**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.   20549**

 

**Form 10-Q**

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

For the quarterly periodended **April 30, 2010.**

 

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

 

For the transition periodfrom            to          .

 

Commissionfile number:   001-31337

 

**CANTEL MEDICAL CORP.**

(Exactname 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) |

 

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

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

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

 

Number of shares of Common Stock outstanding as of May 31,2010: 16,855,033.

 

 

 

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PART I -FINANCIAL INFORMATION

ITEM 1. -FINANCIAL STATEMENTS

CANTEL MEDICALCORP.

CONDENSEDCONSOLIDATED BALANCE SHEETS

(Dollar Amounts inThousands, Except Share Data)

(Unaudited)

 

 
| ** **                                                                                                                                                                                                                     | ** ** | **April 30,** | ** ** | **July 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                                     | ** ** | **2010**           | ** ** | **2009**          | ** ** |
| **Assets**                                                                                                                                                                                                                     |       |               |       |              |       |
| Current assets:                                                                                                                                                                                                                |       |               |       |              |       |
| Cash and cash equivalents                                                                                                                                                                                                      |       | $                  | 19,165     |              | $          | 23,368 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $864 at April 30  and $1,080 at July 31                                                                                                              |       | 29,879             |       | 30,450            |       |
| Inventories:                                                                                                                                                                                                                   |       |               |       |              |       |
| Raw materials                                                                                                                                                                                                                  |       | 14,827             |       | 10,980            |       |
| Work-in-process                                                                                                                                                                                                                |       | 5,155              |       | 3,074             |       |
| Finished goods                                                                                                                                                                                                                 |       | 16,017             |       | 15,146            |       |
| Total inventories                                                                                                                                                                                                              |       | 35,999             |       | 29,200            |       |
| Deferred income taxes                                                                                                                                                                                                          |       | 1,941              |       | 1,898             |       |
| Prepaid expenses and other current assets                                                                                                                                                                                      |       | 4,768              |       | 3,994             |       |
| Total current assets                                                                                                                                                                                                           |       | 91,752             |       | 88,910            |       |
| Property and equipment, net                                                                                                                                                                                                    |       | 35,281             |       | 35,968            |       |
| Intangible assets, net                                                                                                                                                                                                         |       | 33,500             |       | 37,042            |       |
| Goodwill                                                                                                                                                                                                                       |       | 115,627            |       | 114,995           |       |
| Other assets                                                                                                                                                                                                                   |       | 1,151              |       | 956               |       |
|                                                                                                                                                                                                                           |       | $                  | 277,311    |              | $          | 277,871 |   |
| **Liabilities and stockholders’  equity**                                                                                                                                                                                 |       |               |       |              |       |
| Current liabilities:                                                                                                                                                                                                           |       |               |       |              |       |
| Current portion of long-term debt                                                                                                                                                                                              |       | $                  | 10,000     |              | $          | 10,000 |   |
| Accounts payable                                                                                                                                                                                                               |       | 8,993              |       | 8,948             |       |
| Compensation payable                                                                                                                                                                                                           |       | 7,739              |       | 10,431            |       |
| Earnout payable                                                                                                                                                                                                                |       | —             |       | 157               |       |
| Accrued expenses                                                                                                                                                                                                               |       | 6,564              |       | 6,583             |       |
| Deferred revenue                                                                                                                                                                                                               |       | 4,122              |       | 2,819             |       |
| Income taxes payable                                                                                                                                                                                                           |       | —             |       | 175               |       |
| Total current liabilities                                                                                                                                                                                                      |       | 37,418             |       | 39,113            |       |
|                                                                                                                                                                                                                           |       |               |       |              |       |
| Long-term debt                                                                                                                                                                                                                 |       | 15,000             |       | 33,300            |       |
| Deferred income taxes                                                                                                                                                                                                          |       | 17,195             |       | 16,378            |       |
| Other long-term liabilities                                                                                                                                                                                                    |       | 1,477              |       | 1,964             |       |
|                                                                                                                                                                                                                           |       |               |       |              |       |
| Stockholders’ equity:                                                                                                                                                                                                     |       |               |       |              |       |
| Preferred  Stock, par value $1.00 per share; authorized 1,000,000 shares; none issued                                                                                                                                          |       | —             |       | —            |       |
| Common  Stock, par value $.10 per share; authorized 30,000,000 shares; April 30  - 18,207,523 shares issued and 16,855,988 shares outstanding; July 31 -  17,883,873 shares issued and 16,643,727 shares outstanding |       | 1,821              |       | 1,788             |       |
| Additional paid-in capital                                                                                                                                                                                                     |       | 92,732             |       | 87,169            |       |
| Retained earnings                                                                                                                                                                                                              |       | 116,582            |       | 102,103           |       |
| Accumulated other comprehensive income                                                                                                                                                                                         |       | 9,526              |       | 8,281             |       |
| Treasury  Stock, at cost; April 30 - 1,351,535 shares; July 31 - 1,240,146  shares                                                                                                                                   |       | (14,440            | )          | (12,225           | )          |
| Total stockholders’ equity                                                                                                                                                                                                |       | 206,221            |       | 187,116           |       |
|                                                                                                                                                                                                                           |       | $                  | 277,311    |              | $          | 277,871 |   |

 

See accompanying notes.

 

2

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CANTEL MEDICALCORP.

CONDENSEDCONSOLIDATED STATEMENTS OF INCOME

(Dollar Amounts inThousands, Except Per Share Data)

(Unaudited)

 

 
| ** **                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **April 30,**     | ** ** | **April 30,**    | ** ** |
| ** **                              | ** ** | **2010**               | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                    |       |                   |       |                  |       |   |   |   |   |
| Net sales                               |       | $                      | 66,559     |                  | $          | 66,431 |   | $ | 204,141 |   | $ | 193,257 |   |
|                                    |       |                   |       |                  |       |   |   |   |   |
| Cost of sales                           |       | 39,866                 |       | 40,908                |       | 120,866 |   | 120,500 |   |
|                                    |       |                   |       |                  |       |   |   |   |   |
| Gross profit                            |       | 26,693                 |       | 25,523                |       | 83,275 |   | 72,757 |   |
|                                    |       |                   |       |                  |       |   |   |   |   |
| Expenses:                               |       |                   |       |                  |       |   |   |   |   |
| Selling                                 |       | 9,348                  |       | 7,984                 |       | 26,583 |   | 22,326 |   |
| General and administrative              |       | 9,149                  |       | 9,106                 |       | 27,726 |   | 27,167 |   |
| Research and development                |       | 1,342                  |       | 1,261                 |       | 3,764 |   | 3,309 |   |
| Total operating expenses                |       | 19,839                 |       | 18,351                |       | 58,073 |   | 52,802 |   |
|                                    |       |                   |       |                  |       |   |   |   |   |
| Income before interest and income taxes |       | 6,854                  |       | 7,172                 |       | 25,202 |   | 19,955 |   |
|                                    |       |                   |       |                  |       |   |   |   |   |
| Interest expense                        |       | 233                    |       | 588                   |       | 959 |   | 2,013 |   |
| Interest income                         |       | (19                    | )          | (24                   | )          | (35 | ) | (132 | ) |
|                                    |       |                   |       |                  |       |   |   |   |   |
| Income before income taxes              |       | 6,640                  |       | 6,608                 |       | 24,278 |   | 18,074 |   |
|                                    |       |                   |       |                  |       |   |   |   |   |
| Income taxes                            |       | 2,366                  |       | 2,425                 |       | 8,960 |   | 6,784 |   |
|                                    |       |                   |       |                  |       |   |   |   |   |
| Net income                              |       | $                      | 4,274      |                  | $          | 4,183 |   | $ | 15,318 |   | $ | 11,290 |   |
|                                    |       |                   |       |                  |       |   |   |   |   |
| Earnings per common share               |       |                   |       |                  |       |   |   |   |   |
| Basic                                   |       | $                      | 0.25       |                  | $          | 0.25 |   | $ | 0.91 |   | $ | 0.68 |   |
| Diluted                                 |       | $                      | 0.25       |                  | $          | 0.25 |   | $ | 0.90 |   | $ | 0.68 |   |
|                                    |       |                   |       |                  |       |   |   |   |   |
| Dividends per common share              |       | $                      | —     |                  | $          | — |   | $ | 0.05 |   | $ | — |   |

 

See accompanying notes.

 

3

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CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Dollar Amounts in Thousands)

(Unaudited)

 
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **April 30,**    | ** ** |
| ** **                                                                         | ** ** | **2010**              | ** ** | **2009** | ** ** |
|                                                                               |       |                  |       |   |   |
| **Cash flows from operating  activities**                                          |       |                  |       |   |   |
| Net income                                                                         |       | $                     | 15,318     |   | $ | 11,290 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                  |       |   |   |
| Depreciation                                                                       |       | 4,721                 |       | 4,637 |   |
| Amortization                                                                       |       | 3,842                 |       | 3,870 |   |
| Stock-based compensation expense                                                   |       | 2,270                 |       | 1,829 |   |
| Amortization of debt issuance costs                                                |       | 333                   |       | 297 |   |
| Loss on disposal of fixed assets                                                   |       | 224                   |       | 22 |   |
| Deferred income taxes                                                              |       | (847                  | )          | (1,172 | ) |
| Excess tax benefits from stock-based compensation                                  |       | (283                  | )          | (193 | ) |
| Changes in assets and liabilities:                                                 |       |                  |       |   |   |
| Accounts receivable                                                                |       | 662                   |       | (1,079 | ) |
| Inventories                                                                        |       | (6,668                | )          | 1,733 |   |
| Prepaid expenses and other current assets                                          |       | 72                    |       | (638 | ) |
| Accounts payable, deferred revenue and accrued  expenses                           |       | (1,902                | )          | 89 |   |
| Income taxes payable                                                               |       | (291                  | )          | 608 |   |
| Net cash provided by operating activities                                          |       | 17,451                |       | 21,293 |   |
|                                                                               |       |                  |       |   |   |
| **Cash flows from investing  activities**                                          |       |                  |       |   |   |
| Capital expenditures                                                               |       | (4,203                | )          | (2,972 | ) |
| Proceeds from disposal of fixed assets                                             |       | 5                     |       | 5 |   |
| Earnout paid to Crosstex sellers                                                   |       | —                |       | (3,666 | ) |
| Earnout paid to Twist seller                                                       |       | (157                  | )          | (629 | ) |
| Purchase of convertible note receivable                                            |       | (300                  | )          | (203 | ) |
| Other, net                                                                         |       | (197                  | )          | (15 | ) |
| Net cash used in investing activities                                              |       | (4,852                | )          | (7,480 | ) |
|                                                                               |       |                  |       |   |   |
| **Cash flows from financing  activities**                                          |       |                  |       |   |   |
| Borrowings under revolving credit facility                                         |       | —                |       | 3,500 |   |
| Repayments under term loan facility                                                |       | (7,500                | )          | (6,000 | ) |
| Repayments under revolving credit facility                                         |       | (10,800               | )          | (6,500 | ) |
| Proceeds from exercises of stock options                                           |       | 2,006                 |       | 894 |   |
| Dividends paid                                                                     |       | (840                  | )          | — |   |
| Excess tax benefits from stock-based compensation                                  |       | 283                   |       | 193 |   |
| Purchases of treasury stock                                                        |       | (289                  | )          | (404 | ) |
| Net cash used in financing activities                                              |       | (17,140               | )          | (8,317 | ) |
|                                                                               |       |                  |       |   |   |
| Effect of exchange rate changes on cash and cash  equivalents                      |       | 338                   |       | (1,486 | ) |
|                                                                               |       |                  |       |   |   |
| (Decrease) increase in cash and cash equivalents                                   |       | (4,203                | )          | 4,010 |   |
| Cash and cash equivalents at beginning of period                                   |       | 23,368                |       | 18,318 |   |
| Cash and cash equivalents at end of period                                         |       | $                     | 19,165     |   | $ | 22,328 |   |

 

See accompanying notes.

 

4

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**CANTEL****MEDICAL****CORP**.

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

(Unaudited)

 

**Note 1.   Basis of Presentation**

 

The unaudited Condensed Consolidated Financial Statements have beenprepared in accordance with United States generally accepted accountingprinciples for interim financial reporting and the requirements of Form 10-Qand Rule 10.01 of Regulation S-X. Accordingly, they do not include certaininformation and note disclosures required by generally accepted accountingprinciples for annual financial reporting and should be read in conjunctionwith the Consolidated Financial Statements and notes thereto included in theAnnual Report of Cantel Medical Corp. (“Cantel”) on Form 10-K for thefiscal year ended July 31, 2009 (the “2009 Form 10-K”), andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations included elsewhere herein.

 

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

 

TheCondensed Consolidated Balance Sheet at July 31, 2009 was derived from theaudited Consolidated Balance Sheet of Cantel at that date.

 

In June 2008, the Financial Accounting Standards Board (“FASB”)issued Accounting Standards Codification (“ASC”) 260-10-45, “*Earnings Per Share — Other Presentation Matters,”*(“ASC 260-10-45”). ASC 260-10-45provides that unvested share-based payment awards that contain nonforfeitablerights to dividends or dividend equivalents (whether paid or unpaid) areparticipating securities and shall be included in the computation of earningsper share (“EPS”) pursuant to the two-class method. ASC 260-10-45 iseffective for fiscal years beginning after December 15, 2008 and thereforewas adopted on August 1, 2009 as further described in Note 10 to theCondensed Consolidated Financial Statements. All prior period EPS data havebeen adjusted retrospectively to conform to the provisions of ASC260-10-45. For the three and nine months ended April 30, 2009, suchretrospective application caused an insignificant increase in the denominatorof our weighted average shares calculation, which decreased previously reportedbasic EPS for the three and nine months ended April 30, 2009 from $0.26 to$0.25 and $0.69 to $0.68, respectively, and diluted EPS for the nine monthsended April 30, 2009 from $0.69 to $0.68, but had no impact on previouslyreported diluted EPS for the three months ended April 30, 2009.

 

Cantel had five principal operating companies at each of April 30,2010 and July 31, 2009, Minntech Corporation (“Minntech”), CrosstexInternational Inc. (“Crosstex”), Mar Cor Purification, Inc. (“Mar Cor”),Biolab Equipment Ltd. (“Biolab”) and Saf-T-Pak Inc. (“Saf-T-Pak”), all of whichare wholly-owned operating subsidiaries. In addition, Minntech has threeforeign subsidiaries, Minntech B.V., Minntech Asia/Pacific Ltd. and MinntechJapan K.K., which serve as Minntech’s bases in Europe, Asia/Pacific and Japan,respectively.

 

5

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We currently operate our business through six operating segments: WaterPurification and Filtration (through Mar Cor, Biolab and Minntech), HealthcareDisposables (through Crosstex), Endoscope Reprocessing (through Minntech),Dialysis (through Minntech), Therapeutic Filtration (through Minntech) andSpecialty Packaging (through Saf-T-Pak). The Therapeutic Filtration andSpecialty Packaging operating segments are combined in the All Other reportingsegment for financial reporting purposes.

 

On July 31, 2009, we acquired certain net assets of G.E.M. WaterSystems Int’l, LLC (“G.E.M.”), as more fully described in Note 3 to theCondensed Consolidated Financial Statements. The G.E.M. acquisition had an insignificant effect on ourresults of operations for the three and nine months ended April 30, 2010due to the small size of this business and is not included in our results ofoperations for the three and nine months ended April 30, 2009. G.E.M. isincluded in the Water Purification and Filtration segment.

 

Throughoutthis document, references to “Cantel,” “us,” “we,” “our,” and the “Company” arereferences to Cantel Medical Corp. and its subsidiaries, except where thecontext makes it clear the reference is to Cantel itself and not itssubsidiaries.

 

***Subsequent Events***

 

On May 28, 2010, we amended our credit facilities primarily toextend the termination date of the revolving credit facility to August 1,2011 as well as to expand our acquisition financing capabilities, as more fullydescribed in Note 9 to the Condensed Consolidated Financial Statements.

 

On June 1, 2010, we acquired the issued and outstanding capitalstock of Purity Water Company of San Antonio, Inc. (“Purity”), as morefully described in Note 3 to the Condensed Consolidated Financial Statements.Since the acquisition occurred subsequent to April 30, 2010, Purity is notincluded in our results of operations for the three and nine months ended April 30,2010 and 2009.

 

Weperformed a review of events subsequent to April 30, 2010. Based upon thatreview, no additional subsequent events occurred that required updating to ourCondensed Consolidated Financial Statements or disclosures.

 

6

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**Note 2.   Stock-BasedCompensation**

 

Thefollowing table shows the income statement components of stock-basedcompensation expense recognized in the Condensed Consolidated Statements ofIncome:

 
| ** **                                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                              | ** ** | **April 30,**     | ** ** | **April 30,**    | ** ** |
| ** **                                                              | ** ** | **2010**               | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                    |       |                   |       |                  |       |   |   |   |   |
| Cost of sales                                                           |       | $                      | 36,000     |                  | $          | 19,000 |   | $ | 95,000 |   | $ | 55,000 |   |
| Operating expenses:                                                     |       |                   |       |                  |       |   |   |   |   |
| Selling                                                                 |       | 115,000                |       | 52,000                |       | 294,000 |   | 158,000 |   |
| General and administrative                                              |       | 511,000                |       | 708,000               |       | 1,859,000 |   | 1,604,000 |   |
| Research and development                                                |       | 8,000                  |       | 5,000                 |       | 22,000 |   | 12,000 |   |
| Total operating expenses                                                |       | 634,000                |       | 765,000               |       | 2,175,000 |   | 1,774,000 |   |
| Stock-based  compensation before income taxes                           |       | 670,000                |       | 784,000               |       | 2,270,000 |   | 1,829,000 |   |
| Income tax benefits                                                     |       | (239,000               | )          | (289,000              | )          | (822,000 | ) | (735,000 | ) |
| Total  stock-based compensation expense, net of tax                     |       | $                      | 431,000    |                  | $          | 495,000 |   | $ | 1,448,000 |   | $ | 1,094,000 |   |
|                                                                    |       |                   |       |                  |       |   |   |   |   |
| Decrease in earnings per common share due to  stock-based compensation: |       |                   |       |                  |       |   |   |   |   |
|                                                                    |       |                   |       |                  |       |   |   |   |   |
| Basic                                                                   |       | $                      | 0.03       |                  | $          | 0.03 |   | $ | 0.09 |   | $ | 0.07 |   |
|                                                                    |       |                   |       |                  |       |   |   |   |   |
| Diluted                                                                 |       | $                      | 0.03       |                  | $          | 0.03 |   | $ | 0.09 |   | $ | 0.07 |   |

 

Forthe three and nine months ended April 30, 2010 and 2009, the abovestock-based compensation expense before income taxes was recorded in theCondensed Consolidated Financial Statements as stock-based compensation expenseand an increase to additional paid-in capital. The related income tax benefits(which pertain only to stock awards and options that do not qualify asincentive stock options) were recorded as an increase to long-term deferredincome tax assets (which are netted with long-term deferred income taxliabilities) and a reduction to income tax expense.

