiencies included in our projections of future operating results and cash flows of this segment, which projections 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, 2014, management concluded that no events or changes in circumstances have occurred during the three and six months ended January 31, 2014 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,
	2014			2013			2014			2013
Beginning balance	$	1,261,000		$	1,438,000		$	1,261,000		$	1,667,000
Provisions	546,000			336,000			1,237,000			703,000
Settlements	(605,000		)	(542,000		)	(1,296,000		)	(1,138,000		)
Foreign currency translation	(1,000		)	—			(1,000		)	—
Ending balance	$	1,201,000		$	1,232,000		$	1,201,000		$	1,232,000

The warranty provisions and settlements for the three and six months ended January 31, 2014 and 2013 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.

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Note 9.           Financing Arrangements

In March 2014, we modified our existing $100,000,000 senior secured revolving credit facility (the “Existing Revolving Credit Facility”) and $50,000,000 senior secured term loan facility (the “Existing Term Loan Facility”) by entering into a $250,000,000 Third Amended and Restated Credit Agreement dated as of March 4, 2014 (the “New Credit Agreement”). The New Credit Agreement includes a five-year $250,000,000 senior secured revolving facility with sublimits of up to $100,000,000 for borrowings in foreign currencies, $30,000,000 for letters of credit and $10,000,000 for swing line loans (the “New Revolving Credit Facility”).  The Existing Term Loan Facility was terminated after the outstanding balance was reassigned to the New Revolving Credit Facility. Subject to the satisfaction of certain conditions precedent including the consent of the lenders, the Company may from time to time increase the New Revolving Credit Facility by an aggregate amount not to exceed $100,000,000. The senior lenders include Bank of America N.A. (the lead bank and administrative agent), PNC Bank, National Association, and Wells Fargo Bank, National Association. The New Credit Agreement expires on March 4, 2019. Additionally, subject to certain restrictions and conditions (i) any of Cantel’s domestic or foreign subsidiaries may become borrowers and (ii) borrowings may occur in multi-currencies. Unamortized debt issuance costs recorded in other assets amounted to $619,000 at January 31, 2014, of which $90,000 related to the Existing Term Loan Facility and were expensed in March 2014. The remaining unamortized debt issuance cost relating to the Existing Revolving Credit Facility plus additional debt issuance cost of approximately $1,304,000 relating to the New Credit Agreement will be recorded in other assets and amortized over the life of the New Credit Agreement.

Borrowings under the New Credit Agreement bear interest at rates ranging from 0.25% to 1.25% above the lender’s base rate, or at rates ranging from 1.25% to 2.25% 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 Credit Agreement (“Consolidated EBITDA”). At January 31, 2014, the lender’s base rate was 3.25% and the LIBOR rates ranged from 0.16 % to 0.70%. The margins applicable to our outstanding borrowings were 0.25% above the lender’s base rate or 1.25% above LIBOR. Substantially all of our outstanding borrowings were under LIBOR contracts at January 31, 2014. The New Credit Agreement also provides for fees on the unused portion of our facilities at rates ranging from 0.20% to 0.40%, depending upon our Consolidated Leverage Ratio; such rate was 0.25% at January 31, 2014 and 0.20% at March 4, 2014.

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 agreed to exchange our variable interest cash flows with fixed interest cash flows provided by one of our existing senior lenders. With respect to our Existing 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%. As a result of the termination of our Existing Term Loan Facility, this interest rate swap will no longer be considered effective in mitigating the adverse impact on interest expense of increases in LIBOR. With respect to our Existing Revolving Credit Facility, the interest rate swap was for the period that began August 8, 2012 and ended 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%.

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The New 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, (ii) a pledge by Cantel of all of the outstanding shares of its United States-based subsidiaries and 65% of the outstanding shares of certain of Cantel’s foreign-based subsidiaries and (iii) a guaranty by Cantel’s domestic subsidiaries. We are in compliance with all financial and other covenants under the New Credit Agreement.

On January 31, 2014, we had $74,500,000 of outstanding borrowings, which consisted of $25,000,000 and $49,500,000 under the Existing Term Loan Facility and the Existing Revolving Credit Facility, respectively.  Subsequent to January 31, 2014, the outstanding balance under the Existing Term Loan Facility was reassigned to the New Revolving Credit Facility and we repaid $2,500,000 resulting in total outstanding borrowings of $72,000,000 at March 4, 2014, none of which is required to be repaid until March 2019.

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.

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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,
	2014			2013			2014			2013
Numerator for basic and diluted earnings per share:
Net income	$	11,126,000		$	10,452,000		$	22,311,000		$	20,028,000
Less income allocated to participating securities	(149,000		)	(160,000		)	(309,000		)	(317,000		)
Net income available to common stockholders	$	10,977,000		$	10,292,000		$	22,002,000		$	19,711,000
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	40,754,707			40,247,046			40,668,731			40,122,245
Dilutive effect of stock options using the treasury stock method and the average market price for the period	183,995			314,004			188,201			338,331
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock	40,938,702			40,561,050			40,856,932			40,460,576
Earnings per share attributable to common stock:
Basic earnings per share	$	0.27		$	0.26		$	0.54		$	0.49
Diluted earnings per share	$	0.27		$	0.25		$	0.54		$	0.49
Stock options excluded from weighted average dilutive common shares outstanding because their inclusion would have been antidilutive	30,000			52,500			—			—

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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,
	2014	2013	2014	2013
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock	40,938,702	40,561,050	40,856,932	40,460,576
Participating securities	554,029	631,364	576,119	655,627
Total weighted average number of shares and common stock equivalents attributable to both common stock and participating securities	41,492,731	41,192,414	41,433,051	41,116,203

Note 11.                 Income Taxes

The consolidated effective tax rate was 36.7% and 36.3% for the six months ended January 31, 2014 and 2013, respectively. The increase in the consolidated effective tax rate was principally due to the geographic mix of pre-tax income and the impact of Federal tax legislation re-enacted in January 2013, as described below.

For the six months ended January 31, 2014 and 2013, approximately 96% and 97%, respectively, of our income before income taxes was generated from our United States operations, which had an overall effective tax rate of 37.4% and 36.8%, respectively. The higher overall effective tax rate for the six months ended January 31, 2014 was principally caused by Federal tax legislation that had expired in December 2011, but was re-enacted retroactively in January 2013, that enabled us to record the research and experimentation tax credit relating to the entire calendar 2012 in the six months ended January 31, 2013. Additionally, this same Federal tax legislation expired in December 2013 preventing us from recording a full research and experimentation tax credit for the six months ended January 31, 2014.

For the six months ended January 31, 2014 and 2013, approximately 4% and 3%, respectively, of our income before income taxes was generated from our operations in Canada, Singapore, the Netherlands and, for the six months ended January 31, 2014 as a result of the Jet Prep Acquisition, Israel. Collectively, these operations had an overall effective tax rate of 22.1% and 19.8% for the six months ended January 31, 2014 and 2013, respectively. All 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.

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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, 2012	$	124,000
Activity during fiscal 2013	—
Unrecognized tax benefits on July 31, 2013	124,000
Activity during the six months ended January 31, 2014	—
Unrecognized tax benefits on January 31, 2014	$	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, 2005.

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, 2014, aggregate annual 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,
	2014		2015		2016		2017		2018		Thereafter		Total
	(Amounts in thousands)
Maturity of the credit facility (1)	$	—	$	—	$	—	$	—	$	—	$	74,500	$	74,500
Expected interest payments under the credit facility (2)	595		1,189		1,189		1,189		1,189		694		6,045
Minimum commitments under noncancelable operating leases	1,902		3,041		2,142		1,484		1,261		3,679		13,509
Contingent consideration (3)	—		170		518		915		1,279		2,868		5,750
Compensation agreements	2,293		3,436		988		425		350		846		8,338
Deferred compensation and other	28		77		43		41		36		27		252
Total contractual obligations	$	4,818	$	7,913	$	4,880	$	4,054	$	4,115	$	82,614	$	108,394

(1) The maturity of the credit facility reflects the terms under the March 4, 2014 modification, as further explained in Note 9 of the Condensed Consolidated Financial Statements.

(2) The expected interest payments under our credit facility reflect an interest rate of 1.60%, which was our weighted average interest rate on outstanding borrowings at January 31, 2014.

(3) The future potential payments of contingent consideration are shown at present value using a discount rate of 11.5%.

Operating Leases

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

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Contingent Consideration

As part of the Jet Prep Acquisition on November 5, 2013, we recorded a $4,760,000 liability for the estimated fair value of contingent consideration payable to the sellers and a $990,000 liability for the estimated fair value of an assumed contingent obligation payable to the Israeli Government, as further described in Notes 3 and 6 to the Condensed Consolidated Financial Statements, which will be payable based on future sales of the Jet Prep Business (above a minimum threshold with respect to the contingent consideration liability.)  As such, the estimates of the annual required payments as well as the fair value of these contingent liabilities are subjective in nature and highly dependent on future sales projections. Additionally, since we will be continually re-measuring the contingent consideration liability and the assumed contingent obligation at each balance sheet date and recording changes in the respective fair values through our Condensed Consolidated Statements of Income, we may potentially have significant earnings volatility in our future results of operations until the completion of the seven year period with respect to the contingent consideration liability and until the assumed contingent obligation is satisfied, or until the sales of the Jet Prep Ltd. products no longer exist.

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 define 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, the Eagle Pure Water Business on December 31, 2012 and the Sterilator Business on January 7, 2014, we entered into multi-year employment agreements with certain executive officers of the acquired businesses.

Deferred Compensation and Other

Deferred compensation and other primarily includes deferred compensation arrangements for certain former Medivators directors and officers and is recorded in other long-term liabilities.

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Note 13.Accumulated Other Comprehensive Income (Loss)

The components and changes in accumulated other comprehensive income (loss) for the three and six months ended January 31, 2014 and 2013 were as follows:

	Three Months Ended									Six Months Ended
	January 31, 2014									January 31, 2014
	Foreign									Foreign
	Currency			Interest Rate						Currency			Interest Rate
	Translation			Swap						Translation			Swap
	Adjustments			Agreements			Total			Adjustments			Agreements			Total
Beginning balance	$	10,807,000		$	(94,000	)	$	10,713,000		$	11,080,000		$	(103,000	)	$	10,977,000
Other comprehensive loss before reclassifications	(1,401,000		)	(14,000		)	(1,415,000		)	(1,674,000		)	(47,000		)	(1,721,000		)
Income tax effect on other comprehensive loss before reclassification	—			5,000			5,000			—			17,000			17,000
Reclassification adjustments to interest expense for losses on interest rate swaps included in net income during the period	—			48,000			48,000			—			96,000			96,000
Reclassification adjustments for ineffective hedge on interest rate swap included in net income during the period	—			113,000			113,000			—			113,000			113,000
Income tax effect on reclassification adjustments	—			(58,000		)	(58,000		)	—			(76,000		)	(76,000		)
Ending balance	$	9,406,000		$	—		$	9,406,000		$	9,406,000		$	—		$	9,406,000

	Three Months Ended									Six Months Ended
	January 31, 2013									January 31, 2013
	Foreign									Foreign
	Currency			Interest Rate						Currency			Interest Rate
	Translation			Swap						Translation			Swap
	Adjustments			Agreements			Total			Adjustments			Agreements			Total
Beginning balance	$	8,476,000		$	(187,000	)	$	8,289,000		$	8,385,000		$	(210,000	)	$	8,175,000
Other comprehensive income (loss) before reclassifications	89,000			4,000			93,000			211,000			(14,000		)	197,000
Income tax effect on other comprehensive income (loss) before reclassification	(25,000		)	(2,000		)	(27,000		)	(56,000		)	5,000			(51,000		)
Reclassification adjustments to interest expense for losses on interest rate swaps included in net income during the period	—			61,000			61,000			—			116,000			116,000
Income tax effect on reclassification adjustments	—			(21,000		)	(21,000		)	—			(42,000		)	(42,000		)
Ending balance	$	8,540,000		$	(145,000	)	$	8,395,000		$	8,540,000		$	(145,000	)	$	8,395,000

Note 14.Operating Segments

Cantel Medical is a leading global company dedicated to delivering innovative infection prevention and control products and services for patients, caregivers, and other healthcare providers which improve outcomes, enhance safety and help save lives.  Our products include specialized medical device reprocessing systems for endoscopy and renal dialysis, advanced water purification equipment, sterilants, disinfectants and cleaners, sterility assurance monitoring products for hospitals and dental clinics, disposable infection control products primarily for dental and GI endoscopy markets, dialysate concentrates, hollow fiber membrane filtration and separation products, and specialty packaging for infectious and biological specimens. Additionally, we provide technical service for our products.

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.

During the fourth quarter of fiscal 2013, we changed our internal reporting processes by combining our Therapeutic Filtration and Chemistries operating segments, previously reported in the Other reporting segment, with our Water Purification and Filtration reporting

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segment to reflect the way the Company, through its executive management, manages, allocates resources and measures the performance of its businesses. All periods presented have been recast to reflect these changes.

None of our customers accounted for 10% or more of our consolidated net sales for the six months ended January 31, 2014 and 2013, except for DaVita Inc. (“DaVita”), which accounted for approximately 10.9%, or approximately $25,948,000, for the six months ended January 31, 2014 and approximately 10.3%, or $21,290,000, for the six months ended January 31, 2013, of our consolidated net sales. For the six months ended January 31, 2014, DaVita accounted for approximately 25.3% and 37.6% 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. This segment also offers disposable infection control products intended to eliminate the challenges associated with proper cleaning and high-level disinfection of numerous reusable components used in gastrointestinal 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 membrane filtration and separation technologies 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 sterilants, disinfectants and decontamination services used in various applications for infection prevention and control.

DaVita and another large customer accounted for approximately 25.3% and 21.9%, respectively, of our Water Purification and Filtration segment net sales for the six months ended January 31, 2014. Combined, these two customers accounted for approximately 18.3% of our consolidated net sales for the six months ended January 31, 2014.

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 manufactures and provides biological and chemical indicators for sterility assurance monitoring services in the acute-care, alternate-care and dental markets.

Four customers collectively accounted for approximately 52.3% of our Healthcare Disposables segment net sales and approximately 11.2% of our consolidated net sales for the six months ended January 31, 2014.

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.

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Other

In accordance with quantitative thresholds established by ASC 280, the Specialty Packaging operating segment is reported in the Other reporting segment.

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.

The operating segments follow the same accounting policies used for our Condensed Consolidated Financial Statements as described in Note 2 to the 2013 Form 10-K.

Information as to operating segments is summarized below:

	Three Months Ended						Six Months Ended
	January 31,						January 31,
	2014			2013			2014			2013
Net sales:
Endoscopy	$	44,587,000		$	39,422,000		$	88,200,000		$	76,101,000
Water Purification and Filtration	40,719,000			32,369,000			80,469,000			65,530,000
Healthcare Disposables	24,716,000			24,339,000			50,965,000			44,294,000
Dialysis	7,611,000			8,760,000			14,920,000			16,947,000
Other	1,409,000			1,473,000			2,760,000			3,172,000
Total	$	119,042,000		$	106,363,000		$	237,314,000		$	206,044,000
Operating income:
Endoscopy	$	8,218,000		$	9,469,000		$	16,402,000		$	17,145,000
Water Purification and Filtration	7,108,000			3,719,000			13,165,000			8,346,000
Healthcare Disposables	4,563,000			4,709,000			10,282,000			8,800,000
Dialysis	1,996,000			2,312,000			3,760,000			4,488,000
Other	231,000			125,000			236,000			338,000
	22,116,000			20,334,000			43,845,000			39,117,000
General corporate expenses	(3,907,000		)	(3,471,000		)	(7,324,000		)	(6,282,000		)
Interest expense, net	(630,000		)	(775,000		)	(1,274,000		)	(1,408,000		)
Income before income taxes	$	17,579,000		$	16,088,000		$	35,247,000		$	31,427,000

Note 15.Legal Proceedings

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

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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, 2014 compared with the three and six months ended January 31, 2013.

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 high-level disinfection of numerous reusable components used in gastrointestinal endoscopy procedures. Additionally, this segment includes technical maintenance service on its products.

·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. In addition, our therapeutic filtration business and chemistries business, formerly included in our Other reporting segment, have been integrated with our Water Purification and Filtration segment for both operating and reporting purposes. Therapeutic filtration includes hollow fiber membrane filtration and separation technologies for medical applications. Chemistries include certain sterilants, disinfectants and decontamination services used in various applications for infection prevention and control.

·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 manufactures and provides biological and chemical indicators for sterility assurance monitoring services in the acute-care, alternate-care and dental markets.

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

·Specialty Packaging: Specialty packaging and thermal control products, as well as related

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compliance training, for the transport of infectious and biological specimens and thermally sensitive pharmaceutical, medical and other products. (The Specialty Packaging operating segment is reported in the 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, 2013 (the “2013 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, 2014 compared with the three and six months ended January 31, 2013, net sales increased by 11.9% and 15.2%, respectively, and net income increased 6.4% and 11.4%, respectively. 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:

·improved sales and profitability in our Water Purification and Filtration segment primarily relating to (i) higher sales of our capital equipment, consumables and service in the dialysis industry mainly attributable to the increased overall demand driven by both the growing number of dialysis patients and clinics in the United States, as well as our new product introductions such as our heat sanitized water purification systems, which carry higher average selling prices than the systems with the traditional non-heated sanitization technology, and the acquisition of the dialysis water business from Siemens Industry, Inc. and Siemens Canada Limited (collectively, “Siemens”), and (ii) increased demand for our water purification equipment used for commercial and industrial (large capital) applications,

·with respect to the six months ended January 31, 2014, higher sales and improved gross profit percentage in our Healthcare Disposables segment, primarily due to (i) the November 1, 2012 acquisition of SPS Medical Supply Corp. and (ii) increased demand for our sterility assurance and disinfectant products,

·higher sales and improved gross profit percentage in our Endoscopy segment principally due to a shift of product mix to higher margin products including increases in sales volume of (i) endoscope reprocessing disinfectant, service and filter products as a result of the increased field population of equipment and (ii) disposable infection control products used in gastrointestinal endoscopy procedures primarily as a result of new product introductions, and

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

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The above factors were partially offset by:

·favorable fair value adjustments of contingent consideration and a price floor financial instrument recorded in general and administrative expenses in our Endoscopy segment that were more favorable in the prior periods compared with the current periods resulting in an unfavorable net change of $1,909,000 and $2,178,000 for the three and six months ended January 31, 2014, respectively, as further described in Note 6 to the Condensed Consolidated Financial Statements,

·our strategic decision to invest in sales and marketing initiatives in our three largest segments and corporate internal and external resources designed to expand into new markets and gain or maintain market share while also addressing new compliance requirements,

·the recording within cost of sales of $936,000 and $1,892,000 for the three and six months ended January 31, 2014, respectively, in medical device excise tax 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 therefore resulted in only $322,000 for the month of January being recorded in the three and six months ended January 31, 2013,

·decreases in sales volume of certain therapeutic filters in our Water Purification and Filtration segment as sales of these filters were elevated in prior periods due to a market shortage as a result of damage done from an earthquake to the manufacturing facilities of a large competitor,

·decreases in net sales and profitability in our Dialysis operating segment, as further described below,

·an increase in bad debt expense primarily associated with a single customer, and

·the inclusion of the initial operating expenses, as well as acquisition costs, in our Endoscopy segment relating to the November 5, 2013 acquisition of Jet Prep Ltd., as more fully described in Note 3 to the Condensed Consolidated Financial Statements.

(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 sterilants, RENATRON® reprocessing equipment and dialysate concentrate products, as more fully described elsewhere in this MD&A. This reduction in dialysis sales has reduced overall profitability in this segment as compared with profitability in prior periods. 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 material decrease in the market for reprocessing products is likely to result in a significant loss of net sales and a lower level of profitability in this segment in the

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future. See “Risk Factors” in the 2013 Form 10-K.

(iii)In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 was signed into law. The legislation imposed a significant new tax on medical device makers in the form of an excise tax on certain 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 March 4, 2014, we entered into a $250,000,000 Third Amended and Restated Credit Agreement with our senior lenders to refinance our working capital credit facilities, as more fully described in Note 9 to the Condensed Consolidated Financial Statements.

(v)On January 7, 2014, Crosstex’ subsidiary acquired all the issued and outstanding stock of Sterilator Company, Inc. (the “Sterilator Business” or “Sterilator Acquisition”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements.

(vi)On November 5, 2013, our Medivators B.V. subsidiary acquired all the issued and outstanding stock of Jet Prep Ltd. (the “Jet Prep Business” or “Jet Prep Acquisition”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements. Certain components of the acquisition’s purchase price were recorded at fair value and will be continually remeasured at each balance sheet date, which has the potential for creating earnings volatility in the future as further described elsewhere in this MD&A and in Notes 3 and 6 to the Condensed Consolidated Financial Statements.

(vii)On March 22, 2013, our Mar Cor subsidiary entered into an agreement to acquire  from Siemens certain net assets of Siemens’ hemodialysis water business (the “Siemens Water Business” or the “Siemens Water Acquisition”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements.

(viii)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.

(ix)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.