 

Mostof our stock options and stock awards (which consist only of restricted shares)are subject to graded vesting in which portions of the award vest at differenttimes during the vesting period, as opposed to awards that vest at the end ofthe vesting period. We recognize compensation expense for awards subject tograded vesting using the straight-line basis, reduced by estimated forfeitures.At April 30, 2010, total unrecognized stock-based compensation expensebefore income taxes related to total nonvested stock options and stock awardswas $4,016,000 with a remaining weighted average period of 21 months over whichsuch expense is expected to be recognized.

 

Wedetermine the fair value of each stock award using the closing market price ofour Common Stock on the date of grant. Such stock awards are deductible for taxpurposes and were tax-effected using the Company’s estimated U.S. effective taxrate at the time of grant.

 

7

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Asummary of nonvested stock award activity follows:

 

| ** **                                     | ** ** | ** **    | ** ** | **Weighted**   | ** ** |
|------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                                     | ** ** | **Number of** | ** ** | **Average**    | ** ** |
| ** **                                     | ** ** | **Shares**    | ** ** | **Fair Value** | ** ** |
|                                           |       |          |       |           |       |
| Nonvested stock awards at July 31, 2009   |       | 226,328       |       | $              | 13.38      |   |
| Granted                                        |       | 47,825        |       | 15.97          |       |
| Vested                                         |       | (63,668       | )          | 15.37          |       |
| Nonvested  stock awards at April 30, 2010 |       | 210,485       |       | $              | 13.37      |   |

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option valuation model with the following assumptions for optionsgranted during the three and nine months ended April 30, 2010 and 2009:

 
| **Weighted-Average**          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------|------------|------------------------|------------|-----------------------|------------|
| **Black-Scholes Option**      | ** ** | **April 30,**     | ** ** | **April 30,**    | ** ** |
| **Valuation Assumptions**     | ** ** | **2010**               | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
|                          |       |                   |       |                  |       |   |   |   |   |
| Dividend yield (1)            |       | 0.51%                  |       | 0.00%                 |       | 0.02% |   | 0.00% |   |
| Expected volatility (2)       |       | 0.459                  |       | 0.431                 |       | 0.454 |   | 0.425 |   |
| Risk-free interest rate (3)   |       | 1.97%                  |       | 1.41%                 |       | 1.96% |   | 1.56% |   |
| Expected lives (in years) (4) |       | 3.50                   |       | 3.63                  |       | 3.58 |   | 3.83 |   |

----

(1)   Expected annual dividendyield for options granted after our dividend announcement on December 17,2009.

(2)   Volatility was based onhistorical closing prices of our Common Stock.

(3)   The U.S. Treasury rate onthe expected life at the date of grant.

(4)   Based on historical exercisebehavior.

 

Additionally,all options were considered to be deductible for tax purposes in the valuationmodel, except for certain incentive options granted under the 1997 EmployeePlan and to employees residing outside of the United States. Such non-qualifiedoptions were tax-effected using the Company’s estimated U.S. effective tax rateat the time of grant. For the three and nine months ended April 30, 2010,the weighted average fair value of all options granted was approximately $6.70and $5.70, respectively. For the three and nine months ended April 30,2009, the weighted average fair value of all options granted was approximately$4.88 and $4.79, respectively. The aggregate intrinsic value (i.e. the excessmarket price over the exercise price) of all options exercised wasapproximately $683,000 and $1,490,000 for the three and nine months ended April 30,2010, respectively, and $41,000 and $940,000 for the three and nine monthsended April 30, 2009, respectively.

 

8

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Asummary of stock option activity follows:

 

| ** **                         | ** ** | ** **    | ** ** | **Weighted**       | ** ** |
|------------------------------------|------------|---------------|------------|--------------------|------------|
| ** **                         | ** ** | **Number of** | ** ** | **Average**        | ** ** |
| ** **                         | ** ** | **Shares**    | ** ** | **Exercise Price** | ** ** |
|                               |       |          |       |               |       |
| Outstanding at July 31, 2009  |       | 1,505,722     |       | $                  | 16.32      |   |
| Granted                            |       | 424,750       |       | 16.03              |       |
| Canceled                           |       | (180,108      | )          | 21.36              |       |
| Exercised                          |       | (275,825      | )          | 14.25              |       |
| Outstanding at April 30, 2010 |       | 1,474,539     |       | $                  | 16.01      |   |
|                               |       |          |       |               |       |
| Exercisable at July 31, 2009  |       | 1,049,657     |       | $                  | 17.86      |   |
|                               |       |          |       |               |       |
| Exercisable at April 30, 2010 |       | 728,566       |       | $                  | 17.70      |   |
|                               |       |          |       |               |       |

 

Upon exercise of stock options or grant of stock awards, we typicallyissue new shares of our Common Stock (as opposed to using treasury shares).

 

If certain criteria are met when options are exercised or restrictedstock becomes vested, the Company is allowed a deduction on its income taxreturn. Accordingly, we account for the income tax effect on such income taxdeductions as additional paid-in capital or a reduction of deferred income taxassets (which are netted with long-term deferred income tax liabilities) and asa reduction of income taxes payable. For the nine months ended April 30,2010 and 2009, such income tax deductions reduced income taxes payable by$976,000 and $566,000, respectively.

 

We classify the cash flows resulting fromexcess tax benefits as financing cash flows on our Condensed ConsolidatedStatements of Cash Flows. Excess tax benefits arise when the ultimate taxeffect of the deduction for tax purposes is greater than the tax benefit onstock compensation expense (including tax benefits on stock compensationexpense that has only been reflected in past pro forma disclosures relating tofiscal years prior to August 1, 2005) which was determined based upon theaward’s fair value.

 

A summary of our stock award plans follows:

 

***2006 Equity Incentive Plan***

 

OnJanuary 10, 2007, the Company terminated its existing stock option plansand adopted the Cantel Medical Corp. 2006 Equity Incentive Plan (the “2006 Plan”).The 2006 Plan provides for the granting of stock options (including incentivestock options), restricted stock awards, stock appreciation rights andperformance-based awards (collectively “equity awards”) to our employees andnon-employee Directors. The 2006 Plan does not permit the granting ofdiscounted options or discounted stock appreciation rights. On December 17,2009, our stockholders approved an amendment to the 2006 Plan that increasedthe number of shares of Common Stock available for issuance under the 2006 Planby 385,000.  The maximum number of sharesas to which stock options and stock awards may be granted under the 2006 Planis 2,085,000 shares, of which 1,200,000 shares are authorized for issuancepursuant to stock options and stock appreciation rights and 885,000 shares areauthorized for issuance pursuant to restricted stock and other stockawards.  Stock options outstanding underthis plan:

 

- were granted at the closing market price on theday of the grant,

 

- were granted as options that do not qualify asincentive stock options,

 

9

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- as to options granted to employees, areexercisable in three or four equal annual installments commencing on the firstanniversary of the grant date,

 

- include option grants of 750 shares on the lastday of each of our fiscal quarters to each non-employee director who attendedthat quarter’s regularly scheduled Board of Directors meeting (exercisable onthe first anniversary of the grant date),

 

- include option grants of 1,500 shares on the lastday of our fiscal year to each member of our Board of Directors (50% areexercisable on the first anniversary of the grant date and 50% are exercisableon the second anniversary of the grant date),

 

- include option grants of 15,000 shares to eachnewly appointed or elected director (exercisable in three equal annualinstallments commencing on the first anniversary of the grant date),

 

- generally terminate three months followingtermination of employment or service as a non-employee director, and

 

- expire five years from the date of the grant.

 

CommencingNovember 1, 2009, quarterly options are no longer granted to non-employeedirectors and, commencing July 31, 2010, the annual grants of 1,500options to non-employee directors will be changed to grants of 4,500 optionsthat are exercisable in full on the first anniversary of the grant date.

 

Restrictedstock shares outstanding under this plan are subject to risk of forfeituresolely due to an employment length-of-service restriction, with suchrestriction lapsing as to one-third of the shares on each of the first threeanniversaries of the grant date subject to being employed by the Companythrough such vesting date. At April 30, 2010, options to purchase 901,913shares of Common Stock were outstanding, and 210,485 unvested restricted stockshares were outstanding, under the 2006 Plan. At April 30, 2010, 226,083shares are available for issuance pursuant to stock options and stockappreciation rights and 462,096 shares are available for issuance pursuant torestricted stock and other stock awards. The 2006 Plan expires on November 13,2016.

 

***1997 Employee Plan***

 

Atotal of 3,750,000 shares of Common Stock was originally reserved for issuanceor available for grant under our 1997 Employee Stock Option Plan, as amended,which was terminated on January 10, 2007 in conjunction with the adoptionof the 2006 Plan. Options outstanding under this plan:

 

- were granted at the closing market price on theday of the grant,

 

- were granted either as incentive stock options orstock options that do not qualify as incentive stock options,

 

- are exercisable in three or four equal annualinstallments commencing on the first anniversary of the grant date,

 

- generally terminate three months followingtermination of employment, and

 

- expire five years from the date of the grant.

 

At April 30, 2010, options to purchase 532,126 shares of CommonStock were outstanding under the 1997 Employee Stock Option Plan. No additionaloptions will be granted under this plan.

 

10

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***1998 Directors’ Plan***

 

Atotal of 450,000 shares of Common Stock was originally reserved for issuance oravailable for grant under our 1998 Directors’ Stock Option Plan, as amended,which was terminated on January 10, 2007 in conjunction with the adoptionof the 2006 Plan. Options outstanding under this plan:

 

- were granted to directors at the closing marketprice on the day of grant,

 

- include option grants of 15,000 shares to eachnewly appointed or elected director (exercisable in three equal annualinstallments commencing on the first anniversary of the grant date),

 

- include option grants of 750 shares on the lastday of each of our fiscal quarters to each non-employee director who attendedthat quarter’s regularly scheduled Board of Directors meeting (exercisable onthe grant date),

 

- include option grants of 1,500 shares on the lastday of our fiscal year to each member of our Board of Directors (50% areexercisable on the first anniversary of the grant date and 50% are exercisableon the second anniversary of the grant date),

 

- have a term of ten years if granted prior to July 31,2000 or five years if granted on or after July 31, 2000, and

 

- do not qualify as incentive stock options.

 

AtApril 30, 2010, options to purchase 40,500 shares of Common Stock wereoutstanding under the 1998 Directors’ Stock Option Plan. No additional optionswill be granted under this plan.

 

**Note 3.   Acquisitions**

 

***Purity Water Company of San Antonio, Inc.***

 

On June 1, 2010, Mar Cor acquired all of the issued andoutstanding capital stock of Purity, a private company with pre-acquisitionannual revenues of approximately $3,000,000 based in San Antonio, Texas thatdesigns, installs and services high quality, high purity water systems for usein laboratory, industrial, medical, pharmaceutical and semiconductor  environments. Total consideration for thetransaction was approximately $2,000,000. We anticipate that this acquisitionwill have an insignificant contribution to our results of operations for thebalance of fiscal 2010. Purity will be included in the Water Purification andFiltration segment.

 

The primary reason for the acquisition was to add a base of businessand expand the Mar Cor service network in the southwest United States.

 

***G.E.M. Water Systems Int’l, LLC***

 

OnJuly 31, 2009, we purchased substantially all of the assets, including the building housing itsoperations, of G.E.M., aprivate company with pre-acquisition annual revenues of approximately$3,500,000 based in Buena Park, California that designs, installs and services high quality water and bicarbonate systemsfor use in dialysis clinics, hospitals and other healthcare facilities. Thetotal consideration for the transaction, including transaction costs, was$4,468,000.

 

Thepurchase price was allocated to the assets acquired and assumed liabilitiesbased on 

 

11

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estimatedfair values as follows:

 

| ** **                                                            | ** ** | **Final**      | ** ** |
|-----------------------------------------------------------------------|------------|----------------|------------|
| **Net Assets**                                                        | ** ** | **Allocation** | ** ** |
| Current assets                                                        |       | $              | 681,000    |   |
| Property, plant and equipment                                         |       | 1,975,000      |       |
| Amortizable intangible assets - customer  relationships (9-year life) |       | 951,000        |       |
| Non-amortizable intangible assets - trade names  (indefinite life)    |       | 203,000        |       |
| Current liabilities                                                   |       | (808,000       | )          |
| Net assets acquired                                                   |       | $              | 3,002,000  |   |

 

Therewere no in-process research and development projects acquired in connectionwith the acquisition. The excess purchase price of $1,466,000 was assigned togoodwill. Such goodwill, all of which is deductible for income tax purposes,has been included in our Water Purification and Filtration reporting segment.

 

Theprincipal reason for the acquisition was the strengthening of our sales and service presence and base of businessin California with a significant concentration of dialysis clinics andhealthcare institutions.

 

Theacquisition of G.E.M. is included in our results of operations for the threeand nine months ended April 30, 2010. Since the acquisition of G.E.M.occurred on the last day of our fiscal 2009, its results of operations are excluded from the three and nine months ended April 30,2009, but its net assets are included in our Condensed Consolidated BalanceSheet at July 31, 2009. Pro forma consolidated statements of incomedata have not been presented due to the insignificant impact of thisacquisition.

 

**Note 4.   Recent AccountingPronouncements**

 

In June 2009, the FASB issued Statement of FinancialAccounting Standards No. 168, “*The FASBAccounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles, a replacement of FASB Statement No. 162,”*(codified as “ASC 105”). ASC 105 establishes the Accounting StandardsCodification as the source of authoritative accounting literature recognized bythe FASB to be applied by nongovernmental entities in addition to rules andinterpretive releases of the Securities and Exchange Commission (“SEC”), whichare sources of authoritative generally accepted accounting principles (“GAAP”)for SEC registrants. All other non-grandfathered, non-SEC accounting literaturenot included in the codification will become non-authoritative. ASC 105identifies the sources of accounting principles and the framework for selectingthe principles used in the preparation of the financialstatements. Following this statement, the FASB will issue new standards inthe form of Accounting Standards Updates (“ASU”). This standard becameeffective for financial statements for interim and annual reporting periodsending after September 15, 2009 and therefore was adopted by us on August 1,2009. As the codification was not intended to change or alter existing GAAP, itdid not have any impact on our Condensed Consolidated Financial Statements.

 

In February 2010, the FASB issued ASU 2010-09, *“Subsequent Events (Topic 855): Amendments to Certain Recognition andDisclosure Requirements,”* (“ASU 2010-09”). ASU 2010-09 addressespractical issues for SEC registrants with respect to management’s review ofsubsequent events by no longer requiring SEC registrants to disclose the datethrough which management evaluated subsequent events in financial statements.This change alleviates potential conflicts with SEC guidance. ASU 2010-09 iseffective immediately for all financial statements that have not been issued orhave not become available to be issued. As ASU 2010-09 was not 

 

12

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intended to change our subsequent events procedures, it did not haveany impact on our Condensed Consolidated Financial Statements other thanexcluding the disclosure of the date through which management evaluatedsubsequent events in these financial statements.

 

In January 2010, the FASB issued ASU 2010-06, “*Fair Value Measurements and Disclosures (Topic 820):Improving Disclosures about Fair Value Measurements,”*(“ASU 2010-06”).Reporting entities will have to provide information about movements of assetsamong Levels 1 and 2, and a reconciliation of purchases, sales, issuance, andsettlements of activity valued with a Level 3 method, of the three-tier fairvalue hierarchy established by ASC 820, “*FairValue Measurements and Disclosures,”* (“ASC 820”). ASU 2010-06 also clarifies the existing guidanceto require fair value measurement disclosures for each class of assets andliabilities. ASU 2010-06 is effective for interim and annual reporting periodsbeginning after December 15, 2009 for Level 1 and 2 disclosurerequirements, which was adopted in our third quarter of fiscal 2010, and after December 15,2010 for Level 3 disclosure requirements, which we will adopt in our thirdquarter of fiscal 2011 if we have any assets valued with a Level 3 method. Theadoption of ASU 2010-06 for Level 1 and 2 disclosure requirements did not haveany impact upon our financial position, results of operations and financialstatement disclosures due to the nature of our Level 1 assets and the lack ofany assets valued with a Level 2 method.

 

In October 2009, the FASB issued ASU 2009-13, *“RevenueRecognition (Topic 605): Multiple-Deliverable Arrangements, a consensus of theFASB Emerging Issues Task Force,”* (“ASU 2009-13”), which amends ASC605-25, “*RevenueRecognition-Multiple-Element Arrangements.” *ASU 2009-13provides principles for the allocation of consideration among multiple-elementarrangements, allowing more flexibility in identifying and accounting forseparate deliverables. ASU 2009-13 introduces an estimated selling pricemethod for allocating revenue to the elements of a bundled arrangement ifvendor-specific objective evidence or third-party evidence of selling price isnot available, and significantly expands related disclosure requirements. Thisstandard is effective on a prospective basis for revenue arrangements enteredinto or materially modified in fiscal years beginning on or after June 15,2010. We are currently in the process of evaluating the impact of ASU2009-13 on our financial position and results of operations.

 

In December 2007, the FASB issued ASC 805, “*Business Combinations,*” (“ASC 805”), whichestablishes principles and requirements for how an acquirer recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, any non-controlling interest in the acquiree and thegoodwill acquired. Some of the revised guidance of ASC 805 includes initialcapitalization of acquired in-process research and development, expensingtransaction and restructuring costs and recording contingent considerationpayments at fair value, with subsequent adjustments recorded to net earnings.It also provides disclosure requirements to enable users of the financialstatements to evaluate the nature and financial effects of the businesscombination. ASC 805 was effective for business combinations that occurduring or after fiscal years beginning after December 15, 2008 andtherefore was adopted by us on August 1, 2009. Any acquisitions we make infiscal 2010 and future periods will be subject to this new accounting guidance.

 

In September 2006, the FASB issued ASC 820.  ASC 820establishes a framework for measuring fair value, clarifies the definition offair value, and requires additional disclosures about fair value measurementsthat are already required or permitted by other accounting standards (exceptfor measurements of share-based payments) and is expected to increase theconsistency of those measurements. ASC 820, as issued, was effective forfiscal years beginning 

 

13

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after November 15, 2007 and therefore was adopted on August 1,2008 with respect to recorded financial assets and financial liabilities. In February 2008,the effective date of ASC 820 was deferred for certain nonfinancial assets andnonfinancial liabilities to fiscal years beginning after November 15, 2008and therefore this portion of ASC 820 was adopted on August 1, 2009. Theimplementation of ASC 820 did not have a material impact on our financialposition or results of operations at either date.

 

In August 2009, the FASB issued ASU 2009-05, which amends ASC820. ASU 2009-05 provides amendments for fair value measurements ofliabilities. It provides clarification that in circumstances in which aquoted price in an active market for the identical liability is not available,a reporting entity is required to measure fair value using one or morealternate techniques. ASU 2009-05 also clarifies that when estimating fairvalue of a liability, a reporting entity is not required to include a separateinput or adjustment to other inputs relating to the existence of a restrictionthat prevents the transfer of the liability. ASU 2009-05 was effective forthe first reporting period (including interim periods) beginning after issuanceand was adopted by us during our first quarter of fiscal 2010. Theadoption of ASU 2009-05 did not have a material impact on our financialposition or results of operations.

 

**Note 5.   Accumulated OtherComprehensive Income**

 

The Company’s comprehensive income for the three and nine months ended April 30,2010 and 2009 is set forth in the following table:

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **April 30,**     | ** ** | **April 30,**    | ** ** |
| ** **                                  | ** ** | **2010**               | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                        |       |                   |       |                  |       |   |   |   |   |
| Net income                                  |       | $                      | 4,274,000  |                  | $          | 4,183,000 |   | $ | 15,318,000 |   | $ | 11,290,000 |   |
| Other comprehensive income (loss):          |       |                   |       |                  |       |   |   |   |   |
| Unrealized loss on interest cap, net of tax |       | —                 |       | (2,000                | )          | — |   | (96,000 | ) |
| Foreign currency translation, net of tax    |       | 1,195,000              |       | 848,000               |       | 1,245,000 |   | (4,881,000 | ) |
| Comprehensive income                        |       | $                      | 5,469,000  |                  | $          | 5,029,000 |   | $ | 16,563,000 |   | $ | 6,313,000 |   |

 

**Note 6.   Financial Instruments**

 

We account for derivative instruments and hedging activities inaccordance with ASC 815, *“Derivatives and Hedging,”*(“ASC 815”), which requires the Company to recognize all derivatives on thebalance sheet at fair value. Derivatives that are not designated as hedges mustbe adjusted to fair value through earnings. If the derivative is designated asa hedge, depending on the nature of the hedge, changes in the fair value of thederivative will either be offset against the change in the fair value of thehedged assets, liabilities or firm commitments through earnings or recognizedin other comprehensive income until the hedged item is recognized in earnings.The ineffective portion of the change in fair value of a derivative that isdesignated as a hedge will be recognized immediately in earnings. As of April 30,2010, all of our derivatives were designated as hedges.

 

Changesin the value of (i) the Canadian dollar against the United States dollar, (ii) theeuro against the United States dollar and (iii) the British pound againstthe United States dollar affect our results of operations because a portion ofthe net assets of our Canadian subsidiaries (which are reported in ourSpecialty Packaging and Water Purification and Filtration segments) andMinntech’s Netherlands subsidiary (which are reported in our Dialysis andEndoscope 

 

14

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Reprocessingsegments) are denominated and ultimately settled in United States dollars butmust be converted into its functional Canadian dollar or euro currency.Furthermore, as part of the restructuring of our Netherlands subsidiary, asfurther described in Note 15 to the Condensed Consolidated FinancialStatements, a portion of the net assets of our United States subsidiaries,Minntech and Mar Cor, are now denominated and ultimately settled in euros orBritish pounds but must be converted into our functional United States currency.

 

Inorder to hedge against the impact of fluctuations in the value of (i) theCanadian dollar relative to the United States dollar, (ii) the eurorelative to the United States dollar and (iii) the British pound relativeto the United States dollar on the conversion of such net assets into thefunctional currencies, we enter into short-term contracts to purchase Canadiandollars, euros and British pounds forward, which contracts are generally onemonth in duration. These short-term contracts are designated as fair valuehedge instruments. There were four foreign currency forward contracts with anaggregate value of $4,583,000 at April 30, 2010, which covered certainassets and liabilities that were denominated in currencies other than oursubsidiaries’ functional currencies. Such contracts expired on May 31,2010. These foreign currency forward contracts are continually replaced withnew one-month contracts as long as we have significant net assets at oursubsidiaries that are denominated and ultimately settled in currencies otherthan their functional currencies. Under our credit facilities, such contractsto purchase Canadian dollars, euros and British pounds may not exceed$12,000,000 in an aggregate notional amount at any time. For the three and ninemonths ended April 30, 2010, such forward contracts partially offset theimpact on operations relating to certain assets and liabilities that weredenominated in currencies other than our subsidiaries’ functional currenciesand resulted in a net currency conversion loss, net of tax, of $47,000 and$70,000, respectively, on the items hedged. Gains and losses related to thehedging contracts to buy Canadian dollars, euros and British pounds forwardwere immediately realized within general and administrative expenses due to theshort-term nature of such contracts. We do not hold any derivative financialinstruments for speculative or trading purposes.

 

On August 1, 2008, we adopted ASC 820 for our financial assets andliabilities. ASC 820 defines fair value as the price that would be received tosell an asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date. ASC 820 establishes a three levelfair value hierarchy to prioritize the inputs used in valuations, as definedbelow:

 

Level1: Observable inputs that reflect unadjusted quoted prices for identical assetsor liabilities in active markets.

 

Level2: Inputs other than quoted prices included within Level 1 that are observablefor the asset or liability, either directly or indirectly.

 

Level3: Unobservable inputs for the asset or liability.

 

15

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

 
| ** **                                | ** ** | **April 30, 2010** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|
| ** **                                | ** ** | **Level 1**             | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Cash and cash equilavents:                |       |                    |       |   |   |   |   |   |   |
| Bank deposits and certificates of deposit |       | $                       | 14,250,000 |   | $ | — |   | $ | — |   | $ | 14,250,000 |   |
| Money markets                             |       | 4,915,000               |       | — |   | — |   | 4,915,000 |   |
| Total cash and cash equilavents           |       | $                       | 19,165,000 |   | $ | — |   | $ | — |   | $ | 19,165,000 |   |
|                                      |       |                    |       |   |   |   |   |   |   |
|                                      |       | **July 31, 2009**  |       |
|                                      |       | **Level 1**             | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** |   |
| Cash and cash equilavents:                |       |                    |       |   |   |   |   |   |   |
| Bank deposits and certificates of deposit |       | $                       | 11,821,000 |   | $ | — |   | $ | — |   | $ | 11,821,000 |   |
| Money markets                             |       | 11,547,000              |       | — |   | — |   | 11,547,000 |   |
| Total cash and cash equilavents           |       | $                       | 23,368,000 |   | $ | — |   | $ | — |   | $ | 23,368,000 |   |

 

As of April 30, 2010 and July 31, 2009, the carrying amountsfor cash and cash equivalents, accounts receivable and accounts payableapproximated fair value due to the short maturity of these instruments. Webelieve that as of April 30, 2010 and July 31, 2009, the fair valueof our outstanding borrowings under our credit facilities approximated thecarrying value of those obligations since the borrowing rates were comparableto market interest rates.

 

**Note 7.   Intangible Assets andGoodwill**

 

Our intangible assets with definite lives consist primarily of customerrelationships, technology, brand names, non-compete agreements and patents.These intangible assets are being amortized using the straight-line method overthe estimated useful lives of the assets ranging from 3-20 years and have aweighted average amortization period of 10 years. Amortization expense relatedto intangible assets was $1,270,000 and $3,842,000 for the three and ninemonths ended April 30, 2010, respectively, and $1,264,000 and $3,870,000for the three and nine months ended April 30, 2009, respectively. Ourintangible assets that have indefinite useful lives and therefore are notamortized consist of trademarks and trade names.

 

16

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The Company’s intangible assets consist of the following:

 
| ** **                           | ** ** | **April 30, 2010** | ** ** |
|--------------------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | ** **              | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Gross**               | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Intangible assets with finite lives: |       |                    |       |   |   |   |   |
| Customer relationships               |       | $                       | 25,996,000 |   | $ | (11,651,000 | ) | $ | 14,345,000 |   |
| Technology                           |       | 9,497,000               |       | (6,089,000 | ) | 3,408,000 |   |
| Brand names                          |       | 9,546,000               |       | (4,570,000 | ) | 4,976,000 |   |
| Non-compete agreements               |       | 1,863,000               |       | (1,457,000 | ) | 406,000 |   |
| Patents and other registrations      |       | 1,244,000               |       | (285,000 | ) | 959,000 |   |
|                                 |       | 48,146,000              |       | (24,052,000 | ) | 24,094,000 |   |
| Trademarks and trade names           |       | 9,406,000               |       | — |   | 9,406,000 |   |
| Total intangible assets              |       | $                       | 57,552,000 |   | $ | (24,052,000 | ) | $ | 33,500,000 |   |
|                                 |       |                    |       |   |   |   |   |
|                                 |       | **July 31, 2009**  |       |
|                                 |       | ** **              | ** ** | **Accumulated** | ** ** | ** ** |   |
|                                 |       | **Gross**               | ** ** | **Amortization** | ** ** | **Net** |   |
| Intangible assets with finite lives: |       |                    |       |   |   |   |   |
| Customer relationships               |       | $                       | 26,977,000 |   | $ | (10,592,000 | ) | $ | 16,385,000 |   |
| Technology                           |       | 9,345,000               |       | (5,304,000 | ) | 4,041,000 |   |
| Brand names                          |       | 9,546,000               |       | (3,798,000 | ) | 5,748,000 |   |
| Non-compete agreements               |       | 1,863,000               |       | (1,223,000 | ) | 640,000 |   |
| Patents and other registrations      |       | 1,140,000               |       | (221,000 | ) | 919,000 |   |
|                                 |       | 48,871,000              |       | (21,138,000 | ) | 27,733,000 |   |
| Trademarks and trade names           |       | 9,309,000               |       | — |   | 9,309,000 |   |
| Total intangible assets              |       | $                       | 58,180,000 |   | $ | (21,138,000 | ) | $ | 37,042,000 |   |

 

Estimated amortization expense of our intangible assets for theremainder of fiscal 2010 and the next five years is as follows:

 

| Three month period ending July 31, 2010 |   | $         | 1,246,000 |   |
|----------------------------------------------|--------|-----------|-----------|--------|
| Fiscal 2011                                  |   | 4,762,000 |      |
| Fiscal 2012                                  |   | 4,297,000 |      |
| Fiscal 2013                                  |   | 4,223,000 |      |
| Fiscal 2014                                  |   | 4,031,000 |      |
| Fiscal 2015                                  |   | 3,857,000 |      |

 

Goodwillchanged during fiscal 2009 and the nine months ended April 30, 2010 asfollows:

 
| ** **                                                                    | ** ** | **Water**          | ** ** | ** **      | ** ** | ** **       | ** ** | ** **   | ** ** | ** **    | ** ** | ** **   | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------|------------|-----------------|------------|------------------|------------|--------------|------------|---------------|------------|--------------|------------|
| ** **                                                                    | ** ** | **Purification**   | ** ** | **Healthcare**  | ** ** | **Endoscope**    | ** ** | ** **   | ** ** | ** **    | ** ** | **Total**    | ** ** |
| ** **                                                                    | ** ** | **and Filtration** | ** ** | **Disposables** | ** ** | **Reprocessing** | ** ** | **Dialysis** | ** ** | **All Other** | ** ** | **Goodwill** | ** ** |
|                                                                          |       |               |       |            |       |             |       |         |       |          |       |         |       |
| Balance, July 31, 2008                                                   |       | $                  | 37,662,000 |            | $          | 50,473,000       |       | $            | 9,648,000  |          | $          | 8,133,000    |       | $ | 8,042,000 |   | $ | 113,958,000 |   |
| Acquisitions                                                                  |       | 1,466,000          |       | —          |       | —           |       | —       |       | —        |       | 1,466,000    |       |
| Earnout on acquisition                                                        |       | —             |       | 157,000         |       | —           |       | —       |       | —        |       | 157,000      |       |
| Adjustments  primarily relating to income tax exposure of acquired businesses |       | (38,000            | )          | —          |       | —           |       | —       |       | —        |       | (38,000      | )          |
| Foreign currency translation                                                  |       | (244,000           | )          | —          |       | —           |       | —       |       | (304,000      | )          | (548,000     | )          |
| Balance, July 31, 2009                                                   |       | 38,846,000         |       | 50,630,000      |       | 9,648,000        |       | 8,133,000    |       | 7,738,000     |       | 114,995,000  |       |
| Foreign currency translation                                                  |       | 281,000            |       | —          |       | —           |       | —       |       | 351,000       |       | 632,000      |       |
| Balance, April 30, 2010                                                  |       | $                  | 39,127,000 |            | $          | 50,630,000       |       | $            | 9,648,000  |          | $          | 8,133,000    |       | $ | 8,089,000 |   | $ | 115,627,000 |   |

 

OnJuly 31, 2009, we performed impairment studies of the Company’s goodwilland trademarks and trade names and concluded that such assets were notimpaired.

 

17

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**Note 8.   Warranty**

 

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

 
| ** **                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **April 30,**     | ** ** | **April 30,**    | ** ** |
| ** **                   | ** ** | **2010**               | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
|                         |       |                   |       |                  |       |   |   |   |   |
| Beginning balance            |       | $                      | 1,141,000  |                  | $          | 912,000 |   | $ | 949,000 |   | $ | 916,000 |   |
| Provisions                   |       | 420,000                |       | 413,000               |       | 1,370,000 |   | 1,012,000 |   |
| Charges                      |       | (459,000               | )          | (304,000              | )          | (1,217,000 | ) | (859,000 | ) |
| Foreign currency translation |       | 1,000                  |       | 1,000                 |       | 1,000 |   | (47,000 | ) |
| Ending balance               |       | $                      | 1,103,000  |                  | $          | 1,022,000 |   | $ | 1,103,000 |   | $ | 1,022,000 |   |

 

The warranty provisions and charges during the three and nine monthsended April 30, 2010 and 2009 relate principally to the Company’sendoscope reprocessing and water purification products. Warranty reserves areincluded in accrued expenses in the Condensed Consolidated Balance Sheets.

 

**Note 9.   Financing Arrangements**

 

In conjunction with theacquisition of Crosstex, we entered into amended and restated credit facilitiesdated as of August 1, 2005 (the “U.S. Credit Facilities”) with aconsortium of lenders to fund the cash consideration paid in the acquisitionand costs associated with the acquisition, as well as to modify our existingUnited States credit facilities. The U.S. Credit Facilities, as amended,include (i) a six-year $40.0 million senior secured amortizing term loanfacility expiring August 1, 2011 and (ii) a five-year $50.0 millionsenior secured revolving credit facility expiring August 1, 2010. Amountswe repay under the term loan facility may not be re-borrowed. On May 28,2010, we amended the U.S. Credit Facilities which included extending thetermination date for the revolving credit facility to August 1, 2011. Debtissuance costs relating to the U.S. Credit Facilities were recorded in otherassets and are being amortized over the life of the credit facilities. Suchunamortized debt issuance costs amounted to approximately $308,000 at April 30,2010.

 

At April 30, 2010, borrowings under the U.S. Credit Facilitiesbore interest at rates ranging from 0% to 0.50% above the lender’s base rate,or at rates ranging from 0.625% to 1.75% above the London Interbank OfferedRate (“LIBOR”), depending upon our consolidated ratio of debt to earningsbefore interest, taxes, depreciation and amortization, and as further adjustedunder the terms of the U.S. Credit Facilities (“EBITDA”). As a result ofthe May 28, 2010 amendment, borrowings under the U.S. Credit Facilitieswill bear interest at rates ranging from 0.50% to 1.50% above the lender’s baserate, or at rates ranging from 1.50% to 2.50% above LIBOR, depending upon ourconsolidated ratio of debt to EBITDA. At April 30, 2010, the lender’s baserate was 3.25% and the LIBOR rates ranged from 0.25% to 1.60%. The marginsapplicable to our outstanding borrowings at April 30, 2010 were 0.00%above the lender’s base rate and 0.625% above LIBOR. All of our outstandingborrowings were under LIBOR contracts at April 30, 2010. The U.S. CreditFacilities also provide for fees on the unused portion of our facilities atrates ranging from 0.15% to 0.30%, depending upon our consolidated ratio ofdebt to EBITDA; such rate was 0.15% at April 30, 2010. As a result of the May 28,2010 amendment, fees on the unused portion of our facilities will range from0.20% to 0.40%.

 

18

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The U.S. Credit Facilities require us to meet certain financialcovenants and are secured by (i) substantially all of our U.S.-basedassets (including assets of Cantel, Minntech, Mar Cor, Crosstex, and StrongDental Products, Inc.) and (ii) our pledge of all of the outstandingshares of Minntech, Mar Cor, Crosstex and Strong Dental Products, Inc. and65% of the outstanding shares of our foreign-based subsidiaries. Additionally,we are not permitted to pay cash dividends on our Common Stock in excess of$3,000,000 without the consent of our United States lenders. As of April 30,2010, we were in compliance with all financial and other covenants under theU.S. Credit Facilities.

 

OnApril 30, 2010, we had $25,000,000 of outstanding borrowings under theU.S. Credit Facilities, which consisted of $12,500,000 under each of the termloan facility and the revolving credit facility. The maturities of our creditfacilities are described in Note 12 to the Condensed Consolidated FinancialStatements. The revolving credit facility is recorded as a long-term liabilityat April 30, 2010 and July 31, 2009, but was recorded as a currentliability between those dates since the termination date of the facility wasnot extended from August 1, 2010 to August 1, 2011 until the May 28,2010 amendment.

 

**Note10.  Earnings Per Common Share**

 

BasicEPS is computed based upon the weighted average number of common sharesoutstanding during the period. Diluted EPS is computed based upon the weightedaverage number of common shares outstanding during the period plus the dilutiveeffect of Common Stock equivalents using the treasury stock method and theaverage market price of our Common Stock for the period.