(x)On October 16, 2013, our Board of Directors approved a 22% increase in the semiannual cash dividend to $0.045 per share of outstanding common stock, which was paid on January 31, 2014 to shareholders of record on January 17, 2014, as more fully described elsewhere in this MD&A.

(xi)The Company issued 15,044,000 additional shares of common stock in connection

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with a three-for-two stock split effected in the form of a 50% stock dividend paid on July 12, 2013 to stockholders of record July 1, 2013.

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 Sterilator Business and the Jet Prep Business were consummated on January 7, 2014 and November 5, 2013, respectively, their results of operations are included in our consolidated results of operations for the portion of the three and six months ended January 31, 2014 subsequent to their acquisition dates and are not included in our results of operations for the three and six months ended January 31, 2013. However, their results of operations had an insignificant effect on our consolidated results of operations due to the small size of these businesses.

On March 22, 2013, Mar Cor entered into an agreement to acquire the Siemens Water Business by gradually assigning and transitioning customer service agreements to Mar Cor. The majority of such contracts were transitioned as of July 30, 2013, the deemed acquisition date. Consequently, the results of operations of the Siemens Water Business are included in our results of operations for the three and six months ended January 31, 2014 and are not included in our results of operations for the three and six months ended January 31, 2013.

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, 2014 and are included in our results of operations for the three and six months ended January 31, 2013 subsequent to their acquisition dates. The results of operations of the Eagle Pure Water Business had an insignificant effect on our consolidated results of operations due to its small size.

During the fourth quarter of fiscal 2013, we changed our internal reporting processes by combining our Therapeutic Filtration and Chemistries operating segments, previously reported in the Other reporting segment, with our Water Purification and Filtration reporting segment to reflect the way the Company, through its executive management, manages, allocates resources and measures the performance of its businesses. All periods presented have been recast to reflect these changes.

The following discussion should also be read in conjunction with our 2013 Form 10-K.

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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,
	2014			2013			2014			2013
	(Dollar amounts in thousands)						(Dollar amounts in thousands)
	$		%	$		%	$		%	$		%
Endoscopy	$	44,587	37.4	$	39,422	37.1	$	88,200	37.2	$	76,101	36.9
Water Purification and Filtration	40,719		34.2	32,369		30.4	80,469		33.9	65,530		31.8
Healthcare Disposables	24,716		20.8	24,339		22.9	50,965		21.4	44,294		21.5
Dialysis	7,611		6.4	8,760		8.2	14,920		6.3	16,947		8.2
Other	1,409		1.2	1,473		1.4	2,760		1.2	3,172		1.6
	$	119,042	100.0	$	106,363	100.0	$	237,314	100.0	$	206,044	100.0

Net Sales

Net sales increased by $12,679,000, or 11.9%, to $119,042,000 for the three months ended January 31, 2014 from $106,363,000 for the three months ended January 31, 2013.

Net sales increased by $31,270,000, or 15.2%, to $237,314,000 for the six months ended January 31, 2014 from $206,044,000 for the six months ended January 31, 2013.

The increase in net sales for the three and six months ended January 31, 2014 was primarily attributable to increases in sales in our Water Purification and Filtration and Endoscopy segments, as well as our Healthcare Disposables segment with respect to the six months ended January 31, 2014.

Net sales of water purification and filtration products and services increased by $8,350,000, or 25.8%, and $14,939,000, or 22.8%, for the three and six months ended January 31, 2014, respectively, compared with the three and six months ended January 31, 2013, primarily due to (i) increased demand for our water purification capital equipment, consumables and service in the dialysis industry mainly attributable to the increased overall demand driven by both the growing number of dialysis patients and clinics in the United States, as well as our new product introductions such as our heat sanitized water purification systems, which have higher average selling prices than the systems with the traditional non-heated sanitization technology, and the Siemens Water Acquisition, (ii) price increases on certain water purification and filtration products, which were implemented to partially offset increasing costs and (iii) increased demand for our water purification equipment used for commercial and industrial (large capital) applications. These increases were partially offset by a decrease in sales volume of our hemoconcentrator products (filter devices used to concentrate red blood cells and remove excess fluid from the bloodstream during open-heart surgery) for the six months ended January 31, 2014 due to elevated demand in the prior year 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, which were subsequently repaired.

Net sales of endoscopy products and services increased by $5,165,000, or 13.1%, and $12,099,000, or 15.9%, for the three and six months ended January 31, 2014, respectively, compared with the three and six months ended January 31, 2013, primarily due to increases in demand in the United States and internationally for (i) our disinfectants, service, filters and

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equipment accessories due to the increase in the installed base of endoscope reprocessing equipment and (ii) our new product introductions of valves, kits and hybrid tubing procedural products (disposable infection control products used in gastrointestinal endoscopy procedures). We expect sales of disinfectants, service, filters and equipment accessories, which carry higher margins, to continue to benefit as we increase the installed base of endoscope reprocessing equipment. These increases were partially offset by overall lower selling prices principally related to procedural products as a result of our strategic growth plan as well as increased competition.

Net sales of healthcare disposables products increased by $377,000, or 1.5%, and $6,671,000, or 15.1%, for the three and six months ended January 31, 2014, respectively, compared with the three and six months ended January 31, 2013, principally due to (i) the inclusion of only three months of net sales of the SPS Business in the six months ended January 31, 2013 as a result of acquiring the SPS Business on November 1, 2012, (ii) increases in customer demand in the United States and internationally for our sterility assurance and disinfectant products and (iii) price increases on certain healthcare disposables products, which were implemented to partially offset increased costs.

Net sales of dialysis products and services decreased by $1,149,000, or 13.1%, and $2,027,000, or 12.0%, for the three and six months ended January 31, 2014, respectively, compared with the three and six months ended January 31, 2013, primarily due to decreases in demand in the United States (including a decrease from our largest dialysis customer, DaVita, Inc. (“DaVita”)) for our sterilants, RENATRON® dialyzer reprocessing equipment and 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 material decrease in the market for reprocessing products is likely to result in a significant 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.

Gross profit

Gross profit increased by $7,184,000, or 15.9%, to $52,335,000 for the three months ended January 31, 2014 from $45,151,000 for the three months ended January 31, 2013. Gross profit as a percentage of net sales for the three months ended January 31, 2014 and 2013 was 44.0% and 42.4%, respectively.

Gross profit increased by $14,956,000, or 16.8%, to $103,834,000 for the six months ended January 31, 2014 from $88,878,000 for the six months ended January 31, 2013. Gross profit as a percentage of net sales for the six months ended January 31, 2014 and 2013 was 43.8% and

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43.1%, respectively.

The higher gross profit as a percentage of net sales for the three and six months ended January 31, 2014 compared with the three and six months ended January 31, 2013 was primarily due to (i) more favorable sales mix in our three largest segments primarily due to increases in sales volume of certain products that carry higher gross margin percentages than each segment’s prior year overall gross profit percentages such as our sterilants and certain equipment products in our Water Purification and Filtration segment, disinfectants and procedural products in our Endoscopy segment, and sterility assurance and disinfectant products (including sales of products relating to the November 1, 2012 SPS Acquisition) in our Healthcare Disposables segment as well as the decrease in sales volume in certain low margin products in our Dialysis segment and (ii) the inclusion in the three and six months ended January 31, 2013 of $417,000 in severance related charges as part of the prior year cost reduction initiatives and a $177,000 one-time acquisition accounting charge relating to the acquired inventory in the November 1, 2012 acquisition of the SPS Business. These items were partially offset by (i) lower selling prices of certain products primarily in our Endoscopy segment as a result of our strategic growth plan and increased competition and (ii) the incremental impact of $614,000 and $1,570,000 for the three and six months ended January 31, 2014, compared with the three and six months ended January 31, 2013, for a new excise tax on qualified U.S. medical device sales beginning January 2013.

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 was signed into law. The legislation imposes a significant new tax on medical device makers in the form of an 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. Although we have implemented cost reductions and revenue enhancement initiatives to partially offset this new excise tax, we cannot provide any assurances that we will be successful in further 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 the 2013 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 lower cost locations, as explained below), Endoscopy (primarily due to our growth strategy and increased competition) 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 further price increases. Some of our competitors manufacture certain healthcare disposable products in lower cost locations such as China, Southeast Asia and certain locations within North America due to lower overall costs despite expensive shipping costs, quality concerns, sustainability issues and other matters. 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 or level of sales in the future in our Healthcare Disposables segment as a result of lower cost competition from products produced in other geographic locations.

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Operating Expenses

Selling expenses increased by $2,354,000, or 17.2%, to $16,077,000 for the three months ended January 31, 2014 from $13,723,000 for the three months ended January 31, 2013. For the six months ended January 31, 2014, selling expenses increased by $4,705,000, or 17.3%, to $31,841,000 from $27,136,000 for the six months ended January 31, 2013. For the three and six months ended January 31, 2014, these increases were primarily due to (i) increased sales and marketing initiatives to expand into new markets, including international markets, and gain or maintain market share by hiring additional sales and marketing personnel and increasing travel budgets primarily in our Endoscopy segment and to a lesser extent our Water Purification and Filtration segment and increased marketing and advertising in our Healthcare Disposable segment, (ii) the inclusion of only three months of sales and marketing expenses of the SPS Business in the six months ended January 31, 2013 as a result of acquiring the SPS Business on November 1, 2012, (iii) increases in annual salaries and stock-based compensation and (iv) higher commission expense for the six months ended January 31, 2014 principally in our Endoscopy segment as a result of higher sales.

Selling expenses as a percentage of net sales were 13.5% and 12.9% for the three months ended January 31, 2014 and 2013, respectively, and 13.4% and 13.2% for the six months ended January 31, 2014 and 2013, respectively.

General and administrative expenses increased by $3,175,000, or 25.6%, to $15,557,000 for the three months ended January 31, 2014, from $12,382,000 for the three months ended January 31, 2013. For the six months ended January 31, 2014, general and administrative expenses increased by $6,291,000, or 25.8%, to $30,721,000 from $24,430,000 for the six months ended January 31, 2013. For the three and six months ended January 31, 2014, these increases were primarily due to (i) an unfavorable net change of $1,909,000 and $2,178,000, respectively, in our Endoscopy segment due to favorable fair value adjustments of contingent consideration and a price floor financial instrument that were more favorable in the prior periods compared with the current periods, as more fully described in Note 6 to the Condensed Consolidated Financial Statements, (ii) hiring additional personnel as part of our strategic growth initiative as well as to address new compliance requirements, (iii) the inclusion of only three months of general administrative expenses of the SPS Business in the six months ended January 31, 2013 as a result of acquiring the SPS Business on November 1, 2012, (iv) an increase of $329,000 and $657,000, respectively, in bad debt expense, the majority of which relates to a single customer, (v) increases in annual salaries and stock-based compensation, and (vi) an increase of $234,000 and $331,000, respectively, of acquisition related expenses associated with our acquisition program.

General and administrative expenses as a percentage of net sales were 13.1% and 11.6% for the three months ended January 31, 2014 and 2013, respectively, and  12.9% and 11.9% for the six months ended January 31, 2014 and 2013, respectively.

Research and development expenses (which include continuing engineering costs) increased by $309,000 to $2,492,000 for the three months ended January 31, 2014 from $2,183,000 for the three months ended January 31, 2013. For the six months ended January 31, 2014, research and development expenses increased by $274,000 to $4,751,000, from $4,477,000 for the six months ended January 31, 2013. The increase for the three and six months ended January 31, 2014 was primarily due to the inclusion of research and development costs relating to the Jet Prep Acquisition.

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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,
	2014					2013					2014					2013
	(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	$	8,218		18.4	%	$	9,469		24.0	%	$	16,402		18.6	%	$	17,145		22.5	%
Water Purification and Filtration	7,108			17.5	%	3,719			11.5	%	13,165			16.4	%	8,346			12.7	%
Healthcare Disposables	4,563			18.5	%	4,709			19.3	%	10,282			20.2	%	8,800			19.9	%
Dialysis	1,996			26.2	%	2,312			26.4	%	3,760			25.2	%	4,488			26.5	%
Other	231			16.4	%	125			8.5	%	236			8.6	%	338			10.7	%
Operating income	22,116			18.6	%	20,334			19.1	%	43,845			18.5	%	39,117			19.0	%
General corporate expenses	(3,907		)			(3,471		)			(7,324		)			(6,282		)
Income before interest and income taxes	$	18,209		15.3	%	$	16,863		15.9	%	$	36,521		15.4	%	$	32,835		15.9	%

The Endoscopy segment’s operating income decreased by $1,251,000, or 13.2%, and $743,000, or 4.3%, for the three and six months ended January 31, 2014, respectively, compared with the three and six months ended January 31, 2013, primarily due to (i) an unfavorable net change of $1,909,000 and $2,178,000, respectively, in our Endoscopy segment due to favorable fair value adjustments of contingent consideration and a price floor financial instrument that were more favorable in the prior periods compared with the current periods, as more fully described in Note 6 to the Condensed Consolidated Financial Statements, (ii) lower selling prices of certain endoscopy products, (iii) the recording of medical device excise taxes beginning in January 2013, (iv) increased investment in our sales team and other selling initiatives, (v) an increase in bad debt expense primarily associated with a single customer, (vi) the inclusion of the initial operating expenses relating to the November 5, 2013 acquisition of the Jet Prep Business and (vii) increases in annual salaries and stock-based compensation. These items were partially offset by higher sales and improved gross profit percentage principally due to a shift of product mix to higher margin products, as further explained above, and the prior year inclusion of severance related charges in the three months ended January 31, 2013 as part of the prior year cost reduction initiatives.

The Water Purification and Filtration segment’s operating income increased by $3,389,000, or 91.1%, and $4,819,000, or 57.7%, for the three and six months ended January 31, 2014, respectively, compared with the three and six months ended January 31, 2013, primarily due to increased demand for our water purification capital equipment, consumables and service in the dialysis industry and our water purification equipment used for commercial and industrial (large capital) applications and improved gross profit percentage, partially offset by lower sales volume of hemoconcentrator products, as further explained above. Additionally, operating income was adversely affected by increases in annual salaries and stock-based compensation, the inclusion of an excise tax on qualified U.S. medical device sales beginning January 2013, the hiring of additional sales personnel and an increase in warranty expense per unit relating to certain water purification capital equipment.

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The Healthcare Disposables segment’s operating income decreased by $146,000, or 3.1%, for the three months ended January 31, 2014, compared with the three months ended January 31, 2013, primarily due to (i) the inclusion of an excise tax on qualified U.S. medical device sales beginning January 2013, (ii) increases in marketing and advertising expense and (iii) increases in annual salaries and stock-based compensation, partially offset by (i) an increase in sales of $377,000, (ii) the prior year inclusion of a $177,000 one-time acquisition accounting charge recorded in the three months ended January 31, 2013 relating to the acquired inventory in the SPS Acquisition and (iii) an improved gross profit percentage, as further explained above.

The Healthcare Disposables segment’s operating income increased by $1,482,000, or 16.8%, for the six months ended January 31, 2014, compared with the six months ended January 31, 2013, primarily due to the inclusion of only three months of operating results of the SPS Business in the six months ended January 31, 2013 as a result of acquiring the SPS Business on November 1, 2012 and improved sales and gross profit percentage, as explained above, partially offset by (i) the inclusion of an excise tax on qualified U.S. medical device sales beginning January 2013, (ii) increases in marketing and advertising expense and (iii) increases in annual salaries and stock-based compensation.

The Dialysis segment’s operating income decreased by $316,000, or 13.7%, and $728,000, or 16.2%, for the three and six months ended January 31, 2014, respectively, compared with the three and six months ended January 31, 2013, primarily due to decreases in sales, as further explained above, as well as the inclusion of an excise tax on qualified U.S. medical device sales beginning January 2013.

General corporate expenses increased by $436,000, or 12.6%, and $1,042,000, or 16.6%, for the three and six months ended January 31, 2014, respectively, compared with the three and six months ended January 31, 2013. 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, 2014, compared with the three and six months ended January 31, 2013, is primarily due to the addition of internal and external resources to address various growth initiatives and new compliance requirements, as well as increases in annual salaries, stock-based compensation and costs associated with our acquisition program.

Interest

Interest expense decreased by $146,000 to $645,000 for the three months ended January 31, 2014, from $791,000 for the three months ended January 31, 2013.  For the six months ended January 31, 2014, interest expense decreased by $135,000 to $1,302,000 from $1,437,000 for the six months ended January 31, 2013. These decreases were primarily due to a decrease in the average outstanding borrowings, partially offset by the recording of a $113,000 charge for the ineffective hedge on our term credit facility, as further explained in Note 5 to the Condensed Consolidated Financial Statements.

Interest income was $15,000 and $16,000 for the three months ended January 31, 2014 and 2013, respectively, and $28,000 and $29,000 for the six months ended January 31, 2014 and 2013, respectively.

Income taxes

The consolidated effective tax rate was 36.7% and 36.3% for the six months ended January 31, 2014 and 2013, respectively. The increase in the consolidated effective tax rate was principally due to the geographic mix of pre-tax income and the impact of Federal tax legislation re-enacted in January 2013, as described below.

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For the six months ended January 31, 2014 and 2013, approximately 96% and 97%, respectively, of our income before income taxes was generated from our United States operations, which had an overall effective tax rate of 37.4% and 36.8%, respectively. The higher overall effective tax rate for the six months ended January 31, 2014 was principally caused by Federal tax legislation that had expired in December 2011, but was re-enacted retroactively in January 2013, that enabled us to record the research and experimentation tax credit relating to the entire calendar 2012 in the six months ended January 31, 2013. Additionally, this same Federal tax legislation expired in December 2013 preventing us from recording a full research and experimentation tax credit for the six months ended January 31, 2014.

For the six months ended January 31, 2014 and 2013, approximately 4% and 3%, respectively, of our income before income taxes was generated from our operations in Canada, Singapore, the Netherlands, and for the six months ended January 31, 2014 as a result of the Jet Prep Acquisition, Israel. Collectively, these operations had an overall effective tax rate of 22.1% and 19.8% for the six months ended January 31, 2014 and 2013, respectively. All 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, 2012	$	124,000
Activity during fiscal 2013	—
Unrecognized tax benefits on July 31, 2013	124,000
Activity during the six months ended January 31, 2014	—
Unrecognized tax benefits on January 31, 2014	$	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, 2005.

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.

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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,
	2014			2013			2014			2013
Cost of sales	$	109,000		$	37,000		$	171,000		$	92,000
Operating expenses:
Selling	191,000			82,000			301,000			181,000
General and administrative	1,090,000			802,000			2,054,000			1,594,000
Research and development	18,000			8,000			30,000			20,000
Total operating expenses	1,299,000			892,000			2,385,000			1,795,000
Stock-based compensation before income taxes	1,408,000			929,000			2,556,000			1,887,000
Income tax benefits	(493,000		)	(336,000		)	(905,000		)	(676,000		)
Total stock-based compensation expense, net of tax	$	915,000		$	593,000		$	1,651,000		$	1,211,000

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, and were tax-effected using the Company’s estimated U.S. effective tax rate at the time of grant.

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. The fair value of each option grant is determined on the date of grant using the Black-Scholes option valuation model. 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 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, 2014, total unrecognized stock-based compensation expense, before income taxes, related to total nonvested stock options and stock awards was $10,187,000 with a remaining weighted average period of 22 months over which such expense is expected to be recognized. Most of our nonvested awards relate to stock awards.

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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, 2014 and 2013, income tax deductions of $4,516,000 and $2,923,000, respectively, were generated and increased additional paid-in capital by $3,297,000 and $1,868,000, respectively. We classify the cash flows resulting from excess tax benefits as financing cash flows in our Condensed Consolidated Statements of Cash Flows.

Liquidity and Capital Resources

Working Capital

At January 31, 2014, our working capital was $100,439,000, compared with $91,509,000 at July 31, 2013. The increase was primarily due to the modification of our credit facilities as further explained below and in Note 9 to the Condensed Consolidated Financial Statements.

Cash Flows from Operating Activities

Net cash provided by operating activities was $21,549,000 and $19,051,000 for the six months ended January 31, 2014 and 2013, respectively. For the six months ended January 31, 2014, 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), partially offset by an increase in accounts receivable (due to strong sales in the three months ended January 31, 2014 and the timing of sales transactions and payments by certain large customers in our Healthcare Disposables and Water Purification and Filtration segments).

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), partially offset by a decrease in accounts payable and other current liabilities (due primarily to the timing associated with incentive compensation and vendor payments).

Cash Flows from Investing Activities

Net cash used in investing activities was $12,840,000 and $39,409,000 for the six months ended January 31, 2014 and 2013, respectively. For the six months ended January 31, 2014 and 2013, the net cash used in investing activities was primarily for acquisitions and to a lesser extent, capital expenditures.

Cash Flows from Financing Activities

Net cash used in financing activities was $22,911,000 for the six months ended January 31, 2014 compared with $16,911,000 provided by financing activities for the six months ended January 31, 2013. For the six months ended January 31, 2014, the net cash used in financing activities was primarily due to repayments under our credit facilities and purchases of treasury

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shares. 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.

Stock Dividends

On July 12, 2013, the Company issued 15,044,000 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 July 12, 2013 to stockholders of record on July 1, 2013.

Cash Dividends

On October 16, 2013, our Board of Directors approved a 22% increase in the semiannual cash dividend to $0.045 per share of outstanding common stock, which was paid on January 31, 2014 to shareholders of record on January 17, 2014. 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.

Long-Term Contractual Obligations

As of January 31, 2014, aggregate annual 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,
	2014		2015		2016		2017		2018		Thereafter		Total
	(Amounts in thousands)
Maturity of the credit facility (1)	$	—	$	—	$	—	$	—	$	—	$	74,500	$	74,500
Expected interest payments under the credit facility (2)	595		1,189		1,189		1,189		1,189		694		6,045
Minimum commitments under noncancelable operating leases	1,902		3,041		2,142		1,484		1,261		3,679		13,509
Contingent consideration (3)	—		170		518		915		1,279		2,868		5,750
Compensation agreements	2,293		3,436		988		425		350		846		8,338
Deferred compensation and other	28		77		43		41		36		27		252
Total contractual obligations	$	4,818	$	7,913	$	4,880	$	4,054	$	4,115	$	82,614	$	108,394

(1) The maturity of the credit facility reflects the terms under the March 4, 2014 modification, as further explained below.

(2) The expected interest payments under our credit facility reflect an interest rate of 1.60%, which was our weighted average interest rate on outstanding borrowings at January 31, 2014.

(3) The future potential payments of contingent consideration are shown at present value using a discount rate of 11.5%.

Credit Facility

In March 2014, we modified our existing $100,000,000 senior secured revolving credit facility (the “Existing Revolving Credit Facility”) and $50,000,000 senior secured term loan facility (the “Existing Term Loan Facility”) by entering into a $250,000,000 Third Amended and Restated Credit Agreement dated as of March 4, 2014 (the “New Credit Agreement”). The New Credit Agreement includes a five-year $250,000,000 senior secured revolving facility with sublimits of up to $100,000,000 for borrowings in foreign currencies, $30,000,000 for letters of credit and $10,000,000 for swing line loans (the “New Revolving Credit Facility”).  The Existing

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Term Loan Facility was terminated after the outstanding balance was reassigned to the New Revolving Credit Facility. Subject to the satisfaction of certain conditions precedent including the consent of the lenders, the Company may from time to time increase the New Revolving Credit Facility by an aggregate amount not to exceed $100,000,000. The senior lenders include Bank of America N.A. (the lead bank and administrative agent), PNC Bank, National Association, and Wells Fargo Bank, National Association. The New Credit Agreement expires on March 4, 2019. Additionally, subject to certain restrictions and conditions (i) any of Cantel’s domestic or foreign subsidiaries may become borrowers and (ii) borrowings may occur in multi-currencies. Unamortized debt issuance costs recorded in other assets amounted to $619,000 at January 31, 2014, of which $90,000 related to the Existing Term Loan Facility and were expensed in March 2014. The remaining unamortized debt issuance cost relating to the Existing Revolving Credit Facility plus additional debt issuance cost of approximately $1,304,000 relating to the New Credit Agreement will be recorded in other assets and amortized over the life of the New Credit Agreement.

Borrowings under the New Credit Agreement bear interest at rates ranging from 0.25% to 1.25% above the lender’s base rate, or at rates ranging from 1.25% to 2.25% 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 Credit Agreement (“Consolidated EBITDA”). At January 31, 2014, the lender’s base rate was 3.25% and the LIBOR rates ranged from 0.16 % to 0.70%. The margins applicable to our outstanding borrowings were 0.25% above the lender’s base rate or 1.25% above LIBOR. Substantially all of our outstanding borrowings were under LIBOR contracts at January 31, 2014. The New Credit Agreement also provides for fees on the unused portion of our facilities at rates ranging from 0.20% to 0.40%, depending upon our Consolidated Leverage Ratio; such rate was 0.25% at January 31, 2014 and 0.20% at March 4, 2014.

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 Existing 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%. As a result of the termination of our Existing Term Loan Facility, this interest rate swap will no longer be considered effective in mitigating the adverse impact on interest expense of increases in LIBOR. With respect to our Existing Revolving Credit Facility, the interest rate swap was for the period that began August 8, 2012 and ended 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 New 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, (ii) a pledge by Cantel of all of the outstanding shares of its United States-based subsidiaries and 65% of the outstanding shares of certain of Cantel’s foreign-based subsidiaries and (iii) a guaranty by Cantel’s domestic subsidiaries. We are in compliance with all financial and other covenants under the New Credit Agreement.

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On January 31, 2014, we had $74,500,000 of outstanding borrowings, which consisted of $25,000,000 and $49,500,000 under the Existing Term Loan Facility and the Existing Revolving Credit Facility, respectively.  Subsequent to January 31, 2014, the outstanding balance under the Existing Term Loan Facility was reassigned to the New Revolving Credit Facility and we repaid $2,500,000 resulting in total outstanding borrowings of $72,000,000 at March 4, 2014, none of which is required to be repaid until March 2019.

Operating Leases

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

Contingent Consideration

As part of the Jet Prep Acquisition on November 5, 2013, we recorded a $4,760,000 liability for the estimated fair value of contingent consideration payable to the sellers and a $990,000 liability for the estimated fair value of an assumed contingent obligation payable to the Israeli Government, as further described in Notes 3 and 6 to the Condensed Consolidated Financial Statements, which will be payable based on future sales of the Jet Prep Business (above a minimum threshold with respect to the contingent consideration liability.)  As such, the estimates of the annual required payments as well as the fair value of these contingent liabilities are subjective in nature and highly dependent on future sales projections. Additionally, since we will be continually re-measuring the contingent consideration liability and the assumed contingent obligation at each balance sheet date and recording changes in the respective fair values through our Condensed Consolidated Statements of Income, we may potentially have significant earnings volatility in our future results of operations until the completion of the seven year period with respect to the contingent consideration liability and until the assumed contingent obligation is satisfied, or until the sales of the Jet Prep Ltd. products no longer exist.

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 define certain compensation arrangements relating to various employment termination scenarios. In conjunction with the acquisitions of the endoscopy procedural product business of Byrne Medical, Inc. (the “Byrne Medical Business” or the “Byrne Acquisition”) on August 1, 2011, the SPS Business on November 1, 2012, the Eagle Pure Water Business on December 31, 2012 and the Sterilator Business on January 7, 2014, we entered into multi-year employment agreements with certain executive officers of the acquired businesses.

Deferred Compensation and Other

Deferred compensation and other primarily includes deferred compensation arrangements for certain former Medivators directors and officers and is recorded in other long-term liabilities.

Financing Needs

Our four largest operating segments generate significant cash from operations. At January 31, 2014, we had a cash balance of $19,706,000, of which $3,555,000 was held by foreign subsidiaries. Such foreign cash is needed by our foreign subsidiaries for working capital purposes and current international growth initiatives. In the recent past, such international growth initiatives have included the funding of $5,332,000 for the November 5, 2013 Jet Prep Acquisition as further described in Note 3 to the Condensed Consolidated Financials. Accordingly, our foreign unremitted earnings are considered permanently reinvested and unavailable for repatriation.

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We believe that our current cash position, anticipated cash flows from operations and the funds available under our New Credit Agreement will be sufficient to satisfy our worldwide 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 4, 2014, $178,000,000 was available under our New Credit Agreement.

Foreign Currency

The financial statements of our Canadian subsidiaries are translated using the accounting policies described in Note 2 to the 2013 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. Furthermore, certain cash bank accounts, accounts receivable and liabilities of our Canadian and United States subsidiaries are denominated and ultimately settled in United States dollars or Canadian dollars but must be converted into their functional currency.

Changes in the value of the Euro, Singapore dollar and British pound 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, Singapore dollars or British pounds 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 to the 2013 Form 10-K and therefore are impacted by changes in the Euro exchange rate relative to the United States dollar.

In order to hedge against the impact of fluctuations in the value of (i) the Euro relative to the United States dollar, (ii) the Singapore dollar relative to the United States dollar and (iii) the British pound 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 Euros, Singapore dollars and British pounds forward, which contracts are 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 $11,140,000 at February 28, 2014, which covered certain assets and liabilities that were denominated in currencies other than our subsidiaries’ functional currencies. Such contracts expire on March 31, 2014. 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 Euros, Singapore dollars and British pounds 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, 2014, 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. We do not currently hedge against the impact of fluctuations in the value of the Canadian dollar relative to the United States dollar because the currency impact on our Canadian or United States subsidiaries’ assets closely offset the currency impact on our Canadian or United States subsidiaries’ liabilities effectively minimizing realized gains and losses.

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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, 2014 compared with the three and six months ended January 31, 2013.

For purposes of translating the balance sheet at January 31, 2014 compared with July 31, 2013, the total of the foreign currency movements resulted in a foreign currency translation loss of $1,674,000 for the six months ended January 31, 2014, thereby decreasing stockholders’ equity.

Critical Accounting Policies

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

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

Revenue Recognition

Revenue on product sales is recognized as products are shipped to customers and title passes. The passing of title is determined based upon the FOB terms specified for each shipment. With respect to endoscopy, dialysis and specialty packaging products, shipment terms are generally FOB origin for common carrier and 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 have 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.

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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. 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. 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 $1,181,000 and $2,126,000 for the three and six months ended January 31, 2014, respectively, and $1,120,000 and $2,281,000 for the three and six months ended January 31, 2013, 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, laboratories, medical products and service 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; and specialty packaging products are sold to third-party distributors, medical research companies, laboratories, pharmaceutical companies, hospitals, government agencies 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

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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.

In accordance with Accounting Standards Update (“ASU”) 2011-08, “Intangibles — Goodwill and Other,” (“ASU 2011-08”), we 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. Such qualitative factors that are assessed include evaluating a segment’s financial performance, industry and market conditions, macroeconomic conditions and specific issues that can directly affect the segment such as changes in business strategies, competition, supplier relationships, operating costs, regulatory matters, litigation and the composition of the segment’s assets due to acquisitions or other events. At July 31, 2013, because we determined through qualitative factors that the fair values of our Endoscopy, Water Purification and Filtration and Dialysis 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 three segments. We performed step one of the two-step quantitative goodwill impairment test for Healthcare Disposables (due to the increase in assets related to the SPS Medical Acquisition) and Specialty Packaging (due to fair value exceeding book value by a nominal amount in the prior year). 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 weighted fair value results of the discounted cash flow methodology, as well as the market multiple and comparable transaction methodologies. The first step is a review for potential impairment, and the second step measures the amount of impairment, if any.

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In accordance with ASU 2012-02, “Intangibles — Goodwill and Other,” (“ASU 2012-02”), we perform our annual impairment review for indefinite lived intangibles by first assessing qualitative factors, such as those described above, 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, we perform a quantitative analysis comparing the current fair value of our indefinite lived intangibles assets to their carrying values. At July 31, 2013, because we determined through qualitative factors that the fair values of our indefinite lived intangible assets in our Endoscopy and Water Purification and Filtration segments were unlikely to be less than the carrying value, we did not perform a quantitative analysis for those assets. We performed a quantitative analysis for indefinite lived intangible assets in our Healthcare Disposables and Specialty Packaging segments, for the same reasons stated above for our goodwill impairment test, as well as such intangible assets in our Dialysis segment (due to fair value of its indefinite lived intangible assets exceeding book value by a nominal amount in the prior year).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, 2013, 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 and earnings 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, 2013, the average fair value of all of our reporting units exceeded book value by substantial amounts, except our Specialty Packaging segment, which had an average estimated fair value that approximated book value. At January 31, 2014, goodwill relating to our Specialty Packaging reporting unit was $6,438,000. We believe the most significant assumptions impacting the impairment assessment of Specialty Packaging relate to an assumed compounded annual sales growth of 10.7% and future operating efficiencies included in our projections of future operating results and cash flows of this segment, which projections 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, 2014, management concluded that no events or changes in circumstances have occurred during the three and six months ended January 31, 2014 that would indicate that the carrying value 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

56

subjective. On January 31, 2014, 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 is approximately 0.3%), and the expected option life (which is based on historical exercise behavior).

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.

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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.

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. Any adjustments upon resolution of income tax uncertainties are recognized in our results of operations. Unrecognized tax benefits are analyzed periodically and adjustments are made as events occur to warrant adjustment to the related liability.

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 an excise tax on certain U.S. medical device sales that began 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 IRS notices 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, 2014, we recorded excise taxes of $936,000 and $1,892,000 in cost of sales. For the three and six months ended January 31, 2013, we recorded excise taxes of $322,000 in cost of sales relating to the month of January. The regulations regarding the calculations of the medical device taxes are complicated in nature and certain aspects can be subject to interpretation causing the IRS to issue notices clarifying various aspects of these new taxes. 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.

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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 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 or the assumed contingent obligation relating to the Jet Prep Acquisition, as further described in Note 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.

Other Matters

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

Forward Looking Statements

This quarterly report on Form 10-Q contains “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995. 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.  Without limiting the foregoing, words or phrases such as “expect,” “anticipate,” “goal,” “will continue,” “project,” “intend,” “plan,” “believe,” “seek,”  “may,” “could,” and variations of such words and similar expressions generally identify forward-looking statements.   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.  We caution that undue reliance should not be placed on such forward-looking statements, which speak only as of the date made.  Some of the factors which could cause results to differ from those expressed in any forward-looking statement are set forth under Item 1A of the 2013 Form 10-K, entitled Risk Factors. 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.

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.

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For these statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

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 cash bank accounts, accounts receivable and liabilities of our Canadian and United States subsidiaries are denominated and ultimately settled in United States dollars or Canadian 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 2013 Form 10-K.

Changes in the value of the Euro, Singapore dollar and British pound 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,  Singapore dollars or British pounds 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 to the 2013 Form 10-K and therefore are impacted by changes in the Euro exchange rate relative to the United States dollar.

In order to hedge against the impact of fluctuations in the value of (i) the Euro relative to the United States dollar, (ii) the Singapore dollar relative to the United States dollar and (iii) the British pound 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 Euros, Singapore dollars and British pounds forward, which contracts are one month in duration. These short-term contracts are designated as fair value hedge instruments. There were two foreign currency forward contracts with an aggregate value of $6,264,000 at January 31, 2014, which covered certain assets and liabilities that were denominated in currencies other than our subsidiaries’ functional currencies. Such contracts expired on February 28, 2014. 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

60

currencies. For the three and six months ended January 31, 2014, 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. We do not currently hedge against the impact of fluctuations in the value of the Canadian dollar relative to the United States dollar because the currency impact on our Canadian and United States subsidiaries’ assets closely offset the currency impact on our Canadian and United States subsidiaries’ liabilities effectively minimizing realized gains and losses.

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, 2014 and 2013.

For the purpose of translating the balance sheet at January 31, 2014 compared with July 31, 2013, the total of the foreign currency movements resulted in a foreign currency translation loss of $1,674,000, net of tax, for the six months ended January 31, 2014, thereby decreasing stockholders’ equity.

Interest Rate Market Risk

Effective March 4, 2014, we have modified our credit facilities, as described elsewhere in Liquidity and Capital Resources. The modification of our credit facilities increased our borrowing capacity and decreased our margins applied to the lender’s base rate and LIBOR. The interest rate on outstanding borrowings is variable and 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.

Market Risk Sensitive Transactions

We are exposed to market risks arising principally from adverse changes in interest rates and foreign currency.

With respect to interest rate risk, our outstanding debt is under our New Revolving Credit Facility as of March 4, 2014, described elsewhere in Liquidity and Capital Resources. Such credit facility consists of outstanding debt at prevailing market rates of interest, principally under LIBOR contracts ranging from one to twelve months. Therefore, our market risk with respect to such debt is the increase in interest expense which would result from higher interest rates associated with LIBOR.

Based on our outstanding Revolving Credit Facility balance of $72,000,000 at March 4, 2014, a 100 basis point increase in average LIBOR interest rates would result in incremental annual interest expense of $720,000. However, we also maintained a cash balance of $19,706,000 at January 31, 2014 which is maintained in cash or invested in low return cash equivalents such as United States money market funds with leading banking institutions. An increase in interest rates would generate additional interest income as well as increase the fair value of our remaining ineffective interest rate swap agreement, which would both partially offset the adverse impact of additional interest expense. Additionally, substantially all of our outstanding borrowings were under LIBOR contracts that had expiration dates ranging from 1 to 12 months at fixed interest rates for the contract periods, and therefore would mitigate the adverse impact of an increase in interest rates.

Additional information related to market risk sensitive transactions from foreign currency is contained in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our 2013 Form 10-K.

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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 January 7, 2014 and November 5, 2013, we acquired the Sterilator Business and Jet Prep Business, respectively, as more fully described in Note 3 to the Condensed Consolidated Financial Statements. During the initial transition period following the acquisitions, we enhanced our internal control processes at our Crosstex subsidiary and Medivators subsidiary to ensure that all financial information related to these acquisitions were properly reflected in our Condensed Consolidated Financial Statements. We expect all aspects of the Sterilator Business and Jet Prep Business will be fully integrated into our existing internal control structure by July 31, 2014.

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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 2013 Form 10-K. The risk factors disclosed in Part I, Item 1A to our 2013 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	166	$	35.55	—	—
December	519	34.44		—	—
January	22,950	33.79		—	—
Total	23,635	$	33.81	—	—

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.

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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

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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, 2014
	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

65

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Andrew A. Krakauer, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Cantel Medical Corp.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: March 12, 2014
By:	/s/ Andrew A. Krakauer
Andrew A. Krakauer, President and Chief Executive Officer
(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Craig A. Sheldon, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Cantel Medical Corp.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: March 12, 2014
By:	/s/ Craig A. Sheldon
Craig A. Sheldon, Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

EX-32

Exhibit 32

CERTIFICATION

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF

TITLE 18, UNITED STATES CODE)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of Title 18, United States Code), the undersigned officers of Cantel Medical Corp. (the “Company”), do hereby certify with respect to the Quarterly Report of the Company on Form 10-Q for the quarter ended January 31, 2014 as filed with the Securities and Exchange Commission  (the “Form 10-Q”) that, to the best of their knowledge:

1.The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company, as of the date and for the period referred to in this report.