 

In June 2008, the FASB issued ASC 260-10-45, which provides that unvested share-based paymentawards that contain nonforfeitable rights to dividends or dividend equivalents(whether paid or unpaid) are participating securities and shall be included inthe computation of EPS pursuant to the two-class method, a change that reduces bothbasic and diluted EPS. Our participating securities consist solely ofunvested restricted stock awards, which have contractual participation rightsequivalent to those of stockholders of unrestricted common stock. The two-classmethod of computing earnings per share is an allocation method that calculatesearnings per share for common stock and participating securities. Previously,we excluded unvested restricted stock awards in the calculation of basic EPSand included such awards in diluted EPS under the treasury stock method. ASC260-10-45 was effective for fiscal years beginning after December 15, 2008and therefore was adopted on August 1, 2009. All prior period EPS datapresented have been adjusted retrospectively to conform to the provisions of ASC260-10-45. For the three and nine months ended April 30, 2009, suchretrospective application caused an insignificant increase in the denominatorof our weighted average shares calculation, which decreased previously reportedbasic EPS for the three and nine months ended April 30, 2009 from $0.26 to$0.25 and $0.69 to $0.68, respectively, and diluted EPS for the nine monthsended April 30, 2009 from $0.69 to $0.68, but had no impact on previouslyreported diluted EPS for the three months ended April 30, 2009.

 

19

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Thefollowing table sets forth the computation of basic and diluted EPS availableto shareholders of common stock (excluding participating securities):

 
| ** **                                                                                                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                 | ** ** | **April 30,**     | ** ** | **April 30,**    | ** ** |
| ** **                                                                                                                                 | ** ** | **2010**               | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Numerator for basic and diluted earnings per share:                                                                                        |       |                   |       |                  |       |   |   |   |   |
| Net income                                                                                                                                 |       | $                      | 4,274,000  |                  | $          | 4,183,000 |   | $ | 15,318,000 |   | $ | 11,290,000 |   |
| Less income allocated to participating securities                                                                                          |       | (69,000                | )          | (77,000               | )          | (236,000 | ) | (164,000 | ) |
| Net income available to common shareholders                                                                                                |       | $                      | 4,205,000  |                  | $          | 4,106,000 |   | $ | 15,082,000 |   | $ | 11,126,000 |   |
|                                                                                                                                       |       |                   |       |                  |       |   |   |   |   |
| 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                    |       | 16,556,724             |       | 16,286,277            |       | 16,488,107 |   | 16,246,334 |   |
|                                                                                                                                       |       |                   |       |                  |       |   |   |   |   |
| Dilutive  effect of stock options using the treasury stock method and the average  market price for the period                             |       | 221,374                |       | 55,195                |       | 198,032 |   | 48,561 |   |
|                                                                                                                                       |       |                   |       |                  |       |   |   |   |   |
| Denominator  for diluted earnings per share - weighted average number of shares and common  stock equivalents attributable to common stock |       | 16,778,098             |       | 16,341,472            |       | 16,686,139 |   | 16,294,895 |   |
|                                                                                                                                       |       |                   |       |                  |       |   |   |   |   |
| Earnings per share attributable to common stock:                                                                                           |       |                   |       |                  |       |   |   |   |   |
| Basic earnings per share                                                                                                                   |       | $                      | 0.25       |                  | $          | 0.25 |   | $ | 0.91 |   | $ | 0.68 |   |
| Diluted earnings per share                                                                                                                 |       | $                      | 0.25       |                  | $          | 0.25 |   | $ | 0.90 |   | $ | 0.68 |   |
|                                                                                                                                       |       |                   |       |                  |       |   |   |   |   |
| Stock  options excluded from weighted average dilutive common shares outstanding  because their inclusion would have been antidilutive     |       | 456,001                |       | 1,217,651             |       | 674,776 |   | 1,285,226 |   |

 

Areconciliation of weighted average number of shares and common stockequivalents attributable to common stock, as determined above, to the Company’stotal weighted average number of shares and common stock equivalents, includingparticipating securities, are set forth in the following table:

 
| ** **                                                                                                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                 | ** ** | **April 30,**     | ** ** | **April 30,**    | ** ** |
| ** **                                                                                                                                 | ** ** | **2010**               | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Denominator for diluted earnings per share -  weighted average number of shares and common stock equivalents attributable  to common stock |       | 16,778,098             |       | 16,341,472            |       | 16,686,139 |   | 16,294,895 |   |
|                                                                                                                                       |       |                   |       |                  |       |   |   |   |   |
| Participating securities                                                                                                                   |       | 274,153                |       | 305,895               |       | 261,653 |   | 239,352 |   |
|                                                                                                                                       |       |                   |       |                  |       |   |   |   |   |
| Total  weighted average number of shares and common stock equivalents attributable  to both common stock and participating securities      |       | 17,052,251             |       | 16,647,367            |       | 16,947,792 |   | 16,534,247 |   |

 

20

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**Note11.  ****Income Taxes**

 

Theconsolidated effective tax rate was 36.9% and 37.5% for the nine months ended April 30,2010 and 2009, respectively. The decrease in the consolidated effective taxrate was principally due to the geographic mix of pre-tax income, as describedbelow, as well as additional United States taxes in the prior year periodrelated to the repatriation of earnings from our Netherlands subsidiary.

 

Themajority of our income before income taxes was generated from our United Statesoperations, which had an overall effective tax rate of 37.8% and 38.2% for thenine months ended April 30, 2010 and 2009, respectively.

 

Dueto the uncertainty of our Netherlands subsidiary utilizing tax benefits in thefuture, a tax benefit was not recorded on the losses from operations at ourNetherlands subsidiary for the nine months ended April 30, 2009, therebyadversely affecting our overall consolidated effective tax rate in the prioryear period. For the nine months ended April 30, 2010, our Netherlandsoperation became slightly profitable as a result of the prior yearrestructuring of its operations, as more fully described elsewhere in thisMD&A and Note 15 to the Condensed Consolidated Financial Statements.

 

OurCanadian operations had an overall effective tax rate of 15.5% and 20.5% forthe nine months ended April 30, 2010 and 2009, respectively. The lowoverall effective tax rate for the current year period was due to therecognition of a tax benefit upon resolution of an income tax uncertainty thatoriginated from an acquisition, as more fully described below. Approximately 3%and 6% of our income before income taxes was generated from our Canadianoperations for the nine months ended April 30, 2010 and 2009,respectively.

 

Forthe nine months ended April 30, 2010 and 2009, approximately 2% and 3%,respectively, of our income before income taxes was generated from ouroperations in Singapore, a country with a low corporate tax structure. Theoverall effective tax rate for our Singapore operation was 13.5% and 12.9% forthe nine months ended April 30, 2010 and 2009, respectively.

 

Theresults of operations for our subsidiary in Japan did not have a significantimpact on our overall effective tax rate for the nine months ended April 30,2010 and 2009 due to the size of income before income taxes generated from thisoperation.

 

Werecord liabilities for an unrecognized tax benefit when a tax benefit for anuncertain tax position is taken or expected to be taken on a tax return, but isnot recognized in our Condensed Consolidated Financial Statements because itdoes not meet the more-likely-than-not recognition threshold that the uncertaintax position would be sustained upon examination by the applicable taxingauthority. The tax benefits recognized in the financial statements from such aposition are measured based on the largest benefit that has a greater thanfifty percent likelihood of being realized upon settlement with the taxauthorities.The majority ofour unrecognized tax benefits originated from acquisitions. Previously, anyadjustments upon resolution of income tax uncertainties that predate or resultfrom acquisitions were recorded as an increase or decrease to goodwill. On August 1,2009, we adopted ASC 805, “*BusinessCombinations*” (“ASC 805”), which requires the resolution of incometax uncertainties that predate or result from acquisitions 

 

21

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tobe recognized in our results of operations beginning with fiscal 2010. However,if our unrecognized tax benefits are recognized in our financial statements infuture periods, there would not be a significant impact to our overalleffective tax rate due to the size of the unrecognized tax benefits in relationto our income before income taxes. Except for decreases due to the lapse ofapplicable statutes of limitation, we do not expect such unrecognized taxbenefits to significantly decrease or increase in the next twelve months.

 

Areconciliation of the beginning and ending amounts of gross unrecognized taxbenefits is as follows:

 
| ** **                                       | ** ** | **Unrecognized** | ** ** |
|--------------------------------------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Tax Benefits** | ** ** |
|                                             |       |             |       |
| Unrecognized tax benefits on July 31, 2008  |       | $                | 427,000    |   |
| Lapse of statute of limitations                  |       | (47,000          | )          |
| Unrecognized tax benefits on July 31, 2009  |       | 380,000          |       |
| Lapse of statute of limitations                  |       | (77,000          | )          |
| Unrecognized tax benefits on April 30, 2010 |       | $                | 303,000    |   |

 

Generally, the Company is no longersubject to federal, state or foreign income tax examinations for fiscal yearsended prior to July 31, 2003.

 

Our policy is to record potentialinterest and penalties related to income tax positions in interest expense andgeneral and administrative expense, respectively, in our Condensed ConsolidatedFinancial Statements. However, such amounts have been relatively insignificantdue to the amount of our unrecognized tax benefits relating to uncertain taxpositions.

 

**Note 12.  Commitments and Contingencies**

 

***Long-term contractual obligations***

 

Asof April 30, 2010, aggregate annual required payments over the remainingfiscal year, the next four years and thereafter under our contractualobligations that have long-term components were as follows:

 
| ** **                                                  | ** ** | **Three Months**           | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                                  | ** ** | **Ending**                 | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | **July 31,**          | ** ** | **Year Ending July 31,** | ** ** |
| ** **                                                  | ** ** | **2010**                   | ** ** | **2011**                      | ** ** | **2012**   | ** ** | **2013**   | ** ** | **2014**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| ** **                                                  | ** ** | **(Amounts in thousands)** | ** ** |
| Maturities  of the credit facilities (1)                    |       | $                          | 2,500      |                          | $          | 10,000     |       | $          | 12,500     |       | $          | —         |       | $          | —     |   | $ | — |   | $ | 25,000 |   |
| Expected  interest payments under the credit facilities (2) |       | 93                         |       | 234                           |       | —     |       | —     |       | —     |       | —         |       | 327        |       |
| Minimum  commitments under noncancelable operating leases   |       | 822                        |       | 2,511                         |       | 1,624      |       | 1,109      |       | 907        |       | 4,936          |       | 11,909     |       |
| Minimum  commitments under noncancelable capital leases     |       | 13                         |       | 14                            |       | —     |       | —     |       | —     |       | —         |       | 27         |       |
| Deferred compensation and other                             |       | 102                        |       | 411                           |       | 259        |       | 38         |       | 33         |       | 166            |       | 1,009      |       |
| Employment agreements                                       |       | 807                        |       | 2,015                         |       | 243        |       | —     |       | —     |       | —         |       | 3,065      |       |
| Total contractual obligations                               |       | $                          | 4,337      |                          | $          | 15,185     |       | $          | 14,626     |       | $          | 1,147          |       | $          | 940        |   | $ | 5,102 |   | $ | 41,337 |   |

----

(1)                                  As of April 30,2010, annual required payments during the year ending July 31, 2012 

 

22

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represent the outstanding balance on the revolving credit facilitysince the May 28, 2010 amendment to our revolving credit facility extendedthe expiration date from August 1, 2010 to August 1, 2011.

 

(2)                                  The expectedinterest payments under the term and revolving credit facilities reflect interestrates of 2.22% and 0.91%, respectively, which were our weighted averageinterest rates on outstanding borrowings at April 30, 2010.

 

***Operating leases***

 

Minimumcommitments under operating leases include minimum rental commitments for ourleased manufacturing facilities, warehouses, office space and equipment.

 

***Deferred compensation***

 

Included in other long-term liabilities are deferred compensationarrangements for certain former Minntech directors and officers.

 

***Employment agreements***

 

Wehave previously entered into various employment agreements with executives ofthe Company, including our Corporate executive officers and our subsidiaryChief Executive Officers. The majority of such contracts expired and werereplaced effective January 1, 2010 with severance contracts that definedcertain compensation arrangements relating to various employment terminationscenarios.

 

**Note13.  Operating Segments**

 

We are a leading provider of infection prevention and control productsin the healthcare market. Our products include specialized medical devicereprocessing systems for renal dialysis and endoscopy, dialysate concentratesand other dialysis supplies, water purification equipment, sterilants,disinfectants and cleaners, hollow fiber membrane filtration and separationproducts for medical and non-medical applications, and specialty packaging forinfectious and biological specimens. We also provide technical maintenance forour products and offer compliance training services for the transport ofinfectious and biological specimens.

 

Inaccordance with FASB ASC Topic 280, “*SegmentReporting,”* (“ASC 280”),we have determined our reportable business segments based upon an assessment ofproduct types, organizational structure, customers and internally preparedfinancial statements. The primary factors used by us in analyzing segmentperformance are net sales and operating income.

 

TheCompany’s segments are as follows:

 

**WaterPurification and Filtration**, which includes waterpurification equipment design and manufacturing, project management,installation, maintenance, deionization and mixing systems, as well as hollowfiber filter devices and ancillary products for high-purity fluid andseparation applications for healthcare (with a large concentration indialysis), pharmaceutical, biotechnology, research, beverage, semiconductor andother commercial industries. Additionally, this segment includes cold sterilantproducts used to disinfect high-purity water systems.

 

23

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Onecustomer accounted for approximately 24% of our Water Purification andFiltration segment net sales and approximately 7% of our consolidated net salesduring the nine months ended April 30, 2010.

 

**HealthcareDisposables**, which includes single-use infection prevention andcontrol products used principally in the dental market such as face masks,patient towels and bibs, self-sealing sterilization pouches, tray covers,sterilization packaging accessories, surface barriers including eyewear, apronsand gowns, disinfectants, germicidal wipes, hand care products, gloves,sponges, cotton products, cups, needles and syringes, scalpels and blades, andsaliva evacuators and ejectors.

 

Fourcustomers collectively accounted for approximately 54% of our Healthcare Disposablessegment net sales and approximately 14% of our consolidated net sales duringthe nine months ended April 30, 2010.

 

**EndoscopeReprocessing**, which includes endoscope disinfection equipmentand related accessories, disinfectants and supplies that are sold to hospitals,clinics and physicians. Additionally, this segment includes technicalmaintenance service on its products.

 

**Dialysis**, whichincludes disinfection/sterilization reprocessing equipment, sterilants,supplies and concentrates related to hemodialysis treatment of patients withacute kidney failure or chronic kidney failure associated with end-stage renaldisease. Additionally, this segment includes technical maintenance service onits products.

 

Threecustomers collectively accounted for approximately 41% of our Dialysis segmentnet sales and approximately 16% of our consolidated net sales, including onecustomer that accounted for approximately 32% of our Dialysis segment net salesand approximately 8% of our consolidated net sales, during the nine monthsended April 30, 2010.

 

**All Other**

 

In accordance with quantitative thresholds established by ASC 280, wehave combined the Therapeutic Filtration and Specialty Packaging operatingsegments into the All Other reporting segment.

 

**Therapeutic Filtration**, which includes hollowfiber filter devices and ancillary products for use in medical applicationsthat are sold to biotech manufacturers and third-party distributors.

 

**Specialty Packaging**, which includes specialtypackaging and thermal control products, as well as related compliance training,for the safe transport of infectious and biological specimens and thermallysensitive pharmaceutical, medical and other products.

 

Theoperating segments follow the same accounting policies used for our CondensedConsolidated Financial Statements as described in Note 2 to the 2009 Form 10-K.

 

24

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Informationas to operating segments is summarized below:

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **April 30,**     | ** ** | **April 30,**    | ** ** |
| ** **                        | ** ** | **2010**               | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
|                              |       |                   |       |                  |       |   |   |   |   |
| Net sales:                        |       |                   |       |                  |       |   |   |   |   |
| Water Purification and Filtration |       | $                      | 19,126,000 |                  | $          | 18,165,000 |   | $ | 56,828,000 |   | $ | 53,434,000 |   |
| Healthcare Disposables            |       | 16,305,000             |       | 15,587,000            |       | 53,047,000 |   | 45,707,000 |   |
| Endoscope Reprocessing            |       | 16,310,000             |       | 14,162,000            |       | 47,087,000 |   | 38,526,000 |   |
| Dialysis                          |       | 10,558,000             |       | 14,220,000            |       | 34,852,000 |   | 43,700,000 |   |
| All Other                         |       | 4,260,000              |       | 4,297,000             |       | 12,327,000 |   | 11,890,000 |   |
| Total                             |       | $                      | 66,559,000 |                  | $          | 66,431,000 |   | $ | 204,141,000 |   | $ | 193,257,000 |   |
|                              |       |                   |       |                  |       |   |   |   |   |
| Operating Income:                 |       |                   |       |                  |       |   |   |   |   |
| Water Purification and Filtration |       | $                      | 1,851,000  |                  | $          | 1,708,000 |   | $ | 5,927,000 |   | $ | 4,908,000 |   |
| Healthcare Disposables            |       | 2,445,000              |       | 2,082,000             |       | 9,732,000 |   | 5,605,000 |   |
| Endoscope Reprocessing            |       | 1,503,000              |       | 1,530,000             |       | 5,153,000 |   | 4,633,000 |   |
| Dialysis                          |       | 2,245,000              |       | 2,925,000             |       | 7,937,000 |   | 8,060,000 |   |
| All Other                         |       | 899,000                |       | 1,015,000             |       | 3,124,000 |   | 2,701,000 |   |
|                              |       | 8,943,000              |       | 9,260,000             |       | 31,873,000 |   | 25,907,000 |   |
| General corporate expenses        |       | (2,089,000             | )          | (2,088,000            | )          | (6,671,000 | ) | (5,952,000 | ) |
| Interest expense, net             |       | (214,000               | )          | (564,000              | )          | (924,000 | ) | (1,881,000 | ) |
|                              |       |                   |       |                  |       |   |   |   |   |
| Income before income taxes        |       | $                      | 6,640,000  |                  | $          | 6,608,000 |   | $ | 24,278,000 |   | $ | 18,074,000 |   |

 

**Note14.  Legal Proceedings**

 

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

 

**Note 15.  ****Restructuring Activities**

 

During the fourth quarter of fiscal 2008, our management approved andinitiated plans to restructure our Netherlands subsidiary by relocating all ofour manufacturing operations from the Netherlands to the United States. Thisaction is part of our continuing effort to reduce operating costs and improveefficiencies by leveraging the existing infrastructure of our Minntechoperations in Minnesota. The elimination of manufacturing operations in theNetherlands has led to the end of onsite material management, qualityassurance, finance and accounting, human resources and some customer servicefunctions. However, we continue to maintain a strong marketing, sales, serviceand technical support presence based in the Netherlands to serve customersthroughout Europe, the Middle East and Africa.

 

For the three months ended April 30, 2009, we recorded $13,000 inrestructuring costs in general and administrative expenses. For the nine monthsended April 30, 2009, we recorded $358,000 in restructuring costs, ofwhich $176,000 was recorded in cost of sales and $182,000

 

25

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wasrecorded in general and administrative expenses. The total cost of therestructuring plan was $710,000 and was recorded beginning in our fourthquarter of fiscal 2008 until the restructuring plan completion date of July 31,2009. We do not expect to incur any additional restructuring costs. Themajority of the restructuring costs were included in our Endoscope Reprocessingsegment.  Since the above costs wererecorded in our Netherlands subsidiary, which had been experiencing losses fromits operations, tax benefits on the above costs were not recorded.