Date: March 12, 2014
	/s/ Andrew A. Krakauer
	Andrew A. Krakauer
	President and Chief Executive Officer
	(Principal Executive Officer)
	/s/ Craig A. Sheldon
	Craig A. Sheldon
	Senior Vice President, Chief Financial Officer and Treasurer
	(Principal Financial and Accounting Officer)

XML

Acquisitions (Details 5) (Polyp Trap, USD $)	0 Months Ended
	Nov. 13, 2012
Polyp Trap
Acquisitions
Consideration for the transaction	$ 486,000

XML

Income Taxes (Details)	6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013
Income Taxes
Consolidated effective tax rate (as a percent)	36.70%	36.30%
United States
Income Taxes
Consolidated effective tax rate (as a percent)	37.40%	36.80%
Percentage of income before income taxes	96.00%	97.00%
Canada, Singapore and Netherlands
Income Taxes
Consolidated effective tax rate (as a percent)		19.80%
Percentage of income before income taxes		3.00%
Canada, Singapore, Netherlands and Israel
Income Taxes
Consolidated effective tax rate (as a percent)	22.10%
Percentage of income before income taxes	4.00%

XML

Intangible Assets and Goodwill (Details 2) (USD $)	Jan. 31, 2014
Estimated annual amortization expense of intangible assets for next five years
Six month period ending July 31, 2014	$ 5,513,000
Fiscal 2015	11,025,000
Fiscal 2016	7,786,000
Fiscal 2017	7,210,000
Fiscal 2018	6,933,000
Fiscal 2019	$ 6,610,000

XML

Income Taxes (Details 2) (USD $)	Jan. 31, 2014	Jul. 31, 2013	Jul. 31, 2012
Reconciliation of the beginning and ending amounts of gross unrecognized tax benefits
Unrecognized tax benefits at the beginning of the period	$ 124,000	$ 124,000	$ 124,000
Unrecognized tax benefits at the end of the period	$ 124,000	$ 124,000	$ 124,000

XML

Fair Value Measurements (Details 5) (USD $)	6 Months Ended	12 Months Ended
	Jan. 31, 2014	Jul. 31, 2013
Fair Value Measurements
Impairment of long-lived assets, including goodwill and intangibles with indefinite lives	$ 0
Minimum
Disclosure of Fair Value of Financial Instruments
Interest rate base	One month LIBOR	One month LIBOR
Maximum
Disclosure of Fair Value of Financial Instruments
Interest rate base	Twelve month LIBOR	Twelve month LIBOR

XML

Stock-Based Compensation (Details) (USD $)	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014	Jan. 31, 2013
Income statement components of stock-based compensation expense recognized in Consolidated Statements of Income
Stock-based compensation before income taxes	$ 1,408,000	$ 929,000	$ 2,556,000	$ 1,887,000
Income tax benefits	(493,000)	(336,000)	(905,000)	(676,000)
Total stock-based compensation expense, net of tax	915,000	593,000	1,651,000	1,211,000
Cost of sales
Income statement components of stock-based compensation expense recognized in Consolidated Statements of Income
Stock-based compensation before income taxes	109,000	37,000	171,000	92,000
Operating expenses: Selling
Income statement components of stock-based compensation expense recognized in Consolidated Statements of Income
Stock-based compensation before income taxes	191,000	82,000	301,000	181,000
Operating expenses: General and administrative
Income statement components of stock-based compensation expense recognized in Consolidated Statements of Income
Stock-based compensation before income taxes	1,090,000	802,000	2,054,000	1,594,000
Operating expenses: Research and development
Income statement components of stock-based compensation expense recognized in Consolidated Statements of Income
Stock-based compensation before income taxes	18,000	8,000	30,000	20,000
Total operating expenses
Income statement components of stock-based compensation expense recognized in Consolidated Statements of Income
Stock-based compensation before income taxes	$ 1,299,000	$ 892,000	$ 2,385,000	$ 1,795,000

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Commitments and Contingencies (Details 2) (Jet Prep Ltd., Medivators B.V. subsidiary, USD $)	0 Months Ended
	Nov. 05, 2013	Jan. 31, 2014
Jet Prep Ltd. | Medivators B.V. subsidiary
Long-Term Contractual Obligations
Contingent consideration liability	$ 4,760,000	$ 4,760,000
Assumed contingent obligation	$ 990,000	$ 990,000
Period over which potential cash contingent consideration is payable	7 years

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Intangible Assets and Goodwill (Tables)

6 Months Ended

Jan. 31, 2014

Intangible Assets and Goodwill

Schedule of intangible assets

	January 31, 2014
			Accumulated
	Gross		Amortization			Net
Intangible assets with finite lives:
Customer relationships	$	71,949,000	$	(28,068,000	)	$	43,881,000
Technology	25,954,000		(10,203,000		)	15,751,000
Brand names	12,680,000		(8,738,000		)	3,942,000
Non-compete agreements	3,129,000		(633,000		)	2,496,000
Patents and other registrations	1,867,000		(702,000		)	1,165,000
	115,579,000		(48,344,000		)	67,235,000
Trademarks and trade names	9,241,000		—			9,241,000
Total intangible assets	$	124,820,000	$	(48,344,000	)	$	76,476,000

	July 31, 2013
			Accumulated
	Gross		Amortization			Net
Intangible assets with finite lives:
Customer relationships	$	72,142,000	$	(25,379,000	)	$	46,763,000
Technology	21,006,000		(9,642,000		)	11,364,000
Brand names	12,680,000		(8,045,000		)	4,635,000
Non-compete agreements	3,159,000		(541,000		)	2,618,000
Patents and other registrations	1,768,000		(606,000		)	1,162,000
	110,755,000		(44,213,000		)	66,542,000
Trademarks and trade names	9,387,000		—			9,387,000
Total intangible assets	$	120,142,000	$	(44,213,000	)	$	75,929,000

Schedule of estimated amortization expense of intangible assets for remainder of fiscal 2014 and the next five years

Six month period ending July 31, 2014	$	5,513,000
Fiscal 2015	11,025,000
Fiscal 2016	7,786,000
Fiscal 2017	7,210,000
Fiscal 2018	6,933,000
Fiscal 2019	6,610,000

Schedule of changes in goodwill

			Water
			Purification			Healthcare							Total
	Endoscopy		and Filtration			Disposables		Dialysis		Other			Goodwill
Balance, July 31, 2012	$	59,230,000	$	53,288,000		$	55,864,000	$	8,133,000	$	7,140,000		$	183,655,000
Acquisitions	—		4,043,000			24,244,000		—		—			28,287,000
Foreign currency translation	—		(152,000		)	—		—		(172,000		)	(324,000		)
Balance, July 31, 2013	59,230,000		57,179,000			80,108,000		8,133,000		6,968,000			211,618,000
Acquisitions	6,348,000		—			1,697,000		—		—			8,045,000
Foreign currency translation	—		(456,000		)	—		—		(530,000		)	(986,000		)
Balance, January 31, 2014	$	65,578,000	$	56,723,000		$	81,805,000	$	8,133,000	$	6,438,000		$	218,677,000

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Warranties (Details) (USD $)	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014	Jan. 31, 2013
Summary of activity in warranty reserves
Beginning balance	$ 1,261,000	$ 1,438,000	$ 1,261,000	$ 1,667,000
Provisions	546,000	336,000	1,237,000	703,000
Settlements	(605,000)	(542,000)	(1,296,000)	(1,138,000)
Foreign currency translation	(1,000)		(1,000)
Ending Balance	$ 1,201,000	$ 1,232,000	$ 1,201,000	$ 1,232,000

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Fair Value Measurements (Details) (USD $)	1 Months Ended	0 Months Ended				0 Months Ended
	Feb. 29, 2012 lender	Nov. 05, 2013 Medivators B.V. subsidiary Jet Prep Ltd.	Jan. 31, 2014 Medivators B.V. subsidiary Jet Prep Ltd.	Jan. 31, 2014 Medivators B.V. subsidiary Jet Prep Ltd. Contingent consideration	Jan. 31, 2014 Medivators B.V. subsidiary Jet Prep Ltd. Assumed contingent obligation	Nov. 05, 2013 Level 3 Medivators B.V. subsidiary Jet Prep Ltd. item	Jan. 31, 2014 Level 3 Medivators B.V. subsidiary Jet Prep Ltd.	Nov. 05, 2013 Level 3 Medivators B.V. subsidiary Jet Prep Ltd. Minimum
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
Number of existing senior lenders of debt, whose variable interest cash flows will be exchanged by the entity with fixed interest cash flows	1
Contingent consideration liability		$ 4,760,000	$ 4,760,000			$ 4,760,000	$ 4,760,000
Assumed contingent obligation		990,000	990,000			990,000	990,000	810,000
Contingent consideration period		7 years				7 years
Discount rate of cash flow projections (as a percent)						11.50%
Number of liabilities adjusted periodically by recording changes in the fair value through condensed consolidated statements of Income						2
Total potential future contingent consideration payments, low end of range				0	0
Total potential future contingent consideration payments, high end of range				$ 12,000,000	$ 2,430,000

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Acquisitions (Details 3) (Siemens' Hemodialysis Water Business, Mar Cor subsidiary, USD $)	0 Months Ended
	Mar. 22, 2013 project
Acquisitions
Transaction costs	$ 362,000
Total consideration for the transaction, excluding transaction costs	8,300,000
Net Assets
Current assets	728,000
Property, plant and equipment	231,000
Current liabilities	(415,000)
Net assets acquired	4,854,000
Number of in-process research and development projects acquired	0
Goodwill deductible for income tax purposes	3,446,000
Customer relationships
Net Assets
Amortizable intangible assets	4,310,000
Amortizable intangible assets, useful life	12 years
Minimum
Acquisitions
Number of dialysis customers	600
Revenues generated by acquiree in latest fiscal year before the business acquisition	$ 9,000,000

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Earnings Per Common Share (Details) (USD $)	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014	Jan. 31, 2013
Numerator for basic and diluted earnings per share:
Net income	$ 11,126,000	$ 10,452,000	$ 22,311,000	$ 20,028,000
Less income allocated to participating securities	(149,000)	(160,000)	(309,000)	(317,000)
Net income available to common shareholders	$ 10,977,000	$ 10,292,000	$ 22,002,000	$ 19,711,000
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	40,754,707	40,247,046	40,668,731	40,122,245
Dilutive effect of stock options using the treasury stock method and the average market price for the period (in shares)	183,995	314,004	188,201	338,331
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock	40,938,702	40,561,050	40,856,932	40,460,576
Basic earnings per share attributable to common stock (in dollars per share)	$ 0.27	$ 0.26	$ 0.54	$ 0.49
Diluted earnings per share attributable to common stock (in dollars per share)	$ 0.27	$ 0.25	$ 0.54	$ 0.49
Stock options excluded from weighted average dilutive common shares outstanding because their inclusion would have been antidilutive (in shares)	30,000	52,500

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Intangible Assets and Goodwill (Details) (USD $)	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014	Jan. 31, 2013	Jul. 31, 2013
Intangible assets with finite lives:
Amortization expense	$ 2,619,000	$ 2,573,000	$ 5,245,000	$ 4,840,000
Gross	115,579,000		115,579,000		110,755,000
Accumulated Amortization	(48,344,000)		(48,344,000)		(44,213,000)
Net	67,235,000		67,235,000		66,542,000
Intangible assets with indefinite lives:
Trademarks and trade names	9,241,000		9,241,000		9,387,000
Total intangible assets
Gross	124,820,000		124,820,000		120,142,000
Accumulated Amortization	(48,344,000)		(48,344,000)		(44,213,000)
Net	76,476,000		76,476,000		75,929,000
Low end of range
Intangible assets with finite lives:
Estimated useful lives			2 years
High end of range
Intangible assets with finite lives:
Estimated useful lives			20 years
Weighted average
Intangible assets with finite lives:
Estimated useful lives			11 years
Customer relationships
Intangible assets with finite lives:
Gross	71,949,000		71,949,000		72,142,000
Accumulated Amortization	(28,068,000)		(28,068,000)		(25,379,000)
Net	43,881,000		43,881,000		46,763,000
Total intangible assets
Accumulated Amortization	(28,068,000)		(28,068,000)		(25,379,000)
Technology
Intangible assets with finite lives:
Gross	25,954,000		25,954,000		21,006,000
Accumulated Amortization	(10,203,000)		(10,203,000)		(9,642,000)
Net	15,751,000		15,751,000		11,364,000
Total intangible assets
Accumulated Amortization	(10,203,000)		(10,203,000)		(9,642,000)
Brand names
Intangible assets with finite lives:
Gross	12,680,000		12,680,000		12,680,000
Accumulated Amortization	(8,738,000)		(8,738,000)		(8,045,000)
Net	3,942,000		3,942,000		4,635,000
Total intangible assets
Accumulated Amortization	(8,738,000)		(8,738,000)		(8,045,000)
Non-compete agreements
Intangible assets with finite lives:
Gross	3,129,000		3,129,000		3,159,000
Accumulated Amortization	(633,000)		(633,000)		(541,000)
Net	2,496,000		2,496,000		2,618,000
Total intangible assets
Accumulated Amortization	(633,000)		(633,000)		(541,000)
Patents and other registrations
Intangible assets with finite lives:
Gross	1,867,000		1,867,000		1,768,000
Accumulated Amortization	(702,000)		(702,000)		(606,000)
Net	1,165,000		1,165,000		1,162,000
Total intangible assets
Accumulated Amortization	$ (702,000)		$ (702,000)		$ (606,000)

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Acquisitions

6 Months Ended

Jan. 31, 2014

Acquisitions

Acquisitions

Note 3.           Acquisitions

Sterilator Company, Inc.

On January 7, 2014, Crosstex’ subsidiary acquired all the issued and outstanding stock of Sterilator Company, Inc., a private company based in Cuba, New York that manufactures biological indicators and supplies for sterility assurance products, which are used to accurately monitor the effectiveness of sterilization processes. The total consideration for the transaction was $2,829,000.

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

	Preliminary
Net Assets	Allocation
Current assets	$	538,000
Property, plant and equipment	535,000
Amortizable intangible assets (9- year weighted average life):
Customer relationships (11- year life)	130,000
Technology (8- year life)	510,000
Current liabilities	(321,000		)
Deferred income tax liabilities	(260,000		)
Net assets acquired	$	1,132,000

There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of $1,697,000 was assigned to goodwill. Such goodwill, none of which is deductible for income tax purposes, has been included in our Healthcare Disposables reporting segment.

The principal reasons for this vertical acquisition were to (i) add one of our key long-standing suppliers of biological indicators to our portfolio providing a strategic benefit and cost savings to our overall sterility assurance monitoring business and (ii) strengthen our new product development and overall research and development capabilities. Such reasons constitute the significant factors that contributed to a purchase price that resulted in recognition of goodwill.

The Sterilator Acquisition is included in our results of operations for the portion of the three and six months ended January 31, 2014 subsequent to its acquisition date and is not reflected in the three and six months ended January 31, 2013. This acquisition had an insignificant impact on our results of operations.

Jet Prep Ltd.

On November 5, 2013, our Medivators B.V. subsidiary acquired all the issued and outstanding capital stock of Jet Prep Ltd., a private Israeli company that developed the Jet Prep Flushing Device, a novel single-use irrigation and aspiration catheter to improve visualization during colonoscopy procedures. The device has FDA 510(k) and CE Mark clearances and is ready for immediate commercialization by our global endoscopy sales force. Total consideration for the transaction, excluding transaction costs of $200,000, was $5,332,000 plus estimated contingent consideration of $4,760,000 based on a percentage of sales above a minimum threshold over a seven year period as well as the assumption of an estimated $990,000 contingent obligation payable to the Israeli Government, as further explained below. The Jet Prep Acquisition is included in our Endoscopy segment.

We account for contingent consideration by recording the fair value of contingent consideration as a liability and an increase in 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 November 5, 2013 we increased contingent consideration and goodwill by $4,760,000 to record our initial estimated fair value of the contingent consideration that would be earned over the seven year period ending November 4, 2020, as further explained in Note 6 of the Condensed Consolidated Financial Statements. At January 31, 2014, the estimated fair value remained at $4,760,000 and was recorded in contingent consideration in the Condensed Consolidated Balance Sheets.

In connection with the acquisition, we acquired certain ordinary course business assets and liabilities as well as an obligation to repay the Israeli Government for $810,000 of seed funding that was previously granted to Jet Prep. In accordance with the seed funding agreement, the Israeli Government is entitled to a return on their investment that can range from one to six times their total grant based upon specific conditions set forth in the seed funding agreement and applicable Israeli law, including the acceleration of payments if we transfer certain operations of the company or intellectual property outside of Israel. We account for this assumed contingent obligation to the Israeli Government by recording the fair value as a liability and an increase in 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 November 5, 2013 we increased contingent consideration and goodwill by $990,000 to record our initial estimated fair value of the assumed contingent obligation to the Israeli Government that would be earned on a percentage of sales over a forecasted period, as further explained in Note 6 of the Condensed Consolidated Financial Statements. At January 31, 2014, the estimated fair value remained at $990,000, of which $58,000 was recorded in accrued expenses and $932,000 was recorded in contingent consideration.

Since we will be continually re-measuring the contingent consideration liability and the assumed contingent obligation at each balance sheet date and recording changes in the respective fair values through our Condensed Consolidated Statements of Income, we may potentially have significant earnings volatility in our future results of operations until the completion of the seven year period with respect to the contingent consideration and until the assumed contingent obligation is satisfied or until sales of the Jet Prep Ltd. products no longer exist.

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

	Preliminary
Net Assets	Allocation
Current assets	$	64,000
Property, plant and equipment	65,000
Amortizable intangible asset - Technology (7- year life):	5,050,000
Current liabilities	(100,000		)
Deferred income tax liabilities	(345,000		)
Net assets acquired	$	4,734,000

There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of $6,348,000 was assigned to goodwill. Such goodwill, none of which is deductible for income tax purposes, has been included in our Endoscopy reporting segment.

The principal reasons for the acquisition were (i) to address a market need for an effective technology that improves colonoscopy visualization through the use of irrigation and suction, (ii) to expand our endoscopy product portfolio further bolstering the Medivators brand in the gastrointestinal suite, (iii) to further expand our research and development capability by adding accomplished engineers to our existing research and development team and (iv) the expectation that the acquisition will be accretive to our earnings per share in fiscal 2015 and beyond.

The Jet Prep Acquisition is included in our results of operations for the portion of the three and six months ended January 31, 2014 subsequent to its acquisition date and is not reflected in the three and six months ended January 31, 2013. Since commercialization of this Jet Prep Flushing Device has just begun, this acquisition has not yet generated any sales and had an insignificant impact on our results of operations.

Siemens’ Hemodialysis Water Business

On March 22, 2013, Mar Cor and Siemens entered into an asset purchase agreement under which Mar Cor acquired certain net assets of Siemens’ hemodialysis water business primarily consisting of customer service agreements for over 600 dialysis customers in the United States and Canada. Such service agreements had contributed over $9 million in revenue to Siemens in calendar year 2012 (unaudited) and were assigned from Siemens to Mar Cor on an individual customer by customer basis to ensure a seamless transition. The acquisition date of the Siemens Water Business was July 30, 2013, which is when the majority of the customer service agreements were transferred and therefore control of the business had been achieved. The total consideration for the transaction, excluding transaction costs of $362,000, was $8,300,000, which was paid on March 22, 2013.

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	$	728,000
Property, plant and equipment	231,000
Amortizable intangible assets:
Customer relationships (12- year life)	4,310,000
Current liabilities	(415,000		)
Net assets acquired	$	4,854,000

There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of $3,446,000 was assigned to goodwill. Such goodwill, all of which is deductible for income tax purposes, is included in our Water Purification and Filtration reporting segment.

The principal reasons for the acquisition were as follows: (i) the opportunity to increase service revenue and profitability of the Mar Cor service network due to improved operating leverage, (ii) the expansion of Mar Cor’s North American footprint into new geographies, (iii) the opportunity to sell capital equipment and recurring consumables to new customers and (iv) the expectation that the acquisition will be accretive to our earnings per share beyond fiscal 2013.

The Siemens Water Acquisition had an insignificant effect on our results of operations for the three and six months ended January 31, 2014 due to the size of this business in relation to our overall consolidated results of operations and is not reflected in our results of operations for the three and six months ended January 31, 2013. The Siemens Water Business is included in our Water Purification and Filtration segment.

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:

	Final
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, is 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, 2014 and the portion of the three and six months ended January 31, 2013 subsequent to its acquisition date. This acquisition had an insignificant impact on our results of operations.

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 $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 is 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, 2014 and the portion of the three and six months ended January 31, 2013 subsequent to its acquisition date. This acquisition had an insignificant impact on our results of operations.

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, New York 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:

	Final
Net Assets	Allocation
Current assets	$	4,810,000
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	$	11,756,000

There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of $24,244,000 was assigned to goodwill. Such goodwill, none of which is 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. 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, 2014 and the portion of the three and six months ended January 31, 2013 subsequent to its acquisition date.

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Fair Value Measurements (Details 2) (USD $)	12 Months Ended	0 Months Ended	1 Months Ended
	Jul. 31, 2013	Aug. 02, 2011 Recurring basis Level 3 Byrne Medical Business	Nov. 30, 2013 Recurring basis Level 3 Byrne Medical Business	Jul. 29, 2011 Recurring basis Level 3 Byrne Medical Business
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
Initial contingent consideration liability		$ 2,700,000
Initial price floor		3,000,000
Price floor period		3 years
Contingent consideration period		2 years
Discount rate of cash flow projections (as a percent)		14.00%
Stock split ratio	1.5	1.5
Stock consideration (in shares)		902,528
Stock price (in dollars per share)				$ 11.08
Total potential future contingent consideration payments, high end of range		$ 10,000,000	$ 6,666,666
Cantel common stock placed in escrow at the time of acquisition		902,528
Proportion of shares released from escrow			0.33
Proportion of estimated contingent consideration reduced as a result of shares released from escrow			0.33

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Commitments and Contingencies (Tables)

6 Months Ended

Jan. 31, 2014

Commitments and Contingencies

Schedule of aggregate annual required payments over the remaining fiscal year, the next four years and thereafter under contractual obligations that have long-term components

	Six Months Ending
	July 31,		Year Ending July 31,
	2014		2015		2016		2017		2018		Thereafter		Total
	(Amounts in thousands)
Maturity of the credit facility (1)	$	—	$	—	$	—	$	—	$	—	$	74,500	$	74,500
Expected interest payments under the credit facility (2)	595		1,189		1,189		1,189		1,189		694		6,045
Minimum commitments under noncancelable operating leases	1,902		3,041		2,142		1,484		1,261		3,679		13,509
Contingent consideration (3)	—		170		518		915		1,279		2,868		5,750
Compensation agreements	2,293		3,436		988		425		350		846		8,338
Deferred compensation and other	28		77		43		41		36		27		252
Total contractual obligations	$	4,818	$	7,913	$	4,880	$	4,054	$	4,115	$	82,614	$	108,394

(1) The maturity of the credit facility reflects the terms under the March 4, 2014 modification, as further explained in Note 9 of the Condensed Consolidated Financial Statements.

(2) The expected interest payments under our credit facility reflect an interest rate of 1.60%, which was our weighted average interest rate on outstanding borrowings at January 31, 2014.

(3) The future potential payments of contingent consideration are shown at present value using a discount rate of 11.5%.

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Income Taxes (Tables)

6 Months Ended

Jan. 31, 2014

Income Taxes

Schedule of reconciliation of the beginning and ending amounts of gross unrecognized tax benefits

	Unrecognized
	Tax Benefits
Unrecognized tax benefits on July 31, 2012	$	124,000
Activity during fiscal 2013	—
Unrecognized tax benefits on July 31, 2013	124,000
Activity during the six months ended January 31, 2014	—
Unrecognized tax benefits on January 31, 2014	$	124,000

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Commitments and Contingencies (Details) (USD $)	6 Months Ended
	Jan. 31, 2014
Long term debt
Total	$ 74,500,000
Minimum commitments under noncancelable operating leases
Remaining fiscal year	1,902,000
2015	3,041,000
2016	2,142,000
2017	1,484,000
2018	1,261,000
Thereafter	3,679,000
Total	13,509,000
Total contractual obligations
Remaining fiscal year	4,818,000
2015	7,913,000
2016	4,880,000
2017	4,054,000
2018	4,115,000
Thereafter	82,614,000
Total	108,394,000
Credit Facility | Weighted average
Total contractual obligations
Interest rate (as a percent)	1.60%
Contingent consideration
Other commitments
2015	170,000
2016	518,000
2017	915,000
2018	1,279,000
Thereafter	2,868,000
Total	5,750,000
Total contractual obligations
Discount rate of potential payments (as a percent)	11.50%
Compensation agreements
Other commitments
Remaining fiscal year	2,293,000
2015	3,436,000
2016	988,000
2017	425,000
2018	350,000
Thereafter	846,000
Total	8,338,000
Deferred compensation and other
Other commitments
Remaining fiscal year	28,000
2015	77,000
2016	43,000
2017	41,000
2018	36,000
Thereafter	27,000
Total	252,000
Maturity of the credit facility
Long term debt
Thereafter	74,500,000
Total	74,500,000
Expected interest payments under the credit facility
Total contractual obligations
Remaining fiscal year	595,000
2015	1,189,000
2016	1,189,000
2017	1,189,000
2018	1,189,000
Thereafter	694,000
Total	$ 6,045,000

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Fair Value Measurements (Details 3) (Recurring basis, USD $)	Jan. 31, 2014	Jul. 31, 2013
Level 1
Assets:
Total assets	$ 3,993,000	$ 4,241,000
Level 1 | Money markets | Cash and cash equivalents
Assets:
Money markets	3,993,000	4,241,000
Level 2
Liabilities:
Total accrued expenses	94,000	133,000
Total other long-term liabilities		29,000
Total liabilities	113,000	162,000
Level 2 | Interest rate swap agreements | Accrued expenses
Liabilities:
Interest rate swap agreement	94,000	133,000
Level 2 | Interest rate swap agreements | Other long-term liabilities
Liabilities:
Interest rate swap agreement	19,000	29,000
Level 3
Liabilities:
Total accrued expenses	58,000
Total other long-term liabilities		45,000
Total liabilities	5,750,000	45,000
Level 3 | Accrued expenses
Liabilities:
Assumed contingent obligation	58,000
Level 3 | Contingent consideration
Liabilities:
Assumed contingent obligation	932,000
Contingent consideration	4,760,000
Level 3 | Other long-term liabilities
Liabilities:
Price floor		45,000
Total
Assets:
Total assets	3,993,000	4,241,000
Liabilities:
Total accrued expenses	152,000	133,000
Total other long-term liabilities		74,000
Total liabilities	5,863,000	207,000
Total | Accrued expenses
Liabilities:
Assumed contingent obligation	58,000
Total | Contingent consideration
Liabilities:
Assumed contingent obligation	932,000
Contingent consideration	4,760,000
Total | Other long-term liabilities
Liabilities:
Price floor		45,000
Total | Interest rate swap agreements | Accrued expenses
Liabilities:
Interest rate swap agreement	94,000	133,000
Total | Interest rate swap agreements | Other long-term liabilities
Liabilities:
Interest rate swap agreement	19,000	29,000
Total | Money markets | Cash and cash equivalents
Assets:
Money markets	$ 3,993,000	$ 4,241,000

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Accumulated Other Comprehensive Income (Loss) (Tables)

6 Months Ended

Jan. 31, 2014

Accumulated Other Comprehensive Income (Loss)

Schedule of the components and changes in accumulated other comprehensive income (loss)

	Three Months Ended									Six Months Ended
	January 31, 2014									January 31, 2014
	Foreign									Foreign
	Currency			Interest Rate						Currency			Interest Rate
	Translation			Swap						Translation			Swap
	Adjustments			Agreements			Total			Adjustments			Agreements			Total
Beginning balance	$	10,807,000		$	(94,000	)	$	10,713,000		$	11,080,000		$	(103,000	)	$	10,977,000
Other comprehensive loss before reclassifications	(1,401,000		)	(14,000		)	(1,415,000		)	(1,674,000		)	(47,000		)	(1,721,000		)
Income tax effect on other comprehensive loss before reclassification	—			5,000			5,000			—			17,000			17,000
Reclassification adjustments to interest expense for losses on interest rate swaps included in net income during the period	—			48,000			48,000			—			96,000			96,000
Reclassification adjustments for ineffective hedge on interest rate swap included in net income during the period	—			113,000			113,000			—			113,000			113,000
Income tax effect on reclassification adjustments	—			(58,000		)	(58,000		)	—			(76,000		)	(76,000		)
Ending balance	$	9,406,000		$	—		$	9,406,000		$	9,406,000		$	—		$	9,406,000

	Three Months Ended									Six Months Ended
	January 31, 2013									January 31, 2013
	Foreign									Foreign
	Currency			Interest Rate						Currency			Interest Rate
	Translation			Swap						Translation			Swap
	Adjustments			Agreements			Total			Adjustments			Agreements			Total
Beginning balance	$	8,476,000		$	(187,000	)	$	8,289,000		$	8,385,000		$	(210,000	)	$	8,175,000
Other comprehensive income (loss) before reclassifications	89,000			4,000			93,000			211,000			(14,000		)	197,000
Income tax effect on other comprehensive income (loss) before reclassification	(25,000		)	(2,000		)	(27,000		)	(56,000		)	5,000			(51,000		)
Reclassification adjustments to interest expense for losses on interest rate swaps included in net income during the period	—			61,000			61,000			—			116,000			116,000
Income tax effect on reclassification adjustments	—			(21,000		)	(21,000		)	—			(42,000		)	(42,000		)
Ending balance	$	8,540,000		$	(145,000	)	$	8,395,000		$	8,540,000		$	(145,000	)	$	8,395,000

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Operating Segments (Tables)

6 Months Ended

Jan. 31, 2014

Operating Segments

Information as to operating segments

	Three Months Ended						Six Months Ended
	January 31,						January 31,
	2014			2013			2014			2013
Net sales:
Endoscopy	$	44,587,000		$	39,422,000		$	88,200,000		$	76,101,000
Water Purification and Filtration	40,719,000			32,369,000			80,469,000			65,530,000
Healthcare Disposables	24,716,000			24,339,000			50,965,000			44,294,000
Dialysis	7,611,000			8,760,000			14,920,000			16,947,000
Other	1,409,000			1,473,000			2,760,000			3,172,000
Total	$	119,042,000		$	106,363,000		$	237,314,000		$	206,044,000
Operating income:
Endoscopy	$	8,218,000		$	9,469,000		$	16,402,000		$	17,145,000
Water Purification and Filtration	7,108,000			3,719,000			13,165,000			8,346,000
Healthcare Disposables	4,563,000			4,709,000			10,282,000			8,800,000
Dialysis	1,996,000			2,312,000			3,760,000			4,488,000
Other	231,000			125,000			236,000			338,000
	22,116,000			20,334,000			43,845,000			39,117,000
General corporate expenses	(3,907,000		)	(3,471,000		)	(7,324,000		)	(6,282,000		)
Interest expense, net	(630,000		)	(775,000		)	(1,274,000		)	(1,408,000		)
Income before income taxes	$	17,579,000		$	16,088,000		$	35,247,000		$	31,427,000

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Stock-Based Compensation

6 Months Ended

Jan. 31, 2014

Stock-Based Compensation

Stock-Based Compensation

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,
	2014			2013			2014			2013
Cost of sales	$	109,000		$	37,000		$	171,000		$	92,000
Operating expenses:
Selling	191,000			82,000			301,000			181,000
General and administrative	1,090,000			802,000			2,054,000			1,594,000
Research and development	18,000			8,000			30,000			20,000
Total operating expenses	1,299,000			892,000			2,385,000			1,795,000
Stock-based compensation before income taxes	1,408,000			929,000			2,556,000			1,887,000
Income tax benefits	(493,000		)	(336,000		)	(905,000		)	(676,000		)
Total stock-based compensation expense, net of tax	$	915,000		$	593,000		$	1,651,000		$	1,211,000

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, and were tax-effected using the Company’s estimated U.S. effective tax rate at the time of grant.

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, 2014, total unrecognized stock-based compensation expense, before income taxes, related to total nonvested stock options and stock awards was $10,187,000 with a remaining weighted average period of 22 months over which such expense is expected to be recognized. Most 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.

A summary of nonvested stock award activity follows:

			Weighted
	Number of		Average
	Shares		Fair Value
Nonvested stock awards at July 31, 2013	605,767		$	11.96
Granted	247,136		31.84
Canceled	(4,620	)	9.02
Vested	(299,611	)	10.51
Nonvested stock awards at January 31, 2014	548,672		$	21.73

For the six months ended January 31, 2014 and 2013, the Company granted 30,000 and 52,500 options, respectively.

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, 2014 and 2013:

Weighted-Average
Black-Scholes Option	Six Months Ended		Six Months Ended
Valuation Assumptions	January 31, 2014		January 31, 2013
Dividend yield	0.28	%	0.37	%
Expected volatility (1)	42.70	%	50.90	%
Risk-free interest rate (2)	1.44	%	0.67	%
Expected lives (in years) (3)	5.00		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.

For the six months ended January 31, 2014 and 2013, these non-qualified options had a weighted average fair value of $12.08 and $7.27, respectively.

The aggregate intrinsic value (i.e., the excess market price over the exercise price) of all options exercised was $1,748,000 and $2,419,000 for the three and six months ended January 31, 2014 and $3,224,000 and $3,488,000 for the three and six months ended January 31, 2013, respectively.

A summary of stock option activity follows:

			Weighted
	Number of		Average
	Shares		Exercise Price
Outstanding at July 31, 2013	403,831		$	8.25
Granted	30,000		31.81
Exercised	(92,106	)	6.69
Outstanding at January 31, 2014	341,725		$	10.74
Exercisable at July 31, 2013	351,331		$	6.94
Exercisable at January 31, 2014	276,725		$	7.66

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 282,978 and 474,266 shares, respectively, 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, 2014 and 2013, income tax deductions of $4,516,000 and $2,923,000, respectively, were generated and increased additional paid-in capital by $3,297,000 and $1,868,000, respectively. We classify the cash flows resulting from excess tax benefits as financing cash flows in our Condensed Consolidated Statements of Cash Flows.

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Basis of Presentation (Details) (USD $)	6 Months Ended	12 Months Ended
	Jan. 31, 2014 segment company	Jul. 31, 2013 company	Mar. 04, 2014 Credit Agreement Subsequent Events	Jan. 31, 2014 Medivators subsidiary
Basis of Presentation
Number of principal operating companies	5	5
Business Description
Number of foreign subsidiaries				2
Number of operating segments	5
Additional common stock issued as stock dividend (in shares)		15,044,000
Stock split ratio		1.5
Percentage of stock dividend paid		50.00%
Maximum borrowing capacity			$ 250,000,000

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Acquisitions (Details 6) (USD $)				0 Months Ended
	Jan. 31, 2014	Jul. 31, 2013	Jul. 31, 2012	Nov. 03, 2012 SPS Medical Supply Corp. and SPS manufacturing and warehouse facility Crosstex subsidiary	Nov. 03, 2012 SPS Medical Supply Corp. and SPS manufacturing and warehouse facility Crosstex subsidiary Customer relationships	Nov. 03, 2012 SPS Medical Supply Corp. and SPS manufacturing and warehouse facility Crosstex subsidiary Brand names	Nov. 03, 2012 SPS Medical Supply Corp. and SPS manufacturing and warehouse facility Crosstex subsidiary Technology project	Nov. 03, 2012 SPS Medical Supply Corp. and SPS manufacturing and warehouse facility Crosstex subsidiary Non-compete agreement	Nov. 03, 2012 SPS Medical Supply Corp Crosstex subsidiary	Nov. 03, 2012 SPS manufacturing and warehouse facility in Rochester, New York Crosstex subsidiary
Acquisitions
Revenues generated by acquiree in latest fiscal year before the business acquisition									$ 17,500,000
Transaction costs									157,000
Total consideration for the transaction, excluding transaction costs									32,500,000
Consideration for the transaction										3,500,000
Net Assets
Current assets				4,810,000
Property, plant and equipment				3,801,000
Amortizable intangible assets					8,120,000	760,000	500,000	180,000
Other assets, Noncurrent				28,000
Current liabilities				(2,784,000)
Noncurrent deferred income tax liabilities, net				(3,659,000)
Net assets acquired				11,756,000
Amortizable intangible assets, useful life				9 years	10 years	5 years	4 years	6 years
Number of in-process research and development projects acquired							0
Goodwill	218,677,000	211,618,000	183,655,000	24,244,000
Goodwill deductible for income tax purposes				$ 0

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Earnings Per Common Share (Details 2)	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014	Jan. 31, 2013
Reconciliation of weighted average number of shares and common stock equivalents attributable to common stock, to the entity's total weighted average number of shares and common stock equivalents, including participating securities
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock	40,938,702	40,561,050	40,856,932	40,460,576
Participating securities (in shares)	554,029	631,364	576,119	655,627
Total weighted average number of shares and common stock equivalents attributable to both common stock and participating securities	41,492,731	41,192,414	41,433,051	41,116,203

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)	Jan. 31, 2014	Jul. 31, 2013
Current assets:
Cash and cash equivalents	$ 19,706,000	$ 34,076,000
Accounts receivable, net of allowance for doubtful accounts of $1,853 at January 31 and $1,265 at July 31	59,947,000	52,753,000
Inventories:
Raw materials	24,069,000	23,815,000
Work-in-process	7,557,000	6,945,000
Finished goods	24,559,000	23,407,000
Total inventories	56,185,000	54,167,000
Deferred income taxes	4,078,000	4,129,000
Prepaid expenses and other current assets	5,535,000	4,428,000
Income taxes receivable	2,512,000	1,107,000
Total current assets	147,963,000	150,660,000
Property and equipment, net	47,072,000	46,465,000
Intangible assets, net	76,476,000	75,929,000
Goodwill	218,677,000	211,618,000
Other assets	2,997,000	2,999,000
Total assets	493,185,000	487,671,000
Current liabilities:
Current portion of long-term debt		10,000,000
Accounts payable	14,690,000	13,322,000
Compensation payable	8,959,000	14,032,000
Accrued expenses	10,870,000	10,417,000
Deferred revenue	13,005,000	11,380,000
Total current liabilities	47,524,000	59,151,000
Long-term debt	74,500,000	85,000,000
Deferred income taxes	22,304,000	21,186,000
Contingent consideration	5,692,000	45,000
Other long-term liabilities	1,147,000	1,157,000
Commitments and contingencies
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 - 45,516,277 shares issued and 41,339,569 shares outstanding; July 31 - 45,181,655 shares issued and 41,138,121 shares outstanding	4,552,000	4,518,000
Additional paid-in capital	141,289,000	134,853,000
Retained earnings	224,215,000	203,762,000
Accumulated other comprehensive income	9,406,000	10,977,000
Treasury Stock, at cost; January 31 - 4,176,708 shares; July 31 - 4,043,534 shares	(37,444,000)	(32,978,000)
Total stockholders' equity	342,018,000	321,132,000
Total liabilities and stockholders' equity	$ 493,185,000	$ 487,671,000

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Fair Value Measurements (Details 4) (USD $)	3 Months Ended														3 Months Ended
	Jan. 31, 2014	Oct. 31, 2013	Jul. 31, 2013	Apr. 30, 2013	Jan. 31, 2013	Oct. 31, 2012	Jan. 31, 2014 Byrne Medical Business Three-year price floor	Oct. 31, 2013 Byrne Medical Business Three-year price floor	Jul. 31, 2013 Byrne Medical Business Three-year price floor	Apr. 30, 2013 Byrne Medical Business Three-year price floor	Jan. 31, 2013 Byrne Medical Business Three-year price floor	Oct. 31, 2012 Byrne Medical Business Three-year price floor	Jan. 31, 2013 Contingent Consideration Byrne Medical Business	Jul. 31, 2012 Contingent Consideration Byrne Medical Business	Jan. 31, 2014 Contingent Consideration Jet Prep Ltd.	Jan. 31, 2014 Assumed Contingent Obligation Jet Prep Ltd.
Reconciliation of liability measured and recorded at fair value on a recurring basis using Level 3
Beginning balance	$ 1,000	$ 45,000	$ 255,000	$ 314,000	$ 2,224,000	$ 2,537,000	$ 1,000	$ 45,000	$ 255,000	$ 314,000	$ 724,000	$ 1,037,000	$ 1,500,000	$ 1,500,000
Total net unrealized gains included in general and administrative expense in earnings	(1,000)	(44,000)	(210,000)	(59,000)	(1,910,000)	(313,000)	(1,000)	(44,000)	(210,000)	(59,000)	(410,000)	(313,000)	(1,500,000)
Net purchases, issuances, sales and settlements	5,750,000														4,760,000	990,000
Ending balance	$ 5,750,000	$ 1,000	$ 45,000	$ 255,000	$ 314,000	$ 2,224,000		$ 1,000	$ 45,000	$ 255,000	$ 314,000	$ 724,000		$ 1,500,000	$ 4,760,000	$ 990,000

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013
Cash flows from operating activities
Net income	$ 22,311,000	$ 20,028,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	3,967,000	3,574,000
Amortization	5,245,000	4,840,000
Stock-based compensation expense	2,556,000	1,887,000
Amortization of debt issuance costs	162,000	176,000
Loss on disposal of fixed assets	296,000	140,000
Deferred income taxes	575,000	139,000
Excess tax benefits from stock-based compensation	(3,297,000)	(1,868,000)
Changes in assets and liabilities, net of assets acquired and liabilities assumed:
Accounts receivable	(7,190,000)	(2,265,000)
Inventories	(1,812,000)	(4,000)
Prepaid expenses and other current assets	(1,225,000)	(1,846,000)
Accounts payable and other current liabilities	(1,807,000)	(8,766,000)
Income taxes	1,768,000	3,016,000
Net cash provided by operating activities	21,549,000	19,051,000
Cash flows from investing activities
Capital expenditures	(4,363,000)	(2,548,000)
Proceeds from disposal of fixed assets	3,000	4,000
Acquisition of Jet Prep, net of cash acquired	(5,332,000)
Acquisition of Sterilator, net of cash acquired	(2,829,000)
Acquisition of SPS Business, net of cash acquired		(35,415,000)
Acquisition of Polyp Trap		(486,000)
Acquisition of Eagle Pure Water		(870,000)
Other, net	(319,000)	(94,000)
Net cash used in investing activities	(12,840,000)	(39,409,000)
Cash flows from financing activities
Borrowings under revolving credit facility, net of debt issuance costs		37,000,000
Repayments under term loan facility	(5,000,000)	(5,000,000)
Repayments under revolving credit facility	(15,500,000)	(15,000,000)
Proceeds from exercises of stock options	207,000	1,409,000
Dividends paid	(1,858,000)	(1,494,000)
Excess tax benefits from stock-based compensation	3,297,000	1,868,000
Purchases of treasury stock	(4,057,000)	(1,872,000)
Net cash (used in) provided by financing activities	(22,911,000)	16,911,000
Effect of exchange rate changes on cash and cash equivalents	(168,000)	86,000
Decrease in cash and cash equivalents	(14,370,000)	(3,361,000)
Cash and cash equivalents at beginning of period	34,076,000	30,186,000
Cash and cash equivalents at end of period	$ 19,706,000	$ 26,825,000

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Operating Segments (Details) (USD $)	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014	Jan. 31, 2013
Concentration risk
Consolidated net sales	$ 119,042,000	$ 106,363,000	$ 237,314,000	$ 206,044,000
Water Purification and Filtration
Concentration risk
Consolidated net sales	40,719,000	32,369,000	80,469,000	65,530,000
Dialysis
Concentration risk
Consolidated net sales	7,611,000	8,760,000	14,920,000	16,947,000
Healthcare Disposables
Concentration risk
Consolidated net sales	24,716,000	24,339,000	50,965,000	44,294,000
Segment sales | Customer concentration | Water Purification and Filtration | DaVita
Concentration risk
Concentration risk (as a percent)			25.30%
Segment sales | Customer concentration | Water Purification and Filtration | Another large customer
Concentration risk
Concentration risk (as a percent)			21.90%
Segment sales | Customer concentration | Dialysis | DaVita
Concentration risk
Concentration risk (as a percent)			37.60%
Segment sales | Customer concentration | Healthcare Disposables | Four customers
Concentration risk
Number of customers concentration risk			4
Concentration risk (as a percent)			52.30%
Net sales | Customer concentration | DaVita
Concentration risk
Concentration risk (as a percent)			10.90%	10.30%
Consolidated net sales			$ 25,948,000	$ 21,290,000
Net sales | Customer concentration | DaVita and another large customer
Concentration risk
Number of customers concentration risk			2
Concentration risk (as a percent)			18.30%
Net sales | Customer concentration | Four customers
Concentration risk
Number of customers concentration risk			4
Concentration risk (as a percent)			11.20%

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Acquisitions (Details) (USD $)				0 Months Ended
	Jan. 31, 2014	Jul. 31, 2013	Jul. 31, 2012	Jan. 07, 2014 Sterilator Company, Inc. Crosstex' subsidiary project	Jan. 07, 2014 Sterilator Company, Inc. Crosstex' subsidiary Customer relationships	Jan. 07, 2014 Sterilator Company, Inc. Crosstex' subsidiary Technology
Acquisitions
Total consideration for the transaction				$ 2,829,000
Net Assets
Current assets				538,000
Property, plant and equipment				535,000
Amortizable intangible assets					130,000	510,000
Current liabilities				(321,000)
Deferred income tax liabilities				(260,000)
Net assets acquired				1,132,000
Amortizable intangible assets, useful life				9 years	11 years	8 years
Number of in-process research and development projects acquired				0
Goodwill	218,677,000	211,618,000	183,655,000	1,697,000
Goodwill deductible for income tax purposes				$ 0

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Stock-Based Compensation (Tables)

6 Months Ended

Jan. 31, 2014

Stock-Based Compensation

Schedule of 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,
	2014			2013			2014			2013
Cost of sales	$	109,000		$	37,000		$	171,000		$	92,000
Operating expenses:
Selling	191,000			82,000			301,000			181,000
General and administrative	1,090,000			802,000			2,054,000			1,594,000
Research and development	18,000			8,000			30,000			20,000
Total operating expenses	1,299,000			892,000			2,385,000			1,795,000
Stock-based compensation before income taxes	1,408,000			929,000			2,556,000			1,887,000
Income tax benefits	(493,000		)	(336,000		)	(905,000		)	(676,000		)
Total stock-based compensation expense, net of tax	$	915,000		$	593,000		$	1,651,000		$	1,211,000

Summary of nonvested stock award activity

			Weighted
	Number of		Average
	Shares		Fair Value
Nonvested stock awards at July 31, 2013	605,767		$	11.96
Granted	247,136		31.84
Canceled	(4,620	)	9.02
Vested	(299,611	)	10.51
Nonvested stock awards at January 31, 2014	548,672		$	21.73

Weighted-average assumptions used to estimate fair value of stock options granted using the Black-Scholes option valuation model

Weighted-Average
Black-Scholes Option	Six Months Ended		Six Months Ended
Valuation Assumptions	January 31, 2014		January 31, 2013
Dividend yield	0.28	%	0.37	%
Expected volatility (1)	42.70	%	50.90	%
Risk-free interest rate (2)	1.44	%	0.67	%
Expected lives (in years) (3)	5.00		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.