 

As part of the restructuring plan, we sold our Netherlands building andland on May 19, 2009 and entered into a lease for 2.5 years with the newowner so we can continue to use the facility as our European sales and serviceheadquarters as well as for warehouse and distribution activity. The sale ofthe building and land resulted in a gain of $146,000, which is being amortizedover the life of the lease and is recorded in deferred revenue and otherlong-term liabilities. The rent for the full 2.5 year lease of $325,000 waspaid from the sale proceeds and recorded in prepaid expenses and other assets.

 

**Note16.  Convertible Note Receivable**

 

InFebruary 2009, we invested an initial $200,000 in a senior subordinatedconvertible promissory note issued by BIOSAFE, Inc. (“BIOSAFE”), inconnection with BIOSAFE’s grant to us of certain exclusive and non-exclusivelicense rights to BIOSAFE’s antimicrobial additive. BIOSAFE is the owner of apatented and proprietary antimicrobial agent that is built into themanufacturing of end-products to achieve long-lasting microbial protection onsuch end-products’ surface. As a result of BIOSAFE’s successful raising of aminimum incremental amount of cash following our investment, we invested anadditional $300,000 in notes of BIOSAFE in January 2010 bringing theaggregate investment in BIOSAFE notes to $500,000, as obligated under ouragreement with BIOSAFE. We are not obligated to invest any additional funds.

 

Thenotes are convertible into a newly-created series of preferred stock ofBIOSAFE. The notes accrue interest at a per annum rate of 8% until the maturitydate of June 30, 2011 or earlier exercise. Interest is payable in sharesof BIOSAFE stock or in cash. If not paid by the maturity date, interest willaccrue thereafter at a rate of 12% per annum. In connection with ourinvestment, we entered into a license agreement with BIOSAFE under which wewill pay BIOSAFE a fixed royalty percentage of sales of our products containingBIOSAFE’s antimicrobial formulation. This investment, together with accruedinterest, is included within other assets in our Condensed Consolidated BalanceSheets as of April 30, 2010 and July 31, 2009. The carrying value ofthis investment approximates fair value due to the short maturity of the notesand the relatively consistent underlying value of BIOSAFE.

 

26

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

 

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

# ** **

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

 

**Results of Operations** provides a discussion ofthe consolidated results of operations for the three and nine months ended April 30,2010 compared with the three and nine months ended April 30, 2009.

 

**Liquidity and Capital Resources** provides an overview of ourworking capital, cash flows, contractual obligations, financing and foreigncurrency activities.

 

**Critical Accounting Policies** provides a discussion ofour accounting policies that require critical judgments, assumptions andestimates.

 

**Forward-Looking Statements** provides a discussion ofcautionary factors that may affect future results.

 

**Overview**

 

# **Cantel is a leading provider ofinfection prevention and control products in the healthcare market,specializing in the following operating segments:**

# ** **

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

 

·                  Healthcare Disposables: Single-use,infection prevention and control products used principally inthe dental market including face masks, towels and bibs, tray covers, salivaejectors, germicidal wipes, plastic cups, sterilization pouches anddisinfectants.

 

·                  Endoscope Reprocessing: Medicaldevice reprocessing systems, disinfectants, enzymatic detergents and othersupplies used to high-level disinfect flexible endoscopes.

 

·                  Dialysis: Medicaldevice reprocessing systems, sterilants/disinfectants, dialysate concentratesand other supplies for renal dialysis.

 

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

 

·                  Specialty Packaging: Specialtypackaging and thermal control products, as well as related compliance training,for the transport of infectious and biological specimens and thermallysensitive pharmaceutical, medical and other products. (Included in All Otherreporting segment.)

 

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

 

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See our Annual Report on Form 10-K forthe fiscal year ended July 31, 2009 (the “2009 Form 10-K”) and ourCondensed Consolidated Financial Statements for additional financialinformation regarding our reporting segments.

 

# ***Significant Activity***

# ** **

(i)                                     Net incomeincreased by 2% and 36% for the three and nine months ended April 30,2010, respectively, compared with the three and nine months ended April 30,2009. We continue to benefit from having a broad portfolio of infectionprevention and control products sold into diverse business segments and we haveproactively developed our overall business to where approximately 75% of ournet sales are attributable to consumable products and service. The primaryfactors that contributed to this financial performance, as further describedelsewhere in this MD&A, were as follows:

 

·                  an increase in demand duringthe first four months of fiscal 2010 for healthcare disposables products as aresult of the outbreak of the novel H1N1 (swine flu),

 

·                  improved gross margins as aresult of numerous profit improvement and sales and marketing initiatives andthe continued shift in sales mix to higher margin disposables,

 

·                  higher selling pricesincluding those attributable to converting the sale of high-level disinfectantsin our Endoscope Reprocessing segment from our former equipment distributor toour direct sales and service force at higher selling prices,

 

·                  reductions in manufacturing,raw material and distribution costs,

 

·                  general company-wide effortsto control operating expenses while still investing in sales, marketing andresearch and development activities, and

 

·                  favorable interest costs dueto both reduced average interest rates as well as lower outstanding borrowings.

 

The above favorable factors were partiallyoffset by (i) decreases in net sales and profitability in our Dialysissegment, (ii) decreases in net sales of capital equipment in our WaterPurification and Filtration segment and (iii) increased selling costs inour Endoscope Reprocessing segment, as further explained elsewhere in thisMD&A. Additionally, although the outbreak of the novel H1N1 flu resulted instrong sales volume of high margin face masks and other healthcare disposablesproducts during the first four months of fiscal 2010, such sales volume hasreturned to a sales level that is similar to that which existed prior to theoutbreak of the novel H1N1 flu given that the elevated level of reported casesof influenza viruses has subsided.

 

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(ii)                                  We sell ourdialysis products to a concentrated number of customers. Sales in our Dialysissegment were adversely impacted by the continued loss of some lower margindialysate concentrate business from both domestic and international customersas a result of the highly competitive and price sensitive market for suchproduct, as well as the decrease in demand for our Renatron reprocessingequipment, as more fully described elsewhere in this MD&A. This reductionin dialysis sales has reduced overall profitability in this segment. Our marketfor dialysis reprocessing products is limited to dialysis centers that reusedialyzers, which market has been decreasing in the United States. Although webelieve the per procedure cost of reuse dialyzers is more economical thansingle-use dialyzers, a further decrease in the market for dialysisreprocessing products is likely to result in continued loss of net sales and alower level of operating income in this segment in the future. See “RiskFactors” in our 2009 Form 10-K for a discussion of the Company’s riskfactors.

 

(iii)                               While overallsales and operating income have increased in our Water Purification and Filtrationsegment for the three and nine months ended April 30, 2010 compared withthe three and nine months ended April 30, 2009, our net sales of capitalequipment used for dialysis as well as commercial and industrial applicationshave decreased primarily due to the deterioration in the economy and creditmarkets, as more fully described elsewhere in this MD&A.

 

(iv)                              Fluctuations inthe rates of currency exchange had an overall adverse impact on our net incomefor the three and nine months ended April 30, 2010, compared with thethree and nine months ended April 30, 2009, as more fully describedelsewhere in this MD&A.

 

(v)                                 We declared ourfirst cash semiannual dividend of $0.05 per share of outstanding common stock,which was paid on January 29, 2010, as more fully described elsewhere inthis MD&A.

 

(vi)                              We amended ourcredit facilities on May 28, 2010 primarily to extend the termination dateof the revolving credit facility from its August 1, 2010 expiration dateto August 1, 2011, as well as to expand our acquisition financingcapabilities, as more fully described elsewhere in this MD&A.

 

(vii)                           We acquired thebusiness of Purity Water Company of San Antonio, Inc. (“Purity”) on June 1,2010, as more fully described in Note 3 to the Condensed Consolidated FinancialStatements.

 

(viii)                        We acquired thebusiness of G.E.M. Water Systems Int’l, LLC (“G.E.M.”) on July 31, 2009,as more fully described in Note 3 to the Condensed Consolidated FinancialStatements.

 

(ix)                                In June 2008,we announced and began executing our plan to restructure our Netherlandsmanufacturing operations as part of our continuing effort to reduce operatingcosts and leverage our existing United States infrastructure. As a result ofthis restructuring, approximately $13,000 and 

 

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$358,000 of restructuring costs were recordedin the three and nine months ended April 30, 2009, respectively, whichdecreased both basic and diluted earnings per share by $0.02 during the ninemonths ended April 30, 2009, as more fully described in Note 15 to theCondensed Consolidated Financial Statements and elsewhere in this MD&A.

 

**Results of Operations**

 

The results of operations described belowreflect the operating results of Cantel and its wholly-owned subsidiaries.Since the G.E.M. acquisition was completed on July 31, 2009, its resultsof operations are included in our results of operations for the three and ninemonths ended April 30, 2010, but are not reflected in our results ofoperations for the three and nine months ended April 30, 2009.

 

The following discussion should also be readin conjunction with our 2009 Form 10-K.

 

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

 
| ** **                        | ** ** | **Three Months Ended  April 30,** | ** ** | **Nine Months Ended  April 30,** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                        | ** ** | **2010**                               | ** ** | **2009**                              | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                        | ** ** | **(Dollar amounts in thousands)**      | ** ** | **(Dollar amounts in thousands)**     | ** ** |
| ** **                        | ** ** | **$**                                  | ** ** | **%**                                 | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
|                              |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Water Purification and Filtration |       | $                                      | 19,126     |                                  | 28.7       |   | $ | 18,165 |   | 27.3 |   | $ | 56,828 |   | 27.8 |   | $ | 53,434 |   | 27.6 |   |
| Healthcare Disposables            |       | 16,305                                 |       | 24.5                                  |       | 15,587 |   | 23.5 |   | 53,047 |   | 26.0 |   | 45,707 |   | 23.7 |   |
| Endoscope Reprocessing            |       | 16,310                                 |       | 24.5                                  |       | 14,162 |   | 21.3 |   | 47,087 |   | 23.1 |   | 38,526 |   | 19.9 |   |
| Dialysis                          |       | 10,558                                 |       | 15.9                                  |       | 14,220 |   | 21.4 |   | 34,852 |   | 17.1 |   | 43,700 |   | 22.6 |   |
| All Other                         |       | 4,260                                  |       | 6.4                                   |       | 4,297 |   | 6.5 |   | 12,327 |   | 6.0 |   | 11,890 |   | 6.2 |   |
|                              |       | $                                      | 66,559     |                                  | 100.0      |   | $ | 66,431 |   | 100.0 |   | $ | 204,141 |   | 100.0 |   | $ | 193,257 |   | 100.0 |   |

 

***Net Sales***

 

Net sales increased by $128,000 to$66,559,000 for the three months ended April 30, 2010 from $66,431,000 forthe three months ended April 30, 2009.

 

Net sales increased by $10,884,000, or 5.6%,to $204,141,000 for the nine months ended April 30, 2010 from $193,257,000for the nine months ended April 30, 2009.

 

The increase in net sales for the three andnine months ended April 30, 2010 was principally attributable to increasesin sales of endoscope reprocessing products and services, water purificationand filtration products and services and healthcare disposables products,partially offset by a decrease in dialysis products.

 

Net sales of endoscope reprocessing productsand services increased by 15.2% and 22.2% for the three and nine months ended April 30,2010, respectively, compared with the three and nine months ended April 30,2009, primarily due to increases in both domestic and international demand for (i) ourendoscope reprocessing equipment and (ii) our disinfectants and equipmentaccessories due to the increased field population of equipment. Additionally,the increase was due to higher selling prices of our disinfectants in theUnited States as a result of converting such prior period sales from our formerequipment distributor to our direct sales and service force.

 

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Net sales of water purification andfiltration products and services increased by 5.3% and 6.4% for the three andnine months ended April 30, 2010, respectively, compared with the threeand nine months ended April 30, 2009, primarily due to (i) approximately$812,000 and $2,302,000, respectively, of net sales due to the acquisition ofG.E.M. on July 31, 2009, (ii) an increase in demand for oursterilants and filters within our installed equipment base of business, and (iii) thetranslation of Canadian dollar net sales using a stronger Canadian dollaragainst the United States dollar, which favorably impacted net sales byapproximately $346,000 and $570,000, respectively. Partially offsetting theseincreases was a decrease in demand for our water purification equipment used fordialysis (including a decrease in demand for capital equipment by our largestcustomer) as well as commercial and industrial applications primarily as aresult of the deterioration in the general economy and credit markets, whichmay continue to adversely affect capital equipment sales.

 

Net sales of healthcare disposables productsincreased by 4.6% and 16.1% for the three and nine months ended April 30,2010, respectively, compared with the three and nine months ended April 30,2009, despite nominal growth in the overall dental market, primarily due to (i) increaseddemand for our sterilization pouch and barrier cover products as a result offavorable sales and marketing initiatives and (ii) approximately $75,000and $475,000, respectively, in higher net sales as a result of increases inselling prices that were implemented to offset corresponding supplier costincreases. The increase in net sales for the nine months ended April 30,2010 was also due to increased sales volume of high margin face masks, disinfectantsand other healthcare disposables products due to the outbreak of the novel H1N1flu (swine flu) in April 2009, which resulted in significantly increaseddemand during the first four months of fiscal 2010. Although the outbreak ofthe novel H1N1 flu resulted in strong sales volume of high margin face masksand other healthcare disposables products during the first four months offiscal 2010, such sales volume has returned to a sales level that is similar tothat which existed prior to the outbreak of the novel H1N1 flu given that theelevated level of reported cases of influenza viruses has subsided. Atypicaldemand for face masks is highly dependent upon the severity and timing of anypandemic flu outbreak such as the recent novel H1N1 flu, the ability of ourCompany to educate existing customers and potential new customers on thebenefits of our face masks, disinfectants and other products and the level ofurgency our customers and the general public develop and maintain with respectto epidemic and pandemic preparedness.

 

Net sales of dialysis products and servicesdecreased by 25.8% and 20.2% for the three and nine months ended April 30,2010, respectively, compared with the three and nine months ended April 30,2009, primarily due to (i) the continuing adverse impact of losing somedialysate concentrate business (a concentrated acid or bicarbonate used toprepare dialysate, a chemical solution that draws waste products from a patient’sblood through a dialyzer membrane during hemodialysis treatment) from domesticand international customers as a result of the highly competitive and pricesensitive market for this lower margin commodity product, as well as variousglobal economic factors with respect to international demand, and (ii) adecrease in demand in the United States (including a decrease from our largestdialysis customer) and internationally for our Renatron dialyzer reprocessingequipment. Due to sales price decreases by some of our competitors, we expect acontinued decrease in net sales of our lower margin dialysate concentrateproduct in the future as we elect not to pursue unprofitable concentrate sales.Furthermore, Fresenius Medical Care (“Fresenius”), the largest dialysisprovider chain in the United States, manufactures dialysate concentratethemselves and has been decreasing their purchases of that product from us andmay continue to do so in the future. Our market for dialysis reprocessingproducts is limited to dialysis centers that reuse dialyzers, which market has 

 

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been decreasing in the United States. Although we believe the perprocedure cost of reuse dialyzers is more economical than single-use dialyzers,a further decrease in the market for dialysis reprocessing products is likelyto result in continued loss of net sales and a lower level of operating incomein this segment in the future. Partially offsetting these decreases were higherselling prices, which favorably impacted net sales for the three and ninemonths ended April 30, 2010 by approximately $150,000 and $625,000,respectively.

 

***Gross profit***

 

Gross profit increased by $1,170,000, or4.6%, to $26,693,000 for the three months ended April 30, 2010 from$25,523,000 for the three months ended April 30, 2009. Gross profit as apercentage of net sales for the three months ended April 30, 2010 and 2009was 40.1% and 38.4%, respectively.

 

Gross profit increased by $10,518,000, or14.5%, to $83,275,000 for the nine months ended April 30, 2010 from$72,757,000 for the nine months ended April 30, 2009. Gross profit as apercentage of net sales for the nine months ended April 30, 2010 and 2009was 40.8% and 37.6%, respectively.

 

The gross profit percentage for the three andnine months ended April 30, 2010 increased compared with the three andnine months ended April 30, 2009 primarily due to (i) favorable salesmix due to the increased sales volume of certain higher margin products such assterilants and filters in our Water Purification and Filtration segment,sterilization pouches, barrier covers, face masks and disinfectants in ourHealthcare Disposables segment and disinfectants and equipment accessories inour Endoscope Reprocessing segment, as well as decreased sales of our lowermargin dialysate concentrate product in our Dialysis segment, (ii) higherselling prices including those attributable to converting the sale ofhigh-level disinfectants in our Endoscope Reprocessing segment from our formerequipment distributor to our direct sales and service force at higher selling prices,(iii) a decrease in raw material costs due to the lower price of oil, (iv) improvedefficiencies in our manufacturing, distribution and service functions and (v) approximately$176,000 in restructuring charges recorded primarily in our Endoscope Reprocessingsegment during the nine months ended April 30, 2009 relating to therelocation of our Netherlands manufacturing operations, as more fully describedelsewhere in this MD&A. However, we cannot provide assurances that ourgross profit percentage will not be adversely affected in the future (i) byprice competition in certain of our segments such as Dialysis and HealthcareDisposables, (ii) by uncertainties associated with our product mix and (iii) ifraw materials and distribution costs increase and we are unable to implementprice increases.

 

***Operating Expenses***

 

Selling expenses increased by $1,364,000, or17.1%, to $9,348,000 for the three months ended April 30, 2010, from$7,984,000 for the three months ended April 30, 2009. For the nine monthsended April 30, 2010, selling expenses increased by $4,257,000, or 19.1%,to $26,583,000 from $22,326,000 for the nine months ended April 30, 2009.These increases are primarily due to (i) additional sales personnel andhigher compensation expense principally in our Endoscope Reprocessing segmentrelating to incentive compensation, including commissions expense from a moreaggressive commission plan, designed to gain market share and expand into newmarkets, (ii) an increase in advertising and marketing expense primarilyrelated to our Healthcare Disposables segment and (iii) increased salessupport services principally in our Water Purification and Filtration andEndoscope Reprocessing segments during the first six months of the nine months 

 

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ended April 30, 2010.