Summary of stock option activity

			Weighted
	Number of		Average
	Shares		Exercise Price
Outstanding at July 31, 2013	403,831		$	8.25
Granted	30,000		31.81
Exercised	(92,106	)	6.69
Outstanding at January 31, 2014	341,725		$	10.74
Exercisable at July 31, 2013	351,331		$	6.94
Exercisable at January 31, 2014	276,725		$	7.66

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Acquisitions (Details 2) (USD $)				0 Months Ended				0 Months Ended
	Jan. 31, 2014	Jul. 31, 2013	Jul. 31, 2012	Nov. 05, 2013 Jet Prep Ltd. Medivators B.V. subsidiary project	Jan. 31, 2014 Jet Prep Ltd. Medivators B.V. subsidiary	Jan. 31, 2014 Jet Prep Ltd. Medivators B.V. subsidiary Accrued expenses	Jan. 31, 2014 Jet Prep Ltd. Medivators B.V. subsidiary Contingent consideration	Nov. 05, 2013 Jet Prep Ltd. Medivators B.V. subsidiary Technology	Nov. 05, 2013 Jet Prep Ltd. Medivators B.V. subsidiary Contingent consideration, payable to sellers	Nov. 05, 2013 Jet Prep Ltd. Medivators B.V. subsidiary Contingent consideration, payable to Israeli Government	Nov. 05, 2013 Jet Prep Ltd. Medivators B.V. subsidiary Contingent consideration, payable to Israeli Government Minimum	Nov. 05, 2013 Jet Prep Ltd. Medivators B.V. subsidiary Contingent consideration, payable to Israeli Government Maximum
Acquisitions
Transaction costs				$ 200,000
Total consideration for the transaction, excluding transaction costs				5,332,000
Contingent consideration liability				4,760,000	4,760,000		4,760,000		4,760,000
Period over which potential cash contingent consideration is payable				7 years
Assumed contingent obligation				990,000	990,000	58,000	932,000			990,000
Increase in goodwill									4,760,000	990,000
Liabilities assumed										810,000
Israeli Government's rate of return on investment											1	6
Net Assets
Current assets				64,000
Property, plant and equipment				65,000
Amortizable intangible assets								5,050,000
Current liabilities				(100,000)
Deferred income tax liabilities				(345,000)
Net assets acquired				4,734,000
Amortizable intangible assets, useful life								7 years
Number of in-process research and development projects acquired				0
Goodwill	218,677,000	211,618,000	183,655,000	6,348,000
Goodwill deductible for income tax purposes				$ 0

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Fair Value Measurements (Tables)

6 Months Ended

Jan. 31, 2014

Fair Value Measurements

Schedule of fair values of financial instruments measured on a recurring basis

	January 31, 2014
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Money markets	$	3,993,000	$	—	$	—	$	3,993,000
Total assets	$	3,993,000	$	—	$	—	$	3,993,000
Liabilities:
Accrued expenses:
Assumed contingent obligation	$	—	$	—	$	58,000	$	58,000
Interest rate swap agreement	—		94,000		—		94,000
Total accrued expenses	—		94,000		58,000		152,000
Contingent consideration:
Contingent consideration	—		—		4,760,000		4,760,000
Assumed contingent obligation	—		—		932,000		932,000
Other long-term liabilities:
Interest rate swap agreement	—		19,000		—		19,000
Total liabilities	$	—	$	113,000	$	5,750,000	$	5,863,000

	July 31, 2013
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Money markets	$	4,241,000	$	—	$	—	$	4,241,000
Total assets	$	4,241,000	$	—	$	—	$	4,241,000
Liabilities:
Accrued expenses:
Interest rate swap agreements	$	—	$	133,000	$	—	$	133,000
Total accrued expenses	—		133,000		—		133,000
Other long-term liabilities:
Price floor	—		—		45,000		45,000
Interest rate swap agreements	—		29,000		—		29,000
Total other long-term liabilities	—		29,000		45,000		74,000
Total liabilities	$	—	$	162,000	$	45,000	$	207,000

Reconciliation of liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3)

									Jet Prep
	Byrne			Byrne			Jet Prep		Assumed
	Contingent			Price			Contingent		Contingent
	Consideration			Floor			Consideration		Obligation		Total
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		)
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		)
Balance, January 31, 2013	—			314,000			—		—		314,000
Total net unrealized gains included in general and administrative expense in earnings	—			(59,000		)	—		—		(59,000		)
Balance, April 30, 2013	—			255,000			—		—		255,000
Total net unrealized gains included in general and administrative expense in earnings	—			(210,000		)	—		—		(210,000		)
Balance, July 31, 2013	—			45,000			—		—		45,000
Total net unrealized gains included in general and administrative expense in earnings	—			(44,000		)	—		—		(44,000		)
Balance, October 31, 2013	—			1,000			—		—		1,000
Total net unrealized gains included in general and administrative expense in earnings	—			(1,000		)	—		—		(1,000		)
Net purchases, issuances, sales and settlements	—			—			4,760,000		990,000		5,750,000
Balance, January 31, 2014	$	—		$	—		$	4,760,000	$	990,000	$	5,750,000

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Basis of Presentation

6 Months Ended

Jan. 31, 2014

Basis of Presentation

Basis of Presentation

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, 2013 (the “2013 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, 2013 was derived from the audited Consolidated Balance Sheet of Cantel at that date.

Cantel had five principal operating companies at January 31, 2014 and July 31, 2013; 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 our bases in Europe and Asia/Pacific, respectively, and Crosstex has a subsidiary, SPS Medical Supply Corp., as more fully described below and in Note 3 to the Condensed Consolidated Financial Statements.

During the fourth quarter of fiscal 2013, we changed our internal reporting processes by combining our Therapeutic Filtration and Chemistries operating segments, previously reported in the Other reporting segment, with our Water Purification and Filtration reporting segment to reflect the way the Company, through its executive management, manages, allocates resources and measures the performance of its businesses. All periods presented have been recast to reflect these changes.

As such, we currently operate our business through five operating segments: Endoscopy (through Medivators), Water Purification and Filtration (through Mar Cor, Biolab and Medivators), Healthcare Disposables (through Crosstex), Dialysis (through Medivators) and Specialty Packaging (through Saf-T-Pak). The Specialty Packaging operating segment comprises the Other reporting segment for financial reporting purposes.

On January 7, 2014, Crosstex’ subsidiary acquired all the issued and outstanding stock of Sterilator Company, Inc. (the “Sterilator Business” or “Sterilator Acquisition”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements. The results of operations of Sterilator, which had an insignificant effect on our consolidated net income due to the small size of this business, are included in the portion of the three and six months ended January 31, 2014 subsequent to its acquisition date and are not reflected in the three and six months ended January 31, 2013. The Sterilator Business is included in our Healthcare Disposables segment.

On November 5, 2013, our Medivators B.V. subsidiary acquired all the issued and outstanding capital stock of Jet Prep Ltd. (the “Jet Prep Business” or “Jet Prep Acquisition”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements. The results of operations of Jet Prep, which had an insignificant effect on our consolidated net income due to the small size of this business, are included in the portion of the three and six months ended January 31, 2014 subsequent to its acquisition date and are not reflected in the three and six months ended January 31, 2013. The Jet Prep Business is included in our Endoscopy segment.

On March 22, 2013, Mar Cor entered into an agreement to acquire from Siemens Industry, Inc. and Siemens Canada Limited (collectively, “Siemens”) certain net assets of Siemens’ hemodialysis water business (the “Siemens Water Business” or the “Siemens Water Acquisition”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements. The Siemens Water Acquisition had a nominal impact on our results of operations for the three and six months ended January 31, 2014 due to the size of this business in relation to our overall consolidated results of operations and is not reflected in our results of operations for the three and six months ended January 31, 2013. The Siemens Water Business is included in our Water Purification and Filtration segment.

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, which had an insignificant effect on our results of operations due to the small size of the business, is reflected in our results of operations for the three and six months ended January 31, 2014 and the portion of the three and six months ended January 31, 2013 subsequent to its acquisition date. 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. The results of operations of SPS Medical are included in the three and six months ended January 31, 2014, the three months ended January 31, 2013, and the portion of the six months ended January 31, 2013 subsequent to its acquisition date. The SPS Business is included in our Healthcare Disposables segment.

During July 2013, the Company issued 15,044,000 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 July 12, 2013 to stockholders of record on July 1, 2013. The effect of the stock split has been recognized retroactively in all share data in the Condensed Consolidated Statements of Income, Notes to the Condensed Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

Subsequent Events

On March 4, 2014, we entered into a $250,000,000 Third Amended and Restated Credit Agreement with our senior lenders to refinance our working capital credit facilities, as more fully described in Note 9 to the Condensed Consolidated Financial Statements.

We performed a review of events subsequent to January 31, 2014. Based upon that review, no other subsequent events occurred that required updating to our Condensed Consolidated Financial Statements or disclosures.

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jan. 31, 2014	Jul. 31, 2013
CONDENSED CONSOLIDATED BALANCE SHEETS
Accounts receivable, allowance for doubtful accounts (in dollars)	$ 1,853	$ 1,265
Preferred Stock, par value (in dollars per share)	$ 1.00	$ 1.00
Preferred Stock, authorized shares	1,000,000	1,000,000
Preferred Stock, shares issued	0	0
Common Stock, par value (in dollars per share)	$ 0.10	$ 0.10
Common Stock, authorized shares	75,000,000	75,000,000
Common Stock, shares issued	45,516,277	45,181,655
Common Stock, shares outstanding	41,339,569	41,138,121
Treasury Stock, shares	4,176,708	4,043,534

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Income Taxes

6 Months Ended

Jan. 31, 2014

Income Taxes

Income Taxes

Note 11.                 Income Taxes

The consolidated effective tax rate was 36.7% and 36.3% for the six months ended January 31, 2014 and 2013, respectively. The increase in the consolidated effective tax rate was principally due to the geographic mix of pre-tax income and the impact of Federal tax legislation re-enacted in January 2013, as described below.

For the six months ended January 31, 2014 and 2013, approximately 96% and 97%, respectively, of our income before income taxes was generated from our United States operations, which had an overall effective tax rate of 37.4% and 36.8%, respectively. The higher overall effective tax rate for the six months ended January 31, 2014 was principally caused by Federal tax legislation that had expired in December 2011, but was re-enacted retroactively in January 2013, that enabled us to record the research and experimentation tax credit relating to the entire calendar 2012 in the six months ended January 31, 2013. Additionally, this same Federal tax legislation expired in December 2013 preventing us from recording a full research and experimentation tax credit for the six months ended January 31, 2014.

For the six months ended January 31, 2014 and 2013, approximately 4% and 3%, respectively, of our income before income taxes was generated from our operations in Canada, Singapore, the Netherlands and, for the six months ended January 31, 2014 as a result of the Jet Prep Acquisition, Israel. Collectively, these operations had an overall effective tax rate of 22.1% and 19.8% for the six months ended January 31, 2014 and 2013, respectively. All 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, 2012	$	124,000
Activity during fiscal 2013	—
Unrecognized tax benefits on July 31, 2013	124,000
Activity during the six months ended January 31, 2014	—
Unrecognized tax benefits on January 31, 2014	$	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, 2005.

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.

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Document and Entity Information	6 Months Ended
	Jan. 31, 2014	Feb. 28, 2014
Document and Entity Information
Entity Registrant Name	CANTEL MEDICAL CORP
Entity Central Index Key	0000019446
Document Type	10-Q
Document Period End Date	Jan. 31, 2014
Amendment Flag	false
Current Fiscal Year End Date	--07-31
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		41,348,810
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q2

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Commitments and Contingencies

6 Months Ended

Jan. 31, 2014

Commitments and Contingencies

Commitments and Contingencies

Note 12. Commitments and Contingencies

Long-Term Contractual Obligations

As of January 31, 2014, aggregate annual 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,
	2014		2015		2016		2017		2018		Thereafter		Total
	(Amounts in thousands)
Maturity of the credit facility (1)	$	—	$	—	$	—	$	—	$	—	$	74,500	$	74,500
Expected interest payments under the credit facility (2)	595		1,189		1,189		1,189		1,189		694		6,045
Minimum commitments under noncancelable operating leases	1,902		3,041		2,142		1,484		1,261		3,679		13,509
Contingent consideration (3)	—		170		518		915		1,279		2,868		5,750
Compensation agreements	2,293		3,436		988		425		350		846		8,338
Deferred compensation and other	28		77		43		41		36		27		252
Total contractual obligations	$	4,818	$	7,913	$	4,880	$	4,054	$	4,115	$	82,614	$	108,394

(1) The maturity of the credit facility reflects the terms under the March 4, 2014 modification, as further explained in Note 9 of the Condensed Consolidated Financial Statements.

(2) The expected interest payments under our credit facility reflect an interest rate of 1.60%, which was our weighted average interest rate on outstanding borrowings at January 31, 2014.

(3) The future potential payments of contingent consideration are shown at present value using a discount rate of 11.5%.

Operating Leases

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

Contingent Consideration

As part of the Jet Prep Acquisition on November 5, 2013, we recorded a $4,760,000 liability for the estimated fair value of contingent consideration payable to the sellers and a $990,000 liability for the estimated fair value of an assumed contingent obligation payable to the Israeli Government, as further described in Notes 3 and 6 to the Condensed Consolidated Financial Statements, which will be payable based on future sales of the Jet Prep Business (above a minimum threshold with respect to the contingent consideration liability.)  As such, the estimates of the annual required payments as well as the fair value of these contingent liabilities are subjective in nature and highly dependent on future sales projections. Additionally, since we will be continually re-measuring the contingent consideration liability and the assumed contingent obligation at each balance sheet date and recording changes in the respective fair values through our Condensed Consolidated Statements of Income, we may potentially have significant earnings volatility in our future results of operations until the completion of the seven year period with respect to the contingent consideration liability and until the assumed contingent obligation is satisfied, or until the sales of the Jet Prep Ltd. products no longer exist.

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 define 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, the Eagle Pure Water Business on December 31, 2012 and the Sterilator Business on January 7, 2014, we entered into multi-year employment agreements with certain executive officers of the acquired businesses.

Deferred Compensation and Other

Deferred compensation and other primarily includes deferred compensation arrangements for certain former Medivators directors and officers and is recorded in other long-term liabilities.

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014	Jan. 31, 2013
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Net sales	$ 119,042	$ 106,363	$ 237,314	$ 206,044
Cost of sales	66,707	61,212	133,480	117,166
Gross profit	52,335	45,151	103,834	88,878
Expenses:
Selling	16,077	13,723	31,841	27,136
General and administrative	15,557	12,382	30,721	24,430
Research and development	2,492	2,183	4,751	4,477
Total operating expenses	34,126	28,288	67,313	56,043
Income before interest and income taxes	18,209	16,863	36,521	32,835
Interest expense	645	791	1,302	1,437
Interest income	(15)	(16)	(28)	(29)
Income before income taxes	17,579	16,088	35,247	31,427
Income taxes	6,453	5,636	12,936	11,399
Net income	$ 11,126	$ 10,452	$ 22,311	$ 20,028
Earnings per common share:
Basic (in dollars per share)	$ 0.27	$ 0.26	$ 0.54	$ 0.49
Diluted (in dollars per share)	$ 0.27	$ 0.25	$ 0.54	$ 0.49
Dividends per common share (in dollars per share)			$ 0.05	$ 0.04

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Fair Value Measurements

6 Months Ended

Jan. 31, 2014

Fair Value Measurements

Fair Value Measurements

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, 2014 and 2013, 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.

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 agreed 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 the interest rate swap agreements relating to our Revolving Credit Facility during the three and six months ended January 31, 2014 and 2013 were recorded in accumulated other comprehensive income in the Condensed Consolidated Statements of Comprehensive Income. Amounts were reclassified from accumulated other comprehensive income in the period the hedged transaction affected earnings. Similarly, changes in fair value in the interest rate swap agreement relating to our Term Loan Facility during the three and six months ended January 31, 2014 and 2013 were recorded in accumulated other comprehensive income in the Condensed Consolidated Statements of Comprehensive Income until January 31, 2014, at which time the interest rate swap agreement was determined to be ineffective and the remaining fair value of the derivative instrument was recognized in interest expense, as further explained in Note 5 to the Condensed Consolidated Financial Statements.

On November 5, 2013, we recorded a $4,760,000 liability for the estimated fair value of contingent consideration and a $990,000 liability for the estimated fair value of an assumed contingent obligation payable to the Israeli Government relating to the Jet Prep 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 values of the contingent consideration liability and assumed contingent obligation were based on percentages of future sales projections of the Jet Prep Business, above a minimum threshold with respect to the contingent consideration, under various potential scenarios over a seven year period ending November 4, 2020 and weighting the probability of these outcomes.  As such, the determinations of fair values of these contingent liabilities are subjective in nature and highly dependent on future sales projections.  At the date of the acquisition, these cash flow projections were discounted using a rate of 11.5%. 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. These two liabilities will be adjusted periodically by recording changes in the fair value through our Condensed Consolidated Statements of Income driven by the time value of money and changes in the assumptions that were initially used in the valuations. Due to the structure of the acquisition, any such adjustments through our Condensed Consolidated Statements of Income will not be tax effected except for amounts in excess of $810,000 with respect to the assumed contingent obligation, therefore impacting our effective tax rate. At January 31, 2014, the estimated fair value of the contingent consideration and assumed contingent obligation remained at $4,760,000 and $990,000, respectively.

The actual contingent consideration and assumed contingent obligation have the potential of being between zero and a percentage of unlimited sales that could occur until the completion of the seven year period with respect to the contingent consideration liability and until the assumed contingent obligation is satisfied in full, or until the sales of the Jet Prep Ltd. products no longer exist. However, with respect to the contingent consideration, the different likely scenarios of future sales projections used in our fair value determination resulted in total potential future contingent consideration payments ranging between zero and approximately $12,000,000 and the weighted average present value of such scenarios resulted in a fair value of $4,760,000 at January 31, 2014. With respect to the assumed contingent obligation, the different likely scenarios of future sales projections used in our fair value determination resulted in total potential future payments ranging between zero and approximately $2,430,000 and the weighted average present value of such scenarios resulted in a fair value of $990,000 at January 31, 2014. Such fair value amounts would have been higher or lower if we had used different probability factors, future sales projections or discount factors. Given the subjective nature of the assumptions used in the determinations of fair value, we may potentially have significant earnings volatility in our future results of operations.

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 a three year price floor relating to the August 1, 2011 acquisition of the endoscopy procedural product business of Byrne Medical, Inc. (the “Byrne Medical Business” or the “Byrne Acquisition”). 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 ended 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. Based on actual gross profit results for the two year period ended July 31, 2013, contingent consideration was not earned.