 

Selling expenses as apercentage of net sales were 14.0% and 12.0% for the three months ended April 30,2010 and 2009, respectively, and 13.0% and 11.6% for the nine months ended April 30,2010 and 2009, respectively. The increase in our selling expense as apercentage of net sales for the three months ended April 30, 2010 comparedto previous quarters was due to our strategic decision to invest in sellinginitiatives designed to gain or maintain market share as well as to expand intonew markets.

 

General and administrativeexpenses increased by $43,000 to $9,149,000 for the three months ended April 30,2010, from $9,106,000 for the three months ended April 30, 2009, primarilydue to (i) higher compensation expense of approximately $110,000 relatingto annual salary increases in all our segments and additional personnelprimarily in our Water Purification and Filtration segment and (ii) anincrease of approximately $151,000 relating to foreign currency primarily as aresult of translating general and administrative expenses of our internationalsubsidiaries using a significantly stronger Canadian dollar against the UnitedStates dollar, partially offset by a decrease of $197,000 in stock-based compensationexpense.

 

General and administrativeexpenses increased by $559,000, or 2.1%, to $27,726,000 for the nine monthsended April 30, 2010, from $27,167,000 for the nine months ended April 30,2009, primarily due to (i) higher compensation expense of approximately$490,000 relating to annual salary increases in all our segments, incentivecompensation primarily in our Healthcare Disposables segment and additionalpersonnel principally in our Water Purification and Filtration segment, (ii) anincrease of approximately $361,000 relating to foreign currency primarily as aresult of the inclusion of foreign exchange gains during the prior periodassociated with translating certain foreign denominated assets into functionalcurrencies as well as the translation of general and administrative expenses ofour international subsidiaries using a significantly stronger Canadian dollaragainst the United States dollar and (iii) an increase of $255,000 instock-based compensation expense. These increases were partially offset by adecrease in overhead and restructuring costs at our Netherlands operation dueto the completion of restructuring activities, as more fully describedelsewhere in this MD&A, and approximately $184,000 in lower bad debtexpense primarily in our Water Purification and Filtration segment.

 

General and administrativeexpenses as a percentage of net sales were 13.7% for both the three monthsended April 30, 2010 and 2009 and 13.6% and 14.1% for the nine monthsended April 30, 2010 and 2009, respectively.

 

Research and developmentexpenses (which include continuing engineering costs) increased by $81,000 to$1,342,000 for the three months ended April 30, 2010, from $1,261,000 forthe three months ended April 30, 2009. For the nine months ended April 30, 2010, research and developmentexpenses increased by $455,000 to $3,764,000, from $3,309,000 for the ninemonths ended April 30, 2009. These increases are primarily due toincreased development work on certain new products as well as continuingengineering on existing products primarily in our Water Purification andFiltration, Endoscope Reprocessing and Therapeutic Filtration segments.

 

***Interest***

 

Interest expense decreased by $355,000 to$233,000 for the three months ended April 30, 2010, from $588,000 for thethree months ended April 30, 2009. For the nine months ended April 30, 2010, interest expensedecreased by $1,054,000 to $959,000, from $2,013,000 for the nine

 

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months ended April 30, 2009, primarily due to decreases in averageoutstanding borrowings and average interest rates.

 

Interest income decreased by $5,000 to$19,000 for the three months ended April 30, 2010, from $24,000 for thethree months ended April 30, 2009. For the nine months ended April 30, 2010, interest income decreasedby $97,000 to $35,000, from $132,000 for the nine months ended April 30,2009, primarily due to a decrease in average interest rates and a moreconservative investment philosophy.

 

***Income taxes***

 

The consolidated effective tax rate was 36.9%and 37.5% for the nine months ended April 30, 2010 and 2009, respectively.The decrease in the consolidated effective tax rate was principally due to thegeographic mix of pre-tax income, as described below, as well as additionalUnited States taxes in the prior year period related to the repatriation ofearnings from our Netherlands subsidiary.

 

The majority of our income before incometaxes was generated from our United States operations, which had an overalleffective tax rate of 37.8% and 38.2% for the nine months ended April 30,2010 and 2009, respectively.

 

Due to the uncertainty of our Netherlandssubsidiary utilizing tax benefits in the future, a tax benefit was not recordedon the losses from operations at our Netherlands subsidiary for the nine monthsended April 30, 2009, thereby adversely affecting our overall consolidatedeffective tax rate in the prior year period. For the nine months ended April 30,2010, our Netherlands operation became slightly profitable as a result of theprior year restructuring of its operations, as more fully described elsewherein this MD&A and Note 15 to the Condensed Consolidated FinancialStatements.

 

Our Canadian operations had an overalleffective tax rate of 15.5% and 20.5% for the nine months ended April 30,2010 and 2009, respectively. The low overall effective tax rate for the currentyear period was due to the recognition of a tax benefit upon resolution of anincome tax uncertainty that originated from an acquisition, as more fully describedbelow. Approximately 3% and 6% of our income before income taxes was generatedfrom our Canadian operations for the nine months ended April 30, 2010 and2009, respectively.

 

For the nine months ended April 30, 2010and 2009, approximately 2% and 3%, respectively, of our income before incometaxes was generated from our operations in Singapore, a country with a lowcorporate tax structure. The overall effective tax rate for our Singaporeoperation was 13.5% and 12.9% for the nine months ended April 30, 2010 and2009, respectively.

 

The results of operations for our subsidiaryin Japan did not have a significant impact on our overall effective tax ratefor the nine months ended April 30, 2010 and 2009 due to the size ofincome before income taxes generated from this operation.

 

We record liabilities for an unrecognized taxbenefit when a tax benefit for an uncertain tax position is taken or expectedto be taken on a tax return, but is not recognized in our CondensedConsolidated Financial Statements because it does not meet themore-likely-than-not recognition threshold that the uncertain tax positionwould be sustained upon examination by the 

 

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applicable taxing authority. The tax benefits recognized in thefinancial statements from such a position are measured based on the largestbenefit that has a greater than fifty percent likelihood of being realized uponsettlement with the tax authorities.The majority of our unrecognized tax benefitsoriginated from acquisitions. Previously, any adjustments upon resolution ofincome tax uncertainties that predate or result from acquisitions were recordedas an increase or decrease to goodwill. On August 1, 2009, we adoptedAccounting Standards Codification (“ASC”) 805, “*Business Combinations*” (“ASC 805”), which requires theresolution of income tax uncertainties that predate or result from acquisitionsto be recognized in our results of operations beginning with fiscal 2010.However, if our unrecognized tax benefits are recognized in our financialstatements in future periods, there would not be a significant impact to ouroverall effective tax rate due to the size of the unrecognized tax benefits inrelation to our income before income taxes. Except for decreases due to thelapse of applicable statutes of limitation, we do not expect such unrecognizedtax benefits to significantly decrease or increase in the next twelve months.

 

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

 
| ** **                                       | ** ** | **Unrecognized**

**Tax Benefits** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|
|                                             |       |                               |       |
| Unrecognized tax benefits on July 31, 2008  |       | $                                  | 427,000    |   |
| Lapse of statute of limitations                  |       | (47,000                            | )          |
| Unrecognized tax benefits on July 31, 2009  |       | 380,000                            |       |
| Lapse of statute of limitations                  |       | (77,000                            | )          |
| Unrecognized tax benefits on April 30, 2010 |       | $                                  | 303,000    |   |

 

Generally, the Company is no longersubject to federal, state or foreign income tax examinations for fiscal yearsended prior to July 31, 2003.

 

Our policy is to record potentialinterest and penalties related to income tax positions in interest expense andgeneral and administrative expense, respectively, in our Condensed ConsolidatedFinancial Statements. However, such amounts have been relatively insignificantdue to the amount of our unrecognized tax benefits relating to uncertain taxpositions.

 

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***Stock-Based Compensation***

 

Thefollowing table shows the income statement components of stock-basedcompensation expense recognized in the Condensed Consolidated Statements ofIncome:

 
| ** **                                                              | ** ** | **Three Months Ended  April 30,** | ** ** | **Nine Months Ended  April 30,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                              | ** ** | **2010**                               | ** ** | **2009**                              | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                    |       |                                   |       |                                  |       |   |   |   |   |
| Cost of sales                                                           |       | $                                      | 36,000     |                                  | $          | 19,000 |   | $ | 95,000 |   | $ | 55,000 |   |
| Operating expenses:                                                     |       |                                   |       |                                  |       |   |   |   |   |
| Selling                                                                 |       | 115,000                                |       | 52,000                                |       | 294,000 |   | 158,000 |   |
| General and administrative                                              |       | 511,000                                |       | 708,000                               |       | 1,859,000 |   | 1,604,000 |   |
| Research and development                                                |       | 8,000                                  |       | 5,000                                 |       | 22,000 |   | 12,000 |   |
| Total operating expenses                                                |       | 634,000                                |       | 765,000                               |       | 2,175,000 |   | 1,774,000 |   |
| Stock-based compensation before income taxes                            |       | 670,000                                |       | 784,000                               |       | 2,270,000 |   | 1,829,000 |   |
| Income tax benefits                                                     |       | (239,000                               | )          | (289,000                              | )          | (822,000 | ) | (735,000 | ) |
| Total stock-based compensation expense, net of tax                      |       | $                                      | 431,000    |                                  | $          | 495,000 |   | $ | 1,448,000 |   | $ | 1,094,000 |   |
|                                                                    |       |                                   |       |                                  |       |   |   |   |   |
| Decrease in earnings per common share due to  stock-based compensation: |       |                                   |       |                                  |       |   |   |   |   |
|                                                                    |       |                                   |       |                                  |       |   |   |   |   |
| Basic                                                                   |       | $                                      | 0.03       |                                  | $          | 0.03 |   | $ | 0.09 |   | $ | 0.07 |   |
|                                                                    |       |                                   |       |                                  |       |   |   |   |   |
| Diluted                                                                 |       | $                                      | 0.03       |                                  | $          | 0.03 |   | $ | 0.09 |   | $ | 0.07 |   |

 

Forthe three and nine months ended April 30, 2010 and 2009, the abovestock-based compensation expense before income taxes was recorded in theCondensed Consolidated Financial Statements as stock-based compensation expenseand an increase to additional paid-in capital. The related income tax benefits(which pertain only to stock awards and options that do not qualify asincentive stock options) were recorded as an increase to long-term deferredincome tax assets (which are netted with long-term deferred income taxliabilities) and a reduction to income tax expense.

 

Thestock-based compensation expense recorded in the Condensed ConsolidatedFinancial Statements may not be representative of the effect of stock-basedcompensation expense in future periods due to the level of awards issued inpast years (which level may not be similar in the future), modifications ofexisting awards and assumptions used in determining fair value, expected livesand estimated forfeitures. We determine the fair value of each stock awardusing the closing market price of our Common Stock on the date of grant. Weestimate the fair value of each option grant on the date of grant using theBlack-Scholes option valuation model. The determination of fair value using anoption-pricing model is affected by our stock price as well as assumptionsregarding a number of subjective variables. These variables include, but arenot limited to, the expected stock price volatility over the term of theexpected option life (which is determined by using the historical closingprices of our Common Stock), the expected dividend yield (which historicallywas 0% and is now approximately 0.5% as we began paying dividends in January 2010),and the expected option life (which is based on historical exercise behavior).If factors change and we employ different assumptions in the application of ASCTopic 718, *“Compensation — Stock Compensation,”* (“ASC718”), in future periods, the compensation expense that we would record may differsignificantly from what we have recorded in the current period.

 

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Mostof 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 differenttimes during the vesting period, as opposed to awards that vest at the end ofthe vesting period. We recognize compensation expense for awards subject tograded vesting using the straight-line basis, reduced by estimated forfeitures.At April 30, 2010, total unrecognized stock-based compensation expensebefore income taxes related to total nonvested stock options and stock awardswas $4,016,000 with a remaining weighted average period of 21 months over whichsuch expense is expected to be recognized.

 

If certain criteria are met when options are exercised or restrictedstock becomes vested, the Company is allowed a deduction on its income taxreturn. Accordingly, we account for the income tax effect on such income taxdeductions as additional paid-in capital or a reduction of deferred income taxassets (which are netted with long-term deferred income tax liabilities) and asa reduction of income taxes payable. For the nine months ended April 30,2010 and 2009, such income tax deductions reduced income taxes payable by$976,000 and $566,000, respectively.

 

We classify the cash flows resulting fromexcess tax benefits as financing cash flows on our Condensed ConsolidatedStatements of Cash Flows. Excess tax benefits arise when the ultimate taxeffect of the deduction for tax purposes is greater than the tax benefit onstock compensation expense (including tax benefits on stock compensationexpense that has only been reflected in past pro forma disclosures relating tofiscal years prior to August 1, 2005) which was determined based upon theaward’s fair value.

 

**Liquidity and Capital Resources**

 

***Working capital***

 

At April 30, 2010, the Company’s working capital was $54,334,000,compared with $49,797,000 at July 31, 2009.

 

***Cash flows from operating activities***

 

Net cash provided by operating activities was $17,451,000 and$21,293,000 for the nine months ended April 30, 2010 and 2009,respectively. For the nine months ended April 30, 2010, the net cashprovided by operating activities was primarily due to net income (afteradjusting for depreciation, amortization, stock-based compensation expense anddeferred taxes) and a decrease in accounts receivable (due to strongcollections), partially offset by increases in inventories (due to plannedstrategic increases in stock levels of certain products primarily in ourHealthcare Disposables and Endoscope Reprocessing segments) and a decrease inaccounts payable, deferred revenue and accrued expenses (due primarily to thetiming associated with incentive compensation payments).

 

For the nine months ended April 30, 2009, the net cash provided byoperating activities was primarily due to net income (after adjusting fordepreciation, amortization, stock-based compensation expense and deferredincome taxes) and a decrease in inventories (due to strong April sales inour Healthcare Disposables, Endoscope Reprocessing and Water Purification andFiltration segments as well as a decrease in the cost of certain rawmaterials), partially offset by an increase in accounts receivable (due tostrong April sales).

 

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***Cash flows from investing activities***

 

Net cash used in investing activities was $4,852,000 and $7,480,000 forthe nine months ended April 30, 2010 and 2009, respectively. For the ninemonths ended April 30, 2010, the net cash used in investing activities wasprimarily for capital expenditures. For the nine months ended April 30,2009, the net cash used in investing activities was primarily for acquisitionearnout payments to the former owners of Crosstex and Twist and capitalexpenditures.

 

***Cash flows from financing activities***

 

Net cash used in financing activities was $17,140,000 and $8,317,000for the nine months ended April 30, 2010 and 2009, respectively. For thenine months ended April 30, 2010, the net cash used in financingactivities was primarily attributable to repayments under our credit facilitiesand the payment of a dividend to our shareholders, partially offset by proceedsfrom the exercises of stock options. For the nine months ended April 30,2009, the net cash used in financing activities was primarily attributable torepayments under our credit facilities and purchases of treasury stock,partially offset by a borrowing under our revolving credit facility andproceeds from the exercises of stock options.

 

***Dividends***

 

In December 2009, we announced that we intend to pay, for thefirst time, a semiannual cash dividend of $0.05 per outstanding share, or $0.10per share annually, of the Company’s Common Stock. The first cash dividend of$0.05 per share of outstanding Common Stock, which totaled $840,000, was paidon January 29, 2010 to shareholders of record at the close of business on January 15,2010. Future declaration of semiannual dividends and the establishment offuture record and payment dates are subject to the final determination of theCompany’s Board of Directors.

 

***Restructuring activities***

 

During the fourth quarter of fiscal 2008, our management approved andinitiated plans to restructure our Netherlands subsidiary by relocating all ofour manufacturing operations from the Netherlands to the United States. Thisaction is part of our continuing effort to reduce operating costs and improveefficiencies by leveraging the existing infrastructure of our Minntechoperations in Minnesota. The elimination of manufacturing operations in theNetherlands has led to the end of onsite material management, qualityassurance, finance and accounting, human resources and some customer servicefunctions. However, we continue to maintain a strong marketing, sales, serviceand technical support presence based in the Netherlands to serve customersthroughout Europe, the Middle East and Africa.

 

For the three months ended April 30, 2009, we recorded $13,000 inrestructuring costs in general and administrative expenses. For the nine monthsended April 30, 2009, we recorded $358,000 in restructuring costs, ofwhich $176,000 was recorded in cost of sales and $182,000 was recorded ingeneral and administrative expenses. The total cost of the restructuring planwas $710,000 and was recorded beginning in our fourth quarter of fiscal 2008until the restructuring plan completion date of July 31, 2009. We do notexpect to incur any additional restructuring costs. The majority of therestructuring costs were included in our Endoscope Reprocessing segment.  Since the above costs were recorded in ourNetherlands subsidiary, which had been

 

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experiencinglosses from its operations, tax benefits on the above costs were not recorded.

 

As part of the restructuring plan, we sold our Netherlands building andland on May 19, 2009 and entered into a lease for 2.5 years with the newowner so we can continue to use the facility as our European sales and serviceheadquarters as well as for warehouse and distribution activity. The sale ofthe building and land resulted in a gain of $146,000, which is being amortizedover the life of the lease and is recorded in deferred revenue and otherlong-term liabilities. The rent for the full 2.5 year lease of $325,000 waspaid from the sale proceeds and recorded in prepaid expenses and other assets.

 

***Long-term contractual obligations***

 

Asof April 30, 2010, aggregate annual required payments over the remainingfiscal year, the next four years and thereafter under our contractualobligations that have long-term components were as follows:

 
|                                                        |   | **Three Months  Ending**   | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** |   |
|-------------------------------------------------------------|--------|----------------------------|------------|-------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|--------|
|                                                        |   | **July 31,**          | ** ** | **Year Ending July 31,** |       |
|                                                        |   | **2010**                   | ** ** | **2011**                      | ** ** | **2012**   | ** ** | **2013**   | ** ** | **2014**   | ** ** | **Thereafter** | ** ** | **Total**  |   |
|                                                        |   | **(Amounts in thousands)** |       |
| Maturities of the credit facilities (1)                     |   | $                          | 2,500      |                          | $          | 10,000     |       | $          | 12,500     |       | $          | —         |       | $          | — |   | $ | — |   | $ | 25,000 |   |
| Expected interest payments under the credit  facilities (2) |   | 93                         |       | 234                           |       | —     |       | —     |       | —     |       | —         |       | 327        |   |
| Minimum commitments under noncancelable operating  leases   |   | 822                        |       | 2,511                         |       | 1,624      |       | 1,109      |       | 907        |       | 4,936          |       | 11,909     |   |
| Minimum commitments under noncancelable capital  leases     |   | 13                         |       | 14                            |       | —     |       | —     |       | —     |       | —         |       | 27         |   |
| Deferred compensation and other                             |   | 102                        |       | 411                           |       | 259        |       | 38         |       | 33         |       | 166            |       | 1,009      |   |
| Employment agreements                                       |   | 807                        |       | 2,015                         |       | 243        |       | —     |       | —     |       | —         |       | 3,065      |   |
| Total contractual obligations                               |   | $                          | 4,337      |                          | $          | 15,185     |       | $          | 14,626     |       | $          | 1,147          |       | $          | 940    |   | $ | 5,102 |   | $ | 41,337 |   |

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(1)                                  As of April 30,2010, annual required payments during the year ending July 31, 2012represent the outstanding balance on the revolving credit facility since the May 28,2010 amendment to our revolving credit facility extended the expiration datefrom August 1, 2010 to August 1, 2011.

 

(2)                                  The expectedinterest payments under the term and revolving credit facilities reflectinterest rates of 2.22% and 0.91%, respectively, which were our weightedaverage interest rates on outstanding borrowings at April 30, 2010.

 

***Credit facilities***

 

In conjunction with theacquisition of Crosstex, we entered into amended and restated credit facilitiesdated as of August 1, 2005 (the “U.S. Credit Facilities”) with aconsortium of lenders to fund the cash consideration paid in the acquisitionand costs associated with the acquisition, as well as to modify our existingUnited States credit facilities. The U.S. Credit Facilities, as amended,include (i) a six-year $40.0 million senior secured amortizing term loanfacility expiring August 1, 2011 and (ii) a five-year $50.0 millionsenior secured revolving credit facility expiring August 1, 2010. Amountswe repay under the term loan facility may not be re-borrowed. On May 28,2010, we amended the U.S. Credit Facilities which included extending thetermination date for the revolving credit facility to August 1, 2011. Debtissuance costs

 

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relating to the U.S. Credit Facilities were recorded in other assetsand are being amortized over the life of the credit facilities. Suchunamortized debt issuance costs amounted to approximately $308,000 at April 30,2010.

 

At May 31, 2010, borrowings under the U.S. Credit Facilities bearinterest at rates ranging from 0.50% to 1.50% above the lender’s base rate, orat rates ranging from 1.50% to 2.50% above the London Interbank Offered Rate (“LIBOR”),depending upon our consolidated ratio of debt to earnings before interest,taxes, depreciation and amortization, and as further adjusted under the termsof the U.S. Credit Facilities (“EBITDA”). At May 31, 2010, the lender’sbase rate was 3.25% and the LIBOR rates ranged from 0.28% to 1.60%. The marginsapplicable to our outstanding borrowings at May 31, 2010 were 0.50% abovethe lender’s base rate and 1.50% above LIBOR. All of our outstanding borrowingswere under LIBOR contracts at May 31, 2010. The U.S. Credit Facilitiesalso provide for fees on the unused portion of our facilities at rates rangingfrom 0.20% to 0.40%, depending upon our consolidated ratio of debt to EBITDA;such rate was 0.20% at May 31, 2010.

 

The U.S. Credit Facilities require us to meet certain financial covenantsand are secured by (i) substantially all of our U.S.-based assets(including assets of Cantel, Minntech, Mar Cor, Crosstex and Strong DentalProducts, Inc.) and (ii) our pledge of all of the outstanding sharesof Minntech, Mar Cor, Crosstex and Strong Dental Products, Inc. and 65% ofthe outstanding shares of our foreign-based subsidiaries. Additionally, we arenot permitted to pay cash dividends on our Common Stock in excess of $3,000,000without the consent of our United States lenders. As of April 30, 2010, wewere in compliance with all financial and other covenants under the U.S. CreditFacilities.

 

Onboth April 30, 2010 and May 31, 2010, we had $25,000,000 ofoutstanding borrowings under the U.S. Credit Facilities, which consisted of$12,500,000 under each of the term loan facility and the revolving creditfacility. The revolving credit facility is recorded as a long-term liability atApril 30, 2010 and July 31, 2009, but was recorded as a currentliability between those dates since the termination date of the facility wasnot extended from August 1, 2010 to August 1, 2011 until the May 28,2010 amendment.

 

***Operating leases***

 

Minimumcommitments under operating leases include minimum rental commitments for ourleased manufacturing facilities, warehouses, office space and equipment.

 

***Deferred compensation***

 

Includedin other long-term liabilities are deferred compensation arrangements forcertain former Minntech directors and officers.

 

***Employment agreements***

 

Wehave previously entered into various employment agreements with executives ofthe Company, including our Corporate executive officers and our subsidiaryChief Executive Officers. The majority of such contracts expired and werereplaced effective January 1, 2010 with severance contracts that definedcertain compensation arrangements relating to various employment terminationscenarios.

 

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***Convertible Note Receivable***

 

InFebruary 2009, we invested an initial $200,000 in a senior subordinatedconvertible promissory note issued by BIOSAFE, Inc. (“BIOSAFE”), inconnection with BIOSAFE’s grant to us of certain exclusive and non-exclusivelicense rights to BIOSAFE’s antimicrobial additive. BIOSAFE is the owner of apatented and proprietary antimicrobial agent that is built into themanufacturing of end-products to achieve long-lasting microbial protection onsuch end-products’ surface. As a result of BIOSAFE’s successful raising of aminimum incremental amount of cash following our investment, we invested anadditional $300,000 in notes of BIOSAFE in January 2010 bringing theaggregate investment in BIOSAFE notes to $500,000, as obligated under ouragreement with BIOSAFE. We are not obligated to invest any additional funds.

 

Thenotes are convertible into a newly-created series of preferred stock ofBIOSAFE. Interest is payable in shares of BIOSAFE stock or in cash. The notesaccrue interest at a per annum rate of 8% until the maturity date of June 30,2011 or earlier exercise. If not paid by the maturity date, interest willaccrue thereafter at a rate of 12% per annum. In connection with ourinvestment, we entered into a license agreement with BIOSAFE under which wewill pay BIOSAFE a fixed royalty percentage of sales of our products containingBIOSAFE’s antimicrobial formulation. This investment, together with accruedinterest, is included within other assets in our Condensed Consolidated BalanceSheets as of April 30, 2010 and July 31, 2009. The carrying value ofthis investment approximates fair value due to the short maturity of the notesand the relatively consistent underlying value of BIOSAFE.

 

***Financing needs***

 

Although all of our operating segments generate significant cash fromoperations, our Healthcare Disposables, Dialysis, Water Purification and Filtrationand Endoscope Reprocessing segments are the largest generators of cash. At April 30,2010, we had a cash balance of $19,165,000, of which $8,435,000 was held byforeign subsidiaries.

 

Presently, most of our foreign held cash is needed for our foreignoperations’ working capital or our strategic initiatives outside of the UnitedStates. If our foreign cash needs were to decrease or if unfavorable tax lawswere to be implemented in the United States relating to unrepatriated cash, wemay be subject to additional income taxes that could adversely affect ouroverall effective tax rate in the future.

 

We believe that our current cash position, anticipated cash flows fromoperations and the funds available under our revolving credit facility will besufficient to satisfy our cash operating requirements for the foreseeablefuture based upon our existing operations, particularly given that wehistorically have not needed to borrow for working capital purposes. At May 31,2010, $37,500,000 was available under our United States revolving creditfacility, which expires on August 1, 2011.

 

Under the terms of our credit facilities we are limited to the amountof aggregate purchase price we pay for acquisitions during the duration of thecredit agreement without obtaining prior bank approval. As a result of the May 28,2010 amendment to our U.S. Credit Facilities, the aggregate purchase pricepermitted for future acquisitions without obtaining prior bank approval

 

 

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wasreset to $50,000,000, of which $2,000,000 was used for the Purity acquisition.

 

***Foreign currency***

 

During the three and nine months ended April 30, 2010, comparedwith the three and nine months ended April 30, 2009, the average value ofthe Canadian dollar increased by approximately 20.5% and 11.3%, respectively,relative to the value of the United States dollar. Additionally, at April 30,2010 compared with July 31, 2009, the value of the Canadian dollarrelative to the value of the United States dollar increased by approximately5.3%. The financial statements of our Canadian subsidiaries are translatedusing the accounting policies described in Note 2 to the 2009 Form 10-Kand therefore are impacted by changes in the Canadian dollar exchange rate.Additionally, changes in the value of the Canadian dollar against the UnitedStates dollar affect our results of operations because a portion of ourCanadian subsidiaries’ inventories and operating costs (which are reported inthe Water Purification and Filtration and Specialty Packaging segments) arepurchased in the United States and a significant amount of their sales are tocustomers in the United States.

 

For the three and nine months ended April 30, 2010, compared withthe three and nine months ended April 30, 2009, the average value of theeuro increased by approximately 4.2% and 5.8%, respectively, relative to thevalue of the United States dollar. Additionally, at April 30, 2010compared with July 31, 2009, the value of the euro relative to the UnitedStates dollar decreased by approximately 6.4%. The financial statements of ourNetherlands subsidiary are translated using the accounting policies describedin Note 2 to the 2009 Form 10-K and therefore are impacted by changes inthe euro exchange rate relative to the United States dollar. Additionally,changes in the value of the euro against the United States dollar affect ourresults of operations because a portion of the net assets of our Netherlandssubsidiary (which are reported in our Dialysis and Endoscope Reprocessingsegments) are denominated and ultimately settled in United States dollars butmust be converted into its functional euro currency. Furthermore, as part ofthe restructuring of our Netherlands subsidiary, as described in Note 15 to theCondensed Consolidated Financials and elsewhere in this MD&A, a portion ofthe net assets of our United States subsidiaries, Minntech and Mar Cor, are nowdenominated and ultimately settled in euros or British pounds but must beconverted into our functional United States currency.

 

In order to hedge against the impact of fluctuations in the value of (i) theCanadian dollar relative to the United States dollar, (ii) the eurorelative to the United States dollar and (iii) the British pound relativeto the United States dollar on the conversion of such net assets into thefunctional currencies, we enter into short-term contracts to purchase Canadiandollars, euros and British pounds forward, which contracts are generally onemonth in duration. These short-term contracts are designated as fair valuehedges. There were four foreign currency forward contracts with an aggregatevalue of $4,601,000 at May 31, 2010, which cover certain assets andliabilities that were denominated in currencies other than our subsidiaries’functional currencies. Such contracts expire on June 30, 2010. Theseforeign currency forward contracts are continually replaced with new one-monthcontracts as long as we have significant net assets at our subsidiaries thatare denominated and ultimately settled in currencies other than theirfunctional currencies. Under our credit facilities, such contracts to purchaseCanadian dollars, euros and British pounds may not exceed $12,000,000 in anaggregate notional amount at any time. In accordance with ASC 815, *“Derivatives and Hedging”* (“ASC 815”), such foreign currencyforward contracts are designated as hedges. Gains and losses related to thesehedging contracts to buy Canadian dollars, euros and British pounds forward areimmediately realized within general and administrative expenses due to theshort-term nature of such contracts. For the three and nine

 

 

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monthsended April 30, 2010, such forward contracts partially offset the impacton operations related to certain assets and liabilities that are denominated incurrencies other than our subsidiaries’ functional currencies.

 

Changes in the value of the Japanese yen relative to the United Statesdollar during the three and nine months ended April 30, 2010, comparedwith the three and nine months ended April 30, 2009, did not have asignificant impact upon either our results of operations or the translation ofour balance sheet, primarily due to the fact that our Japanese subsidiaryaccounts for a relatively small portion of consolidated net sales, net incomeand net assets.

 

Overall, fluctuations in the rates of currency exchange had an adverseimpact for the three and nine months ended April 30, 2010, compared withthe three and nine months ended April 30, 2009, upon our net income ofapproximately $123,000 and $323,000, respectively, primarily due to theincrease in the value of the Canadian dollar relative to the United Statesdollar.

 

For purposes of translating the balance sheet at April 30, 2010 comparedwith July 31, 2009, the total of the foreign currency movements resultedin a foreign currency translation gain of $1,245,000 for the nine months ended April 30,2010, thereby increasing stockholders’ equity.

 

# **Critical AccountingPolicies**

# ** **

Our discussion and analysis of our financial condition and results ofoperations are based upon our Condensed Consolidated Financial Statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. On an ongoing basis, we continually evaluateour estimates. We base our estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates.

 

We believe the following critical accounting policies affect our moresignificant judgments and estimates used in the preparation of our CondensedConsolidated Financial Statements.

 

# ***Revenue Recognition***

# ** **

Revenue on product sales is recognized as products are shipped tocustomers and title passes. The passing of title is determined based upon theFOB terms specified for each shipment. With respect to dialysis, therapeutic,specialty packaging and endoscope reprocessing products, shipment terms aregenerally FOB origin for common carrier and FOB destination when ourdistribution fleet is utilized (except for one large customer in dialysiswhereby all products are shipped FOB destination). With respect to waterpurification and filtration and healthcare disposable products, shipment termsmay be either FOB origin or destination. Customer acceptance for the majorityof our product sales occurs at the time of delivery. In certain instances,primarily with respect to some of our water purification and filtrationequipment, endoscope reprocessing equipment and an insignificant amount of oursales of dialysis equipment, post-delivery obligations such as installation,in-servicing or training are contractually specified; in such instances,revenue recognition is deferred until all of such

 

 

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conditionshave been substantially fulfilled such that the products are deemed functionalby the end-user. With respect to a portion of water purification and filtrationproduct sales, equipment is sold as part of a system for which the equipment isfunctionally interdependent or the customer’s purchase order specifies “ship-complete”as a condition of delivery; revenue recognition on such sales is deferred untilall equipment has been delivered.

 

A portion of our water purification and filtration and endoscopereprocessing sales are recognized as multiple element arrangements, wherebyrevenue is allocated to the equipment, installation and service componentsbased upon vendor specific objective evidence, which principally includescomparable historical transactions of similar equipment and installation soldas stand alone components, as well as an evaluation of unrelated third partycompetitor pricing of similar installation.

 

Revenueon service sales is recognized when repairs are completed at the customer’slocation or when repairs are completed at our facilities and the products areshipped to customers. With respect to certain service contracts in ourEndoscope Reprocessing and Water Purification and Filtration operatingsegments, service revenue is recognized on a straight-line basis over thecontractual term of the arrangement. All shipping and handling fees invoiced tocustomers, such as freight, are recorded as revenue (and related costs areincluded within cost of sales) at the time the sale is recognized.

 

Noneof our sales contains right-of-return provisions. Customer claims for credit orreturn due to damage, defect, shortage or other reason must be pre-approved byus before credit is issued or such product is accepted for return. No cashdiscounts for early payment are offered except with respect to a small portionof our sales of dialysis, healthcare disposable and water purification andfiltration products and certain prepaid packaging products. We do not offerprice protection, although advance pricing contracts or required notice periodsprior to implementation of price increases exist for certain customers withrespect to many of our products. With respect to certain of our dialysis,dental, water purification and filtration and endoscope reprocessing customers,volume rebates are provided; such volume rebates are provided for as areduction of sales at the time of revenue recognition and amounted to $712,000and $2,269,000 for the three and nine months ended April 30, 2010,respectively, and $711,000 and $1,877,000 for the three and nine months ended April 30,2009, respectively. The increase in volume rebates for the nine months ended April 30,2010, compared with the nine months ended April 30, 2009, is primarily dueto increased sales volume primarily in our Healthcare Disposables and EndoscopeReprocessing segments. Such allowances are determined based on estimatedprojections of sales volume for the entire rebate agreement periods. If itbecomes known that sales volume to customers will deviate from originalprojections, the volume rebate provisions originally established would beadjusted accordingly.

 

Themajority of our dialysis products are sold to end-users; the majority oftherapeutic filtration products and healthcare disposable products are sold tothird party distributors; water purification and filtration products andservices are sold directly and through third-party distributors to hospitals,dialysis clinics, pharmaceutical and biotechnology companies and otherend-users; our endoscope reprocessing products and services are sold primarilyto distributors internationally and directly to hospitals and other end-usersin the United States; and specialty packaging products are sold to third-partydistributors, medical research companies, laboratories, pharmaceuticalcompanies, hospitals, government agencies and other end-users. Sales to all ofthese customers follow our revenue recognition policies.

 

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***Accounts Receivable and Allowance for DoubtfulAccounts***

 

Accounts receivable consist of amounts due to us from normal businessactivities. Allowances for doubtful accounts are reserves for the estimatedloss from the inability of customers to make required payments. We usehistorical experience as well as current market information in determining theestimate. While actual losses have historically been within management’sexpectations and provisions established, if the financial condition of ourcustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required. Alternatively, if certaincustomers paid their delinquent receivables, reductions in allowances may berequired.

 

# ***Inventories***

# ** **

Inventories consist of raw materials, work-in-process and finishedproducts which are sold in the ordinary course of our business and are statedat the lower of cost (first-in, first-out) or market. In assessing the value ofinventories, we must make estimates and judgments regarding reserves requiredfor product obsolescence, aging of inventories and other issues potentiallyaffecting the saleable condition of products. In performing such evaluations,we use historical experience as well as current market information. With fewexceptions, the saleable value of our inventories has historically been withinmanagement’s expectation and provisions established, however, rapid changes inthe market due to competition, technology and various other factors could havean adverse effect on the saleable value of our inventories, resulting in theneed for additional reserves.

 

***Goodwill and Intangible Assets***

 

Certain of our identifiable intangible assets, including customerrelationships, technology, brand names, non-compete agreements and patents, areamortized using the straight-line method over their estimated useful lives whichrange from 3 to 20 years. Additionally, we have recorded goodwill andtrademarks and trade names, all of which have indefinite useful lives and aretherefore not amortized. All of our intangible assets and goodwill are reviewedfor impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable, and goodwill and intangibleassets with indefinite lives are reviewed for impairment at least annually*.*Our management is primarily responsiblefor determining if impairment exists and considers a number of factors,including third-party valuations, when making these determinations. Inperforming a review for goodwill impairment, management uses a two-step processthat begins with an estimation of the fair value of the related operatingsegments by using the average fair value results of the market multiple anddiscounted cash flow methodologies. The first step is a review for potentialimpairment, and the second step measures the amount of impairment, if any. Inperforming our annual review for indefinite lived intangibles, managementcompares the current fair value of such assets to their carrying values. Withrespect to amortizable intangible assets when impairment indicators arepresent, management would determine whether expected future non-discounted cashflows 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 31,2009, management concluded that none of our intangible assets or goodwill wasimpaired. On April 30, 2010, management concluded that no events orchanges in circumstances have occurred during the nine months ended April 30,2010 that would indicate that the carrying amount of our intangible assets andgoodwill may not be recoverable.