After giving effect for the Company’s three-for-two stock splits, the stock portion of the consideration paid for the Byrne Acquisition consisted of 902,528 shares of Cantel common stock and was based on the closing price of Cantel common stock on the NYSE on July 29, 2011 ($11.08). Subject to certain conditions and limitations, under a three year price floor, 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 the sellers 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 recorded as a liability at fair value on the date of acquisition. The 902,528 shares of Cantel common stock were (i) placed in escrow at the time of the acquisition as security for certain indemnification obligations of the sellers and (ii) subjected to a multi-year lock-up feature prohibiting the sellers from selling or otherwise transferring the shares. In November 2013, one-third of the shares were released from escrow and the lock-up feature. Likewise, the three year price floor was modified to exclude the released shares and reduce the $10,000,000 value guaranty by one-third to $6,666,666.

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 a decrease to accrued expenses or other long-term liabilities 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.

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

	January 31, 2014
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Money markets	$	3,993,000	$	—	$	—	$	3,993,000
Total assets	$	3,993,000	$	—	$	—	$	3,993,000
Liabilities:
Accrued expenses:
Assumed contingent obligation	$	—	$	—	$	58,000	$	58,000
Interest rate swap agreement	—		94,000		—		94,000
Total accrued expenses	—		94,000		58,000		152,000
Contingent consideration:
Contingent consideration	—		—		4,760,000		4,760,000
Assumed contingent obligation	—		—		932,000		932,000
Other long-term liabilities:
Interest rate swap agreement	—		19,000		—		19,000
Total liabilities	$	—	$	113,000	$	5,750,000	$	5,863,000

	July 31, 2013
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Money markets	$	4,241,000	$	—	$	—	$	4,241,000
Total assets	$	4,241,000	$	—	$	—	$	4,241,000
Liabilities:
Accrued expenses:
Interest rate swap agreements	$	—	$	133,000	$	—	$	133,000
Total accrued expenses	—		133,000		—		133,000
Other long-term liabilities:
Price floor	—		—		45,000		45,000
Interest rate swap agreements	—		29,000		—		29,000
Total other long-term liabilities	—		29,000		45,000		74,000
Total liabilities	$	—	$	162,000	$	45,000	$	207,000

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:

									Jet Prep
	Byrne			Byrne			Jet Prep		Assumed
	Contingent			Price			Contingent		Contingent
	Consideration			Floor			Consideration		Obligation		Total
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		)
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		)
Balance, January 31, 2013	—			314,000			—		—		314,000
Total net unrealized gains included in general and administrative expense in earnings	—			(59,000		)	—		—		(59,000		)
Balance, April 30, 2013	—			255,000			—		—		255,000
Total net unrealized gains included in general and administrative expense in earnings	—			(210,000		)	—		—		(210,000		)
Balance, July 31, 2013	—			45,000			—		—		45,000
Total net unrealized gains included in general and administrative expense in earnings	—			(44,000		)	—		—		(44,000		)
Balance, October 31, 2013	—			1,000			—		—		1,000
Total net unrealized gains included in general and administrative expense in earnings	—			(1,000		)	—		—		(1,000		)
Net purchases, issuances, sales and settlements	—			—			4,760,000		990,000		5,750,000
Balance, January 31, 2014	$	—		$	—		$	4,760,000	$	990,000	$	5,750,000

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, equipment and other assets, 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. 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 are 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, 2013, 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, 2014 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, 2014 and July 31, 2013, 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, 2014 and July 31, 2013, 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.

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Derivatives

6 Months Ended

Jan. 31, 2014

Derivatives

Derivatives

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, 2014, all of our derivatives were designated as hedges, except for our remaining interest rate swap agreement, as further explained below. We do not hold any derivative financial instruments for speculative or trading purposes.

Changes in the value of (i) the Euro against the United States dollar, (ii) the Canadian dollar against the United States dollar, (iii) the Singapore dollar against the United States dollar and (iv) the British pound 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 United States dollars, Canadian dollars, Euros, Singapore dollars or British pounds, but must be converted into their functional currency.

In order to hedge against the impact of fluctuations in the value of (i) the Euro relative to the United States dollar, (ii) the Singapore dollar relative to the United States dollar and (iii) the British pound 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 Euros, Singapore dollars and British pounds forward, which contracts are one month in duration. These short-term contracts are designated as fair value hedge instruments. There were two foreign currency forward contracts with an aggregate value of $6,264,000 at January 31, 2014, which covered certain assets and liabilities that were denominated in currencies other than our subsidiaries’ functional currencies. Such contracts expired on February 28, 2014. 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, 2014, 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 $34,000 and $96,000, respectively, on the items hedged. 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.  Gains and losses related to hedging contracts to buy Euros, Singapore dollars and British pounds forward are immediately realized within general and administrative expenses due to the short-term nature of such contracts. We do not currently hedge against the impact of fluctuations in the value of the Canadian dollar relative to the United States dollar because the currency impact on our Canadian and United States subsidiaries’ assets closely offset the currency impact on our Canadian and United States subsidiaries’ liabilities effectively minimizing realized gains and losses.

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. Such interest rate swap agreements were designated as cash flow hedge instruments and were designed to be effective in offsetting changes in the cash flows related to the hedged borrowings. 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 was for the period that began August 8, 2012 and ended January 31, 2014, initially covering $25,000,000 of borrowings based on one-month LIBOR and thereafter reduced semi-annually by increments of $5,000,000, and the fixed interest cash flow was at a one month LIBOR rate of 0.496%. As more fully described in Note 6 to the Condensed Consolidated Financial Statements, we account for the interest rate swap agreements by initially 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, 2014, our formal assessment concluded that the changes in the fair value of both derivative instruments that began on August 8, 2012 have been highly effective. However, the remaining derivative instrument at January 31, 2014, which relates solely to our Term Loan Facility, was determined to be ineffective at January 31, 2014 due to the modifications to our credit facilities in March 2014, as more fully described in Note 9 to the Condensed Consolidated Financial Statements. Accordingly, the fair value of the interest rate swap agreement of $113,000 relating to our Term Loan Facility was recognized in interest expense in the Condensed Consolidated Statements of Income for the three and six months ended January 31, 2014 and future changes in the fair value of the derivative instrument will be recognized immediately in interest expense.

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Acquisitions (Tables)

6 Months Ended

Jan. 31, 2014

Sterilator Company, Inc.

Acquisitions

Schedule of purchase price allocated to the assets acquired and assumed liabilities based on estimated fair values

	Preliminary
Net Assets	Allocation
Current assets	$	538,000
Property, plant and equipment	535,000
Amortizable intangible assets (9- year weighted average life):
Customer relationships (11- year life)	130,000
Technology (8- year life)	510,000
Current liabilities	(321,000		)
Deferred income tax liabilities	(260,000		)
Net assets acquired	$	1,132,000

Jet Prep Ltd.

Acquisitions

Schedule of purchase price allocated to the assets acquired and assumed liabilities based on estimated fair values

	Preliminary
Net Assets	Allocation
Current assets	$	64,000
Property, plant and equipment	65,000
Amortizable intangible asset - Technology (7- year life):	5,050,000
Current liabilities	(100,000		)
Deferred income tax liabilities	(345,000		)
Net assets acquired	$	4,734,000

Siemens' Hemodialysis Water Business

Acquisitions

Schedule of purchase price allocated to the assets acquired and assumed liabilities based on estimated fair values

	Final
Net Assets	Allocation
Current assets	$	728,000
Property, plant and equipment	231,000
Amortizable intangible assets:
Customer relationships (12- year life)	4,310,000
Current liabilities	(415,000		)
Net assets acquired	$	4,854,000

Eagle Pure Water Systems, Inc.

Acquisitions

Schedule of purchase price allocated to the assets acquired and assumed liabilities based on estimated fair values

	Final
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

SPS Medical Supply Corp.

Acquisitions

Schedule of purchase price allocated to the assets acquired and assumed liabilities based on estimated fair values

	Final
Net Assets	Allocation
Current assets	$	4,810,000
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	$	11,756,000

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Accumulated Other Comprehensive Income (Loss)

6 Months Ended

Jan. 31, 2014

Accumulated Other Comprehensive Income (Loss)

Accumulated Other Comprehensive Income (Loss)

Note 13. Accumulated Other Comprehensive Income (Loss)

The components and changes in accumulated other comprehensive income (loss) for the three and six months ended January 31, 2014 and 2013 were as follows:

	Three Months Ended									Six Months Ended
	January 31, 2014									January 31, 2014
	Foreign									Foreign
	Currency			Interest Rate						Currency			Interest Rate
	Translation			Swap						Translation			Swap
	Adjustments			Agreements			Total			Adjustments			Agreements			Total
Beginning balance	$	10,807,000		$	(94,000	)	$	10,713,000		$	11,080,000		$	(103,000	)	$	10,977,000
Other comprehensive loss before reclassifications	(1,401,000		)	(14,000		)	(1,415,000		)	(1,674,000		)	(47,000		)	(1,721,000		)
Income tax effect on other comprehensive loss before reclassification	—			5,000			5,000			—			17,000			17,000
Reclassification adjustments to interest expense for losses on interest rate swaps included in net income during the period	—			48,000			48,000			—			96,000			96,000
Reclassification adjustments for ineffective hedge on interest rate swap included in net income during the period	—			113,000			113,000			—			113,000			113,000
Income tax effect on reclassification adjustments	—			(58,000		)	(58,000		)	—			(76,000		)	(76,000		)
Ending balance	$	9,406,000		$	—		$	9,406,000		$	9,406,000		$	—		$	9,406,000

	Three Months Ended									Six Months Ended
	January 31, 2013									January 31, 2013
	Foreign									Foreign
	Currency			Interest Rate						Currency			Interest Rate
	Translation			Swap						Translation			Swap
	Adjustments			Agreements			Total			Adjustments			Agreements			Total
Beginning balance	$	8,476,000		$	(187,000	)	$	8,289,000		$	8,385,000		$	(210,000	)	$	8,175,000
Other comprehensive income (loss) before reclassifications	89,000			4,000			93,000			211,000			(14,000		)	197,000
Income tax effect on other comprehensive income (loss) before reclassification	(25,000		)	(2,000		)	(27,000		)	(56,000		)	5,000			(51,000		)
Reclassification adjustments to interest expense for losses on interest rate swaps included in net income during the period	—			61,000			61,000			—			116,000			116,000
Income tax effect on reclassification adjustments	—			(21,000		)	(21,000		)	—			(42,000		)	(42,000		)
Ending balance	$	8,540,000		$	(145,000	)	$	8,395,000		$	8,540,000		$	(145,000	)	$	8,395,000

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Financing Arrangements

6 Months Ended

Jan. 31, 2014

Financing Arrangements

Financing Arrangements

Note 9.           Financing Arrangements

In March 2014, we modified our existing $100,000,000 senior secured revolving credit facility (the “Existing Revolving Credit Facility”) and $50,000,000 senior secured term loan facility (the “Existing Term Loan Facility”) by entering into a $250,000,000 Third Amended and Restated Credit Agreement dated as of March 4, 2014 (the “New Credit Agreement”). The New Credit Agreement includes a five-year $250,000,000 senior secured revolving facility with sublimits of up to $100,000,000 for borrowings in foreign currencies, $30,000,000 for letters of credit and $10,000,000 for swing line loans (the “New Revolving Credit Facility”).  The Existing Term Loan Facility was terminated after the outstanding balance was reassigned to the New Revolving Credit Facility. Subject to the satisfaction of certain conditions precedent including the consent of the lenders, the Company may from time to time increase the New Revolving Credit Facility by an aggregate amount not to exceed $100,000,000. The senior lenders include Bank of America N.A. (the lead bank and administrative agent), PNC Bank, National Association, and Wells Fargo Bank, National Association. The New Credit Agreement expires on March 4, 2019. Additionally, subject to certain restrictions and conditions (i) any of Cantel’s domestic or foreign subsidiaries may become borrowers and (ii) borrowings may occur in multi-currencies. Unamortized debt issuance costs recorded in other assets amounted to $619,000 at January 31, 2014, of which $90,000 related to the Existing Term Loan Facility and were expensed in March 2014. The remaining unamortized debt issuance cost relating to the Existing Revolving Credit Facility plus additional debt issuance cost of approximately $1,304,000 relating to the New Credit Agreement will be recorded in other assets and amortized over the life of the New Credit Agreement.

Borrowings under the New Credit Agreement bear interest at rates ranging from 0.25% to 1.25% above the lender’s base rate, or at rates ranging from 1.25% to 2.25% 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 Credit Agreement (“Consolidated EBITDA”). At January 31, 2014, the lender’s base rate was 3.25% and the LIBOR rates ranged from 0.16 % to 0.70%. The margins applicable to our outstanding borrowings were 0.25% above the lender’s base rate or 1.25% above LIBOR. Substantially all of our outstanding borrowings were under LIBOR contracts at January 31, 2014. The New Credit Agreement also provides for fees on the unused portion of our facilities at rates ranging from 0.20% to 0.40%, depending upon our Consolidated Leverage Ratio; such rate was 0.25% at January 31, 2014 and 0.20% at March 4, 2014.

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 agreed to exchange our variable interest cash flows with fixed interest cash flows provided by one of our existing senior lenders. With respect to our Existing 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%. As a result of the termination of our Existing Term Loan Facility, this interest rate swap will no longer be considered effective in mitigating the adverse impact on interest expense of increases in LIBOR. With respect to our Existing Revolving Credit Facility, the interest rate swap was for the period that began August 8, 2012 and ended 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 New 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, (ii) a pledge by Cantel of all of the outstanding shares of its United States-based subsidiaries and 65% of the outstanding shares of certain of Cantel’s foreign-based subsidiaries and (iii) a guaranty by Cantel’s domestic subsidiaries. We are in compliance with all financial and other covenants under the New Credit Agreement.

On January 31, 2014, we had $74,500,000 of outstanding borrowings, which consisted of $25,000,000 and $49,500,000 under the Existing Term Loan Facility and the Existing Revolving Credit Facility, respectively.  Subsequent to January 31, 2014, the outstanding balance under the Existing Term Loan Facility was reassigned to the New Revolving Credit Facility and we repaid $2,500,000 resulting in total outstanding borrowings of $72,000,000 at March 4, 2014, none of which is required to be repaid until March 2019.

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Operating Segments (Details 2) (USD $)	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014	Jan. 31, 2013
Information as to operating segments
Net sales	$ 119,042,000	$ 106,363,000	$ 237,314,000	$ 206,044,000
Operating income	18,209,000	16,863,000	36,521,000	32,835,000
Interest expense, net	(630,000)	(775,000)	(1,274,000)	(1,408,000)
Income before income taxes	17,579,000	16,088,000	35,247,000	31,427,000
Operating Segments
Information as to operating segments
Operating income	22,116,000	20,334,000	43,845,000	39,117,000
General corporate expenses
Information as to operating segments
Operating income	(3,907,000)	(3,471,000)	(7,324,000)	(6,282,000)
Endoscopy
Information as to operating segments
Net sales	44,587,000	39,422,000	88,200,000	76,101,000
Operating income	8,218,000	9,469,000	16,402,000	17,145,000
Water Purification and Filtration
Information as to operating segments
Net sales	40,719,000	32,369,000	80,469,000	65,530,000
Operating income	7,108,000	3,719,000	13,165,000	8,346,000
Healthcare Disposables
Information as to operating segments
Net sales	24,716,000	24,339,000	50,965,000	44,294,000
Operating income	4,563,000	4,709,000	10,282,000	8,800,000
Dialysis
Information as to operating segments
Net sales	7,611,000	8,760,000	14,920,000	16,947,000
Operating income	1,996,000	2,312,000	3,760,000	4,488,000
Other
Information as to operating segments
Net sales	1,409,000	1,473,000	2,760,000	3,172,000
Operating income	$ 231,000	$ 125,000	$ 236,000	$ 338,000

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Intangible Assets and Goodwill

6 Months Ended

Jan. 31, 2014

Intangible Assets and Goodwill

Intangible Assets and Goodwill

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 $2,619,000 and $5,245,000 for the three and six months ended January 31, 2014, respectively, and $2,573,000 and $4,840,000 for the three and six months ended January 31, 2013, 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, 2014
			Accumulated
	Gross		Amortization			Net
Intangible assets with finite lives:
Customer relationships	$	71,949,000	$	(28,068,000	)	$	43,881,000
Technology	25,954,000		(10,203,000		)	15,751,000
Brand names	12,680,000		(8,738,000		)	3,942,000
Non-compete agreements	3,129,000		(633,000		)	2,496,000
Patents and other registrations	1,867,000		(702,000		)	1,165,000
	115,579,000		(48,344,000		)	67,235,000
Trademarks and trade names	9,241,000		—			9,241,000
Total intangible assets	$	124,820,000	$	(48,344,000	)	$	76,476,000

	July 31, 2013
			Accumulated
	Gross		Amortization			Net
Intangible assets with finite lives:
Customer relationships	$	72,142,000	$	(25,379,000	)	$	46,763,000
Technology	21,006,000		(9,642,000		)	11,364,000
Brand names	12,680,000		(8,045,000		)	4,635,000
Non-compete agreements	3,159,000		(541,000		)	2,618,000
Patents and other registrations	1,768,000		(606,000		)	1,162,000
	110,755,000		(44,213,000		)	66,542,000
Trademarks and trade names	9,387,000		—			9,387,000
Total intangible assets	$	120,142,000	$	(44,213,000	)	$	75,929,000

Estimated amortization expense of our intangible assets for the remainder of fiscal 2014 and the next five years is as follows:

Six month period ending July 31, 2014	$	5,513,000
Fiscal 2015	11,025,000
Fiscal 2016	7,786,000
Fiscal 2017	7,210,000
Fiscal 2018	6,933,000
Fiscal 2019	6,610,000

Goodwill changed during fiscal 2013 and the six months ended January 31, 2014 as follows:

			Water
			Purification			Healthcare							Total
	Endoscopy		and Filtration			Disposables		Dialysis		Other			Goodwill
Balance, July 31, 2012	$	59,230,000	$	53,288,000		$	55,864,000	$	8,133,000	$	7,140,000		$	183,655,000
Acquisitions	—		4,043,000			24,244,000		—		—			28,287,000
Foreign currency translation	—		(152,000		)	—		—		(172,000		)	(324,000		)
Balance, July 31, 2013	59,230,000		57,179,000			80,108,000		8,133,000		6,968,000			211,618,000
Acquisitions	6,348,000		—			1,697,000		—		—			8,045,000
Foreign currency translation	—		(456,000		)	—		—		(530,000		)	(986,000		)
Balance, January 31, 2014	$	65,578,000	$	56,723,000		$	81,805,000	$	8,133,000	$	6,438,000		$	218,677,000

On July 31, 2013, 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, 2013, the average fair value of all of our reporting units exceeded book value by substantial amounts, except our Specialty Packaging segment, which had an average estimated fair value that approximated book value. At January 31, 2014, goodwill relating to our Specialty Packaging reporting unit was $6,438,000. We believe the most significant assumptions impacting the impairment assessment of Specialty Packaging relate to an assumed compounded annual sales growth of 10.7% and future operating efficiencies included in our projections of future operating results and cash flows of this segment, which projections 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, 2014, management concluded that no events or changes in circumstances have occurred during the three and six months ended January 31, 2014 that would indicate that the carrying amount of our intangible assets and goodwill may not be recoverable.

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Warranties

6 Months Ended

Jan. 31, 2014

Warranties

Warranties

Note 8.           Warranties

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

	Three Months Ended						Six Months Ended
	January 31,						January 31,
	2014			2013			2014			2013
Beginning balance	$	1,261,000		$	1,438,000		$	1,261,000		$	1,667,000
Provisions	546,000			336,000			1,237,000			703,000
Settlements	(605,000		)	(542,000		)	(1,296,000		)	(1,138,000		)
Foreign currency translation	(1,000		)	—			(1,000		)	—
Ending balance	$	1,201,000		$	1,232,000		$	1,201,000		$	1,232,000

The warranty provisions and settlements for the three and six months ended January 31, 2014 and 2013 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.

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Earnings Per Common Share

6 Months Ended

Jan. 31, 2014

Earnings Per Common Share

Earnings Per Common Share

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,
	2014			2013			2014			2013
Numerator for basic and diluted earnings per share:
Net income	$	11,126,000		$	10,452,000		$	22,311,000		$	20,028,000
Less income allocated to participating securities	(149,000		)	(160,000		)	(309,000		)	(317,000		)
Net income available to common stockholders	$	10,977,000		$	10,292,000		$	22,002,000		$	19,711,000
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	40,754,707			40,247,046			40,668,731			40,122,245
Dilutive effect of stock options using the treasury stock method and the average market price for the period	183,995			314,004			188,201			338,331
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock	40,938,702			40,561,050			40,856,932			40,460,576
Earnings per share attributable to common stock:
Basic earnings per share	$	0.27		$	0.26		$	0.54		$	0.49
Diluted earnings per share	$	0.27		$	0.25		$	0.54		$	0.49
Stock options excluded from weighted average dilutive common shares outstanding because their inclusion would have been antidilutive	30,000			52,500			—			—

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,
	2014	2013	2014	2013
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock	40,938,702	40,561,050	40,856,932	40,460,576
Participating securities	554,029	631,364	576,119	655,627
Total weighted average number of shares and common stock equivalents attributable to both common stock and participating securities	41,492,731	41,192,414	41,433,051	41,116,203

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Stock-Based Compensation (Details 2) (USD $)	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014	Jan. 31, 2013	Jul. 31, 2013
Stock-Based Compensation
Total unrecognized stock-based compensation expense, before income taxes, related to total nonvested stock options and stock awards (in dollars)	$ 10,187,000		$ 10,187,000
Remaining weighted average period over which unrecognized stock-based compensation expense is expected to be recognized			22 months
Stock-based awards, additional disclosure
Reissued shares from treasury stock for exercise of stock options and grant of stock awards (in shares)		282,978		474,266
Deduction in income tax due to exercise of options and vesting of restricted stock (in dollars)			4,516,000	2,923,000
Increase in additional paid-in capital due to excess tax benefit on stock-based compensation expense (in dollars)			3,297,000	1,868,000
Restricted shares
Number of Shares
Nonvested stock awards at the beginning of the period (in shares)			605,767
Granted (in shares)			247,136
Cancelled (in shares)			(4,620)
Vested (in shares)			(299,611)
Nonvested stock awards at the end of the period (in shares)	548,672		548,672
Weighted Average Fair Value
Nonvested stock awards at the beginning of the period (in dollars per share)			$ 11.96
Granted (in dollars per share)			$ 31.84
Cancelled (in dollars per share)			$ 9.02
Vested (in dollars per share)			$ 10.51
Nonvested stock awards at the end of the period (in dollars per share)	$ 21.73		$ 21.73
Stock options
Weighted-Average Black-Scholes Option Valuation Assumptions
Dividend yield (as a percent)			0.28%	0.37%
Expected volatility (as a percent)			42.70%	50.90%
Risk-free interest rate (as a percent)			1.44%	0.67%
Expected lives			5 years	5 years
Stock options, additional disclosure
Weighted average fair value of all options granted (in dollars per share)			$ 12.08	$ 7.27
Aggregate intrinsic value of all options exercised (in dollars)	$ 1,748,000	$ 3,224,000	$ 2,419,000	$ 3,488,000
Number of Shares
Outstanding at the beginning of the period (in shares)			403,831
Options granted (in shares)			30,000	52,500
Exercised (in shares)			(92,106)
Outstanding at the end of the period (in shares)	341,725		341,725
Exercisable at the end of the period (in shares)	276,725		276,725		351,331
Weighted Average Exercise Price
Outstanding at the beginning of the period (in dollars per share)			$ 8.25
Granted (in dollars per share)			$ 31.81
Exercised (in dollars per share)			$ 6.69
Outstanding at the end of the period (in dollars per share)	$ 10.74		$ 10.74
Exercisable at the end of the period (in dollars per share)	$ 7.66		$ 7.66		$ 6.94

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Financing Arrangements (Details) (USD $)	1 Months Ended	6 Months Ended			12 Months Ended	6 Months Ended	12 Months Ended	6 Months Ended	0 Months Ended			6 Months Ended	0 Months Ended			6 Months Ended	0 Months Ended		0 Months Ended		0 Months Ended		0 Months Ended	6 Months Ended		6 Months Ended		0 Months Ended	6 Months Ended		6 Months Ended
	Feb. 29, 2012 lender	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014 Minimum	Jul. 31, 2013 Minimum	Jan. 31, 2014 Maximum	Jul. 31, 2013 Maximum	Jan. 31, 2014 Credit Agreement	Mar. 04, 2014 Credit Agreement Subsequent Events	Mar. 04, 2014 Credit Agreement Minimum Subsequent Events	Mar. 04, 2014 Credit Agreement Maximum Subsequent Events	Jan. 31, 2014 Credit Agreement Lender's base rate	Mar. 04, 2014 Credit Agreement Lender's base rate Subsequent Events	Mar. 04, 2014 Credit Agreement Lender's base rate Minimum Subsequent Events	Mar. 04, 2014 Credit Agreement Lender's base rate Maximum Subsequent Events	Jan. 31, 2014 Credit Agreement LIBOR	Mar. 04, 2014 Credit Agreement LIBOR Subsequent Events	Jan. 31, 2014 Credit Agreement LIBOR Minimum	Mar. 04, 2014 Credit Agreement LIBOR Minimum Subsequent Events	Jan. 31, 2014 Credit Agreement LIBOR Maximum	Mar. 04, 2014 Credit Agreement LIBOR Maximum Subsequent Events	Jan. 31, 2014 Revolving Credit Facility	Mar. 04, 2014 Revolving Credit Facility Subsequent Events	Jan. 31, 2014 Revolving Credit Facility Interest rate swap with fixed interest cash flows Cash flow hedge instruments	Aug. 08, 2012 Revolving Credit Facility Interest rate swap with fixed interest cash flows Cash flow hedge instruments	Jan. 31, 2014 Revolving Credit Facility One month LIBOR Interest rate swap with fixed interest cash flows Cash flow hedge instruments	Jan. 31, 2014 Term Loan Facility	Mar. 04, 2014 Term Loan Facility Subsequent Events	Jan. 31, 2014 Term Loan Facility Interest rate swap with fixed interest cash flows Cash flow hedge instruments	Aug. 08, 2012 Term Loan Facility Interest rate swap with fixed interest cash flows Cash flow hedge instruments	Jan. 31, 2014 Term Loan Facility One month LIBOR Interest rate swap with fixed interest cash flows Cash flow hedge instruments	Mar. 04, 2014 Borrowings of foreign currency Subsequent Events	Mar. 04, 2014 Letters of credit Subsequent Events	Mar. 04, 2014 Swing line loans Subsequent Events
Financing Arrangements
Maximum borrowing capacity									$ 250,000,000													$ 100,000,000	$ 250,000,000									$ 100,000,000	$ 30,000,000	$ 10,000,000
Borrowings																											50,000,000
Term of line of credit facility																							5 years
Maximum additional borrowing capacity available at the entity's option																							100,000,000
Unamortized debt issuance costs		619,000																									90,000
Additional debt issuance costs									1,304,000
Margin on reference rate (as a percent)												0.25%		0.25%	1.25%	1.25%			1.25%		2.25%
Reference rate, description				One month LIBOR	One month LIBOR	Twelve month LIBOR	Twelve month LIBOR					lender's base rate	lender's base rate			LIBOR	LIBOR
Reference rate (as a percent)												0.3250						0.0016		0.0070
Fees on unused portion of credit facilities (as a percent)								0.25%	0.20%	0.20%	0.40%
Number of existing senior lenders of debt, whose variable interest cash flows will be exchanged by the entity with fixed interest cash flows	1
Borrowing initially hedged																									25,000,000					40,000,000
Reference rate, description																										one month LIBOR					one month LIBOR
Interest rate (as a percent)																										0.496%					0.664%
Quarterly reduction in borrowings hedged																													2,500,000
Semi-annual reduction in borrowings hedged																								5,000,000
Shares of foreign subsidiaries pledged as security (as a percent)									65.00%
Outstanding borrowings		74,500,000																				49,500,000					25,000,000	72,000,000
Repayment of borrowings		$ 5,000,000	$ 5,000,000																									$ 2,500,000

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Legal Proceedings

6 Months Ended

Jan. 31, 2014

Legal Proceedings

Legal Proceedings

Note 15. Legal Proceedings

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

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Warranties (Tables)

6 Months Ended

Jan. 31, 2014

Warranties

Summary of activity in warranty reserves

	Three Months Ended						Six Months Ended
	January 31,						January 31,
	2014			2013			2014			2013
Beginning balance	$	1,261,000		$	1,438,000		$	1,261,000		$	1,667,000
Provisions	546,000			336,000			1,237,000			703,000
Settlements	(605,000		)	(542,000		)	(1,296,000		)	(1,138,000		)
Foreign currency translation	(1,000		)	—			(1,000		)	—
Ending balance	$	1,201,000		$	1,232,000		$	1,201,000		$	1,232,000

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Intangible Assets and Goodwill (Details 3) (USD $)	6 Months Ended	12 Months Ended	6 Months Ended		6 Months Ended	12 Months Ended	6 Months Ended	12 Months Ended				6 Months Ended	12 Months Ended
	Jan. 31, 2014	Jul. 31, 2013	Jan. 31, 2014 Endoscopy	Jul. 31, 2012 Endoscopy	Jan. 31, 2014 Water Purification and Filtration	Jul. 31, 2013 Water Purification and Filtration	Jan. 31, 2014 Healthcare Disposables	Jul. 31, 2013 Healthcare Disposables	Jan. 31, 2014 Dialysis	Jul. 31, 2013 Dialysis	Jul. 31, 2012 Dialysis	Jan. 31, 2014 Other	Jul. 31, 2013 Other	Jan. 31, 2014 Specialty Packaging segment
Changes in Goodwill
Balance at the beginning of the period	$ 211,618,000	$ 183,655,000	$ 59,230,000	$ 59,230,000	$ 57,179,000	$ 53,288,000	$ 80,108,000	$ 55,864,000	$ 8,133,000	$ 8,133,000	$ 8,133,000	$ 6,968,000	$ 7,140,000	$ 6,438,000
Acquisitions	8,045,000	28,287,000	6,348,000			4,043,000	1,697,000	24,244,000
Foreign currency translation	(986,000)	(324,000)			(456,000)	(152,000)						(530,000)	(172,000)
Balance at the end of the period	$ 218,677,000	$ 211,618,000	$ 65,578,000	$ 59,230,000	$ 56,723,000	$ 57,179,000	$ 81,805,000	$ 80,108,000	$ 8,133,000	$ 8,133,000	$ 8,133,000	$ 6,438,000	$ 6,968,000	$ 6,438,000
Assumed compounded annual sales growth impacting the impairment assessments (as a percent)														10.70%

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Derivatives (Details) (USD $)	1 Months Ended				3 Months Ended		6 Months Ended		3 Months Ended	6 Months Ended			6 Months Ended			6 Months Ended
	Feb. 29, 2012 lender	Jan. 31, 2014	Jan. 31, 2014 Term Loan Facility	Jan. 31, 2014 Revolving Credit Facility	Jan. 31, 2014 Foreign currency forward contracts Fair value hedge instruments contract	Jan. 31, 2013 Foreign currency forward contracts Fair value hedge instruments	Jan. 31, 2014 Foreign currency forward contracts Fair value hedge instruments contract	Jan. 31, 2013 Foreign currency forward contracts Fair value hedge instruments	Jan. 31, 2014 Interest rate swap agreements Term Loan Facility	Jan. 31, 2014 Interest rate swap agreements Term Loan Facility	Jan. 31, 2014 Interest rate swap agreements Cash flow hedge instruments Term Loan Facility	Aug. 08, 2012 Interest rate swap agreements Cash flow hedge instruments Term Loan Facility	Jan. 31, 2014 Interest rate swap agreements Cash flow hedge instruments Term Loan Facility One month LIBOR	Jan. 31, 2014 Interest rate swap agreements Cash flow hedge instruments Revolving Credit Facility	Aug. 08, 2012 Interest rate swap agreements Cash flow hedge instruments Revolving Credit Facility	Jan. 31, 2014 Interest rate swap agreements Cash flow hedge instruments Revolving Credit Facility One month LIBOR
Derivatives
Term of contracts							1 month
Number of contracts					2		2
Aggregate value of contracts					$ 6,264,000		$ 6,264,000
Term of renewed contracts							1 month
Net currency conversion loss, net of tax					34,000	29,000	96,000	44,000
Number of existing senior lenders of debt, whose variable interest cash flows will be exchanged by the entity with fixed interest cash flows	1
Borrowing initially hedged												40,000,000			25,000,000
Reference rate, description													one month LIBOR			one month LIBOR
Quarterly reduction in borrowings hedged											2,500,000
Semi-annual reduction in borrowings hedged														5,000,000
Interest rate (as a percent)													0.664%			0.496%
Outstanding borrowings		74,500,000	25,000,000	49,500,000
Fair value of interest rate swap recognized in interest expense									$ 113,000	$ 113,000

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014	Jan. 31, 2013
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$ 11,126	$ 10,452	$ 22,311	$ 20,028
Other comprehensive (loss) income:
Foreign currency translation, net of tax	(1,401)	64	(1,674)	155
Unrealized holding losses on interest rate swaps arising during the period, net of tax	(9)	2	(30)	(9)
Reclassification adjustments to interest expense for losses on interest rate swaps included in net income during the period, net of tax	30	40	60	74
Reclassification adjustments to interest expense for ineffective hedge on interest rate swap included in net income during the period, net of tax	73		73
Total other comprehensive (loss) income, net of tax	(1,307)	106	(1,571)	220
Comprehensive income	$ 9,819	$ 10,558	$ 20,740	$ 20,248

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Recent Accounting Pronouncements

6 Months Ended

Jan. 31, 2014

Recent Accounting Pronouncements

Recent Accounting Pronouncements

Note 4. Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” (“ASU 2013-11”), which requires that a liability related to an unrecognized tax benefit be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 is expected to have no impact on our financial condition, results of operations or cash flows.

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Accumulated Other Comprehensive Income (Loss) (Details) (USD $)	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014	Jan. 31, 2013
Components and changes in accumulated other comprehensive income (loss)
Balance at the beginning of the period	$ 10,713,000	$ 8,289,000	$ 10,977,000	$ 8,175,000
Other comprehensive income (loss) before reclassifications	(1,415,000)	93,000	(1,721,000)	197,000
Income tax effect on other comprehensive income (loss) before reclassifications	5,000	(27,000)	17,000	(51,000)
Reclassification adjustments to interest expense for losses on interest rate swaps included in net income during the period	48,000	61,000	96,000	116,000
Reclassification adjustments for ineffective hedge on interest rate swap included in net income during the period	113,000		113,000
Income tax effect on reclassification adjustments	(58,000)	(21,000)	(76,000)	(42,000)
Balance at the end of the period	9,406,000	8,395,000	9,406,000	8,395,000
Foreign Currency Translation Adjustments
Components and changes in accumulated other comprehensive income (loss)
Balance at the beginning of the period	10,807,000	8,476,000	11,080,000	8,385,000
Other comprehensive income (loss) before reclassifications	(1,401,000)	89,000	(1,674,000)	211,000
Income tax effect on other comprehensive income (loss) before reclassifications		(25,000)		(56,000)
Balance at the end of the period	9,406,000	8,540,000	9,406,000	8,540,000
Interest Rate Swap Agreements
Components and changes in accumulated other comprehensive income (loss)
Balance at the beginning of the period	(94,000)	(187,000)	(103,000)	(210,000)
Other comprehensive income (loss) before reclassifications	(14,000)	4,000	(47,000)	(14,000)
Income tax effect on other comprehensive income (loss) before reclassifications	5,000	(2,000)	17,000	5,000
Reclassification adjustments to interest expense for losses on interest rate swaps included in net income during the period	48,000	61,000	96,000	116,000
Reclassification adjustments for ineffective hedge on interest rate swap included in net income during the period	113,000		113,000
Income tax effect on reclassification adjustments	(58,000)	(21,000)	(76,000)	(42,000)
Balance at the end of the period		$ (145,000)		$ (145,000)

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Earnings Per Common Share (Tables)

6 Months Ended

Jan. 31, 2014

Earnings Per Common Share

Schedule of 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,
	2014			2013			2014			2013
Numerator for basic and diluted earnings per share:
Net income	$	11,126,000		$	10,452,000		$	22,311,000		$	20,028,000
Less income allocated to participating securities	(149,000		)	(160,000		)	(309,000		)	(317,000		)
Net income available to common stockholders	$	10,977,000		$	10,292,000		$	22,002,000		$	19,711,000
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	40,754,707			40,247,046			40,668,731			40,122,245
Dilutive effect of stock options using the treasury stock method and the average market price for the period	183,995			314,004			188,201			338,331
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock	40,938,702			40,561,050			40,856,932			40,460,576
Earnings per share attributable to common stock:
Basic earnings per share	$	0.27		$	0.26		$	0.54		$	0.49
Diluted earnings per share	$	0.27		$	0.25		$	0.54		$	0.49
Stock options excluded from weighted average dilutive common shares outstanding because their inclusion would have been antidilutive	30,000			52,500			—			—

Schedule of reconciliation of weighted average number of shares and common stock equivalents attributable to common stock to the Company's total weighted average number of shares and common stock equivalents including participating securities

	Three Months Ended		Six Months Ended
	January 31,		January 31,
	2014	2013	2014	2013
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock	40,938,702	40,561,050	40,856,932	40,460,576
Participating securities	554,029	631,364	576,119	655,627
Total weighted average number of shares and common stock equivalents attributable to both common stock and participating securities	41,492,731	41,192,414	41,433,051	41,116,203

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Acquisitions (Details 4) (Eagle Pure Water Systems, Inc., USD $)	0 Months Ended
	Dec. 31, 2012 project
Acquisitions
Revenues generated by acquiree in latest fiscal year before the business acquisition	$ 500,000
Consideration for the transaction	870,000
Net Assets
Current assets	8,000
Property, plant and equipment	70,000
Current liabilities	(5,000)
Net assets acquired	273,000
Amortizable intangible assets, useful life	3 years
Number of in-process research and development projects acquired	0
Goodwill deductible for income tax purposes	597,000
Customer relationships
Net Assets
Amortizable intangible assets	150,000
Amortizable intangible assets, useful life	3 years
Brand names
Net Assets
Amortizable intangible assets	18,000
Amortizable intangible assets, useful life	3 years
Non-compete agreement
Net Assets
Amortizable intangible assets	$ 32,000
Amortizable intangible assets, useful life	5 years

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Operating Segments

6 Months Ended

Jan. 31, 2014

Operating Segments

Operating Segments

Note 14. Operating Segments

Cantel Medical is a leading global company dedicated to delivering innovative infection prevention and control products and services for patients, caregivers, and other healthcare providers which improve outcomes, enhance safety and help save lives.  Our products include specialized medical device reprocessing systems for endoscopy and renal dialysis, advanced water purification equipment, sterilants, disinfectants and cleaners, sterility assurance monitoring products for hospitals and dental clinics, disposable infection control products primarily for dental and GI endoscopy markets, dialysate concentrates, hollow fiber membrane filtration and separation products, and specialty packaging for infectious and biological specimens. Additionally, we provide technical service for our products.

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.

During the fourth quarter of fiscal 2013, we changed our internal reporting processes by combining our Therapeutic Filtration and Chemistries operating segments, previously reported in the Other reporting segment, with our Water Purification and Filtration reporting segment to reflect the way the Company, through its executive management, manages, allocates resources and measures the performance of its businesses. All periods presented have been recast to reflect these changes.

None of our customers accounted for 10% or more of our consolidated net sales for the six months ended January 31, 2014 and 2013, except for DaVita Inc. (“DaVita”), which accounted for approximately 10.9%, or approximately $25,948,000, for the six months ended January 31, 2014 and approximately 10.3%, or $21,290,000, for the six months ended January 31, 2013, of our consolidated net sales. For the six months ended January 31, 2014, DaVita accounted for approximately 25.3% and 37.6% 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. This segment also offers disposable infection control products intended to eliminate the challenges associated with proper cleaning and high-level disinfection of numerous reusable components used in gastrointestinal 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 membrane filtration and separation technologies 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 sterilants, disinfectants and decontamination services used in various applications for infection prevention and control.

DaVita and another large customer accounted for approximately 25.3% and 21.9%, respectively, of our Water Purification and Filtration segment net sales for the six months ended January 31, 2014. Combined, these two customers accounted for approximately 18.3% of our consolidated net sales for the six months ended January 31, 2014.

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 manufactures and provides biological and chemical indicators for sterility assurance monitoring services in the acute-care, alternate-care and dental markets.

Four customers collectively accounted for approximately 52.3% of our Healthcare Disposables segment net sales and approximately 11.2% of our consolidated net sales for the six months ended January 31, 2014.

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.

Other

In accordance with quantitative thresholds established by ASC 280, the Specialty Packaging operating segment is reported in the Other reporting segment.

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.

The operating segments follow the same accounting policies used for our Condensed Consolidated Financial Statements as described in Note 2 to the 2013 Form 10-K.

Information as to operating segments is summarized below:

	Three Months Ended						Six Months Ended
	January 31,						January 31,
	2014			2013			2014			2013
Net sales:
Endoscopy	$	44,587,000		$	39,422,000		$	88,200,000		$	76,101,000
Water Purification and Filtration	40,719,000			32,369,000			80,469,000			65,530,000
Healthcare Disposables	24,716,000			24,339,000			50,965,000			44,294,000
Dialysis	7,611,000			8,760,000			14,920,000			16,947,000
Other	1,409,000			1,473,000			2,760,000			3,172,000
Total	$	119,042,000		$	106,363,000		$	237,314,000		$	206,044,000
Operating income:
Endoscopy	$	8,218,000		$	9,469,000		$	16,402,000		$	17,145,000
Water Purification and Filtration	7,108,000			3,719,000			13,165,000			8,346,000
Healthcare Disposables	4,563,000			4,709,000			10,282,000			8,800,000
Dialysis	1,996,000			2,312,000			3,760,000			4,488,000
Other	231,000			125,000			236,000			338,000
	22,116,000			20,334,000			43,845,000			39,117,000
General corporate expenses	(3,907,000		)	(3,471,000		)	(7,324,000		)	(6,282,000		)
Interest expense, net	(630,000		)	(775,000		)	(1,274,000		)	(1,408,000		)
Income before income taxes	$	17,579,000		$	16,088,000		$	35,247,000		$	31,427,000