 

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While the results of these annual reviewshave historically not indicated impairment, impairment reviews are highlydependent on management’s projections of our future operating results and cashflows (which management believes to be reasonable), discount rates based on theCompany’s weighted-average cost of capital and appropriate benchmark peercompanies. Assumptions used in determining future operating results and cashflows include current and expected market conditions and future salesforecasts. Subsequent changes in these assumptions and estimates could resultin future impairment. Although we consistently use the same methods indeveloping the assumptions and estimates underlying the fair valuecalculations, such estimates are uncertain by nature and can vary from actualresults. At July 31, 2009, our reporting units that were potentially at riskfor impairment were Healthcare Disposables and Specialty Packaging, which hadaverage fair values that exceeded book value by approximately 6% and 11%, respectively.With respect to Healthcare Disposables, such average fair value was determinedusing future operating and cash flow assumptions that management believes to beconservative, especially in light of more recent market conditions such as theoutbreak of the novel H1N1 flu (swine flu), which has had a positive impact onoperating results of this segment. For all of our remaining reporting units,average fair value exceeded book value by substantial amounts.

 

***Long-Lived Assets***

 

We evaluate the carrying value of long-livedassets including property, equipment and other assets whenever events orchanges in circumstances indicate that the carrying value may not berecoverable. An assessment is made to determine if the sum of the expectedfuture non-discounted cash flows from the use of the assets and eventualdisposition is less than the carrying value. If the sum of the expectednon-discounted cash flows is less than the carrying value, an impairment lossis recognized based on fair value. With few exceptions, our historicalassessments of our long-lived assets have not differed significantly from theactual amounts realized. However, the determination of fair value requires usto make certain assumptions and estimates and is highly subjective, and accordingly,actual amounts realized may differ significantly from our estimates.

 

# ***WarrantyReserve***

# ** **

We provide for estimated costs that may beincurred to remedy deficiencies of quality or performance of our products atthe time of revenue recognition. Most of our products have a one year warranty,although a majority of our endoscope reprocessing equipment in the UnitedStates carries a warranty period of up to fifteen months. We record provisionsfor product warranties as a component of cost of sales based upon an estimateof the amounts necessary to settle existing and future claims on products sold.The historical relationship of warranty costs to products sold is the primarybasis for the estimate. A significant increase in third party service repairrates, the cost and availability of parts or the frequency of claims could havea material adverse impact on our results for the period or periods in whichsuch claims or additional costs materialize. Management reviews its warrantyexposure periodically and believes that the warranty reserves are adequate;however, actual claims incurred could differ from original estimates, requiringadjustments to the reserves.

 

***Stock-Based Compensation***

 

For fiscal 2005 and earlier periods, weaccounted for stock options using the intrinsic 

 

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value method under which stock compensation expense was not recognizedbecause we granted stock options with exercise prices equal to the market valueof the shares at the date of grant. Beginning August 1, 2005, we accountedfor stock options under ASC 718 using the modified prospective method for thetransition. Under the modified prospective method, stock compensation expenseis recognized for any option grant or stock award granted on or after August 1,2005, as well as the unvested portion of stock options granted prior to August 1,2005, based upon the award’s fair value.

 

Most of our stock option and stock awards(which consist only of restricted stock) are subject to graded vesting in whichportions of the award vest at different times during the vesting period, asopposed to awards that vest at the end of the vesting period. We recognizecompensation expense for awards subject to graded vesting using thestraight-line basis, reduced by estimated forfeitures. Forfeitures areestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates. Forfeitures are estimatedbased on historical experience.

 

The stock-based compensation expense recordedin our Condensed Consolidated Financial Statements may not be representative ofthe effect of stock-based compensation expense in future periods due to thelevel of awards issued in past years (which level may not be similar in the future),modifications to existing awards and assumptions used in determining fairvalue, expected lives and estimated forfeitures. We determine the fair value ofeach stock award using the closing market price of our Common Stock on the dateof grant. We estimate the fair value of each option grant on the date of grantusing the Black-Scholes option valuation model. The determination of fair valueusing an option-pricing model is affected by our stock price as well asassumptions regarding a number of subjective variables. These variablesinclude, but are not limited to, the expected stock price volatility over theterm of the expected option life (which is determined by using the historicalclosing prices of our Common Stock), the expected dividend yield (whichhistorically has been 0% and is now approximately 0.5% as we began payingdividends in January 2010), and the expected option life (which is basedon historical exercise behavior). If factors change and we employ differentassumptions in future periods, the compensation expense that we would recordmay differ significantly from what we have recorded in the current period.

 

***Legal Proceedings***

 

In the normal course of business, we aresubject to pending and threatened legal actions. It is our policy to accrue foramounts related to these legal matters if it is probable that a liability hasbeen incurred and an amount of anticipated exposure can be reasonablyestimated. We do not believe that any of these pending claims or legal actionswill have a material effect on our business, financial condition, results ofoperations or cash flows.

 

***Income******Taxes***

 

We recognize deferred tax assets andliabilities based on differences between the financial statement carryingamounts and the tax basis of assets and liabilities. Deferred tax assets andliabilities also include items recorded in conjunction with the purchaseaccounting for business acquisitions. We regularly review our deferred taxassets for recoverability and establish a valuation allowance, if necessary, basedon historical taxable income, projected future taxable income, and the expectedtiming of the reversals of existing temporary differences. Although realizationis not assured, management believes it is more likely than not that therecorded

 

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deferred tax assets, as adjusted for valuation allowances, will berealized. Additionally, deferred tax liabilities are regularly reviewed toconfirm that such amounts are appropriately stated. A review of our deferredtax items considers known future changes in various effective tax rates,principally in the United States. If the effective tax rate were to change inthe future, particularly in the United States and to a lesser extent Canada,our items of deferred tax could be materially affected. All of such evaluationsrequire significant management judgments.

 

We record liabilities for an unrecognized taxbenefit when a tax benefit for an uncertain tax position is taken or expectedto be taken on a tax return, but is not recognized in our CondensedConsolidated Financial Statements because it does not meet themore-likely-than-not recognition threshold that the uncertain tax positionwould be sustained upon examination by the applicable taxing authority. The majorityof such unrecognized tax benefits originated from acquisitions and are basedprimarily upon management’s assessment of exposure associated with acquiredcompanies. Previously, any adjustments upon resolution of income taxuncertainties that predate or result from acquisitions were recorded as anincrease or decrease to goodwill. On August 1, 2009, we adopted ASC 805,which requires the resolution of income tax uncertainties that predate orresult from acquisitions to be recognized in our results of operationsbeginning with fiscal 2010. Unrecognized tax benefits are analyzed periodicallyand adjustments are made as events occur to warrant adjustment to the relatedliability.

 

# ***BusinessCombinations***

# ** **

Acquisitions require significant estimatesand judgments related to the fair value of assets acquired and liabilitiesassumed.

 

Certain liabilities and reserves aresubjective in nature. We reflect such liabilities and reserves based upon themost recent information available. In conjunction with our acquisitions, suchsubjective liabilities and reserves principally include certain income tax andsales and use tax exposures, including tax liabilities related to our foreignsubsidiaries, as well as reserves for accounts receivable, inventories andwarranties. The ultimate settlement of such liabilities may be for amountswhich are different from the amounts recorded.

 

***Costs Associated with Exit orDisposal Activities***

 

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

 

Inherent in the calculation of liabilitiesrelating to exit and disposal activities are significant management judgmentsand estimates, including estimates of termination costs, employee attrition andthe interest rate used to discount certain expected net cash payments. Suchjudgments and estimates are reviewed by us on a regular basis. The cumulativeeffect of a change to a liability resulting from a revision to either timing orthe amount of estimated cash flows is recognized by us as an adjustment to theliability in the period of the change.

 

Although we have historically recordedminimal charges associated with exit or disposal activities, we recordedcharges associated with exit or disposal activities in fiscals 2009 and 2008relating to our restructuring plan for our Netherlands manufacturingoperations, as further 

 

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described in our MD&A and Note 15 to the Condensed ConsolidatedFinancial Statements.

 

# ***Other Matters***

# ** **

We do not have any off balance sheetfinancial arrangements, other than future commitments under operating leasesand employment agreements.

 

**Forward Looking Statements**

 

Thisquarterly report on Form 10-Q contains “forward-looking statements” asthat term is defined under the Private Securities Litigation Reform Act of 1995and releases issued by the Securities and Exchange Commission (the “SEC”) andwithin the meaning of Section 27Aof the Securities Act of 1933, as amended (the “Securities Act”) and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are based on currentexpectations, estimates, or forecasts about our businesses, the industries inwhich we operate, and the beliefs and assumptions of management; they do notrelate strictly to historical or current facts. We have tried, whereverpossible, to identify such statements by using words such as “expect,” “anticipate,”“goal,” “project,” “intend,” “plan,” “believe,” “seek,”  “may,” “could,” and variations of such wordsand similar expressions. In addition, any statements that refer to predictionsor projections of our future financial performance, anticipated growth andtrends in our businesses, and other characterizations of future events orcircumstances are forward-looking statements. Readers are cautioned that theseforward-looking statements are only predictions about future events, activitiesor developments and are subject to numerous risks, uncertainties, and assumptionsthat are difficult to predict including, among other things, the following:

 

·                  theincreasing market share of single-use dialyzers relative to reuse dialyzers inthe United States

 

·                  furtherindustry consolidation resulting in greater buying power by some of ourcustomers

 

·                  our dependence on aconcentrated number of customers in three of our largest segments

 

·                  novelH1N1 flu severity and level of urgency developed by customers with respect topandemic preparedness

 

·                  thevolatility of oil and fuel prices on our raw materials anddistribution costs

 

·                  theacquisition of new businesses and successfully integrating and operating suchbusinesses

 

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

 

·                  foreigncurrency exchange rate fluctuations and trade barriers

 

·                  theimpact of significant government regulation on our businesses

 

You should understand that it is not possibleto predict or identify all such factors. Consequently, you should not considerthe foregoing items to be a complete list of all potential risks oruncertainties. See “Risk Factors” in our 2009 Form 10-K for a discussionof the above 

 

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risk factors and certain additional risk factors that you shouldconsider before investing in the shares of our Common Stock.

 

All forward-looking statements herein speakonly as of the date of this Report. We expressly disclaim any obligation orundertaking to release publicly any updates or revisions to any forward-lookingstatements contained herein to reflect any change in our expectations withregard thereto or any change in events, conditions or circumstances on whichany such statement is based.

 

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

 

**ITEM 3.                QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

**Foreign Currency and Market Risk**

 

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

 

A portion of our Canadian subsidiaries’inventories and operating costs (which are reported in the Water Purificationand Filtration and Specialty Packaging segments) are purchased in the UnitedStates and a significant amount of their sales are to customers in the UnitedStates. The businesses of our Canadian subsidiaries could be materially andadversely affected by the imposition of trade barriers, fluctuations in therate of currency exchange, tariff increases and import and export restrictionsbetween the United States and Canada. Changes in the value of the Canadiandollar against the United States dollar also affect our results of operationsbecause certain net assets of our Canadian subsidiaries are denominated andultimately settled in United States dollars but must be converted into theirfunctional currency. Additionally, the financial statements of our Canadiansubsidiaries are translated using the accounting policies described in Note 2to the 2009 Form 10-K. Fluctuations in the rates of currency exchangebetween the United States and Canada had an overall adverse impact for thethree and nine months ended April 30, 2010, compared with the three andnine months ended April 30, 2009, upon our net income and had a favorableimpact upon stockholders’ equity, as described in our MD&A.

 

Changes in the value of the euro against theUnited States dollar affect our results of operations because a portion of thenet assets of our Netherlands subsidiary (which are reported in our Dialysisand Endoscope Reprocessing segments) are denominated and ultimately settled inUnited States dollars but must be converted into its functional euro currency.Furthermore, as part of the restructuring of our Netherlands subsidiary, asdescribed in Note 15 to the Condensed Consolidated Financials and elsewhere inthis MD&A, a portion of the net assets of our United States subsidiaries,Minntech and Mar Cor, are now denominated and ultimately settled in euros orBritish pounds but must be converted into our functional United Statescurrency. Additionally, the financial statements of our Netherlands subsidiaryare translated using the accounting policies described in Note 2 to the 2009 Form 10-K.Fluctuations in the rates of currency exchange

 

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between the United States dollar and the euro or British pound did nothave a significant overall impact for the three and nine months ended April 30,2010, compared with the three and nine months ended April 30, 2009, uponour net income and stockholders’ equity.

 

In order to hedge against the impact offluctuations in the value of (i) the Canadian dollar relative to theUnited States dollar, (ii) the euro relative to the United States dollarand (iii) the British pound relative to the United States dollar on theconversion of such net assets into functional currencies, we enter intoshort-term contracts to purchase Canadian dollars, euros and British poundsforward, which contracts are generally one month in duration. These short-termcontracts are designated as fair value hedges. There were four foreign currencyforward contracts with an aggregate value of $4,583,000 at April 30, 2010,which covered certain assets and liabilities that were denominated incurrencies other than our subsidiaries’ functional currencies. Such contractsexpired on May 31, 2010. These foreign currency forward contracts arecontinually replaced with new one-month contracts as long as we havesignificant net assets at our subsidiaries that are denominated and ultimatelysettled in currencies other than their functional currencies. Under our creditfacilities, such contracts to purchase Canadian dollars, euros and Britishpounds may not exceed $12,000,000 in an aggregate notional amount at any time.For the three and nine months ended April 30, 2010, such forward contractspartially offset the impact on operations related to certain assets andliabilities that are denominated in currencies other than our subsidiaries’functional currencies.

 

The functional currency of Minntech’s Japansubsidiary is the Japanese yen. Changes in the value of the Japanese yenrelative to the United States dollar during the three and nine months ended April 30,2010, compared with the three and nine months ended April 30, 2009, didnot have a significant impact upon either our results of operations or thetranslation of the balance sheet, primarily due to the fact that our Japanesesubsidiary accounts for a relatively small portion of consolidated net sales,net income and net assets.

 

Overall, fluctuations in the rates ofcurrency exchange had an adverse impact on our net income for the three andnine months ended April 30, 2010, compared with the three and nine monthsended April 30, 2009, and a favorable impact upon stockholders’ equity,primarily due to the increase in the value of the Canadian dollar relative tothe United States dollar.

 

**Interest Rate Market Risk**

 

We have a United States credit facility forwhich the interest rate on outstanding borrowings is variable. Substantiallyall of our outstanding borrowings are under LIBOR contracts. Therefore,interest expense is affected by the general level of interest rates in theUnited States as well as LIBOR interest rates.

 

Additionally, we amended our U.S. Creditfacilities on May 28, 2010. Due to current market conditions, themodification of our credit facilities resulted in an increase of our marginsabove the lender’s base rate and LIBOR, which may adversely affect our resultsof operations in the future.

 

**Market Risk Sensitive Transactions**

 

Additional information related to market risksensitive transactions is contained in Part II, Item 7A, Quantitative andQualitative Disclosures About Market Risk, in our 2009 Form 10-K.

 

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**ITEM 4.                CONTROLSAND PROCEDURES.**

 

We maintain disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act) designed to ensure that information required to be disclosedin our Exchange Act reports is recorded, processed, summarized and reportedwithin the time periods specified by the SEC and that such information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and our Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosures.

 

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

 

We have evaluated our internal controls overfinancial reporting and determined that no changes occurred during the periodcovered by this report that have materially affected, or are reasonably likelyto materially affect, our internal controls over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**ITEM 1.                LEGAL PROCEEDINGS**

 

None.

 

**ITEM 1A.             RISK FACTORS**

 

There have been no material changes in ourrisk factors from those disclosed in Part I, Item 1A to our 2009 Form 10-K.The risk factors disclosed in Part I, Item 1A to our 2009 Form 10-K,in addition to the other information set forth in this report, could materiallyaffect our business, financial condition, or results of operations.

 

**ITEM 2.****                                               ****UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

The following table represents informationwith respect to purchases of Common Stock made by the Company during thecurrent quarter:

 
| **Month of Purchase** | ** ** | **Total number of  shares purchased** | ** ** | **Average price  paid per share** | ** ** | **Total number of shares  purchased as part of  publicly announced  plans or programs** | ** ** | **Maximum number of  shares that may yet  be purchased under  the program** | ** ** |
|-----------------------|------------|---------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
|                  |       |                                  |       |                              |       |                                                                                    |       |                                                                        |       |
| February              |       | 8,825                                 |       | $                                 | 19.10      |                                                                                    | —     |                                                                        | —     |   |
| March                 |       | —                                |       | —                            |       | —                                                                                  |       | —                                                                      |       |
| April                 |       | 6,059                                 |       | 19.91                             |       | —                                                                                  |       | —                                                                      |       |
| Total                 |       | 14,884                                |       | $                                 | 19.43      |                                                                                    | —     |                                                                        | —     |   |

 

The Company does not currently have arepurchase program. All of the shares purchased during the current quarterrepresent shares surrendered to the Company to pay employee withholding taxesdue upon the vesting of restricted stock or the exercise of stock options thatdo not qualify as incentive stock options.

 

**ITEM 3.                DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4.                RESERVED**

 

**ITEM 5.                OTHER INFORMATION**

 

None.

 

**ITEM 6.                EXHIBITS**

 

10(a) - Sixth Amendmentto Credit Agreement and Consent dated May 28, 2010 among Registrant, Bankof America N.A., PNC Bank, National Association, and Wells Fargo Bank, NationalAssociation (and Banc of America Securities LLC, as sole lead arranger and solebook manager).

 

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10(b) - Registrant’s1998 Directors’ Stock Option Plan, as amended on March 18, 2010.

 

10(c) - Registrant’s1997 Employee Stock Option Plan, as amended on March 18, 2010.

 

31.1   - Certification of Principal ExecutiveOfficer.

 

31.2   -Certification of Principal Financial Officer.

 

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

 

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**SIGNATURES**

 

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

 

 

|                          | CANTEL MEDICAL CORP. |
|-------------------------------|----------------------|
|                          |                 |   |
|                          |                 |   |
| Date:  June 9, 2010 |                 |   |
|                          |                 |   |
|                          | By:                  | /s/ Andrew A. Krakauer |   |
|                          |                 | Andrew A. Krakauer, |
|                          |                 | President and Chief Executive Officer |
|                          |                 | (Principal Executive Officer) |
|                          |                 |   |
|                          |                 |   |
|                          | By:                  | /s/ Craig A. Sheldon |   |
|                          |                 | Craig A. Sheldon, |
|                          |                 | Senior Vice President, Chief Financial Officer and Treasurer |
|                          |                 | (Principal Financial and Accounting Officer) |
|                          |                 |   |
|                          |                 |   |
|                          | By:                  | /s/ Steven C. Anaya |   |
|                          |                 | Steven C. Anaya, |
|                          |                 | Vice President and Controller |

 

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