Form 10-Q CANTEL MEDICAL CORP For: Oct 31

December 7, 2017 3:05 PM


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549
 
Form 10-Q

☒Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
For the quarterly period ended October 31, 2017.
 
or
 
☐Transition Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
For the transition period from            to           .
 
Commission file number:   001-31337
 
CANTEL MEDICAL CORP.
(Exact name of registrant as specified in its charter)
 
Delaware
 
22-1760285
(State or other jurisdiction of
 
(I.R.S. employer
incorporation or organization)
 
identification no.)
 
150 Clove Road, Little Falls, New Jersey
 
07424
 
(973) 890-7220
(Address of principal executive offices)
 
(Zip code)
 
(Registrant's telephone number, including area code)
 
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐ 
Emerging growth company ☐ 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No 
 
Number of shares of common stock outstanding as of November 30, 2017: 41,805,837.




Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

TABLE OF CONTENTS

 
 
Page No.
 
PART I – FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
PART II – OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Signatures
 




Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

PART I – FINANCIAL INFORMATION
Item 1.    Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited)
 
October 31,
 
July 31, 
 
2017
 
2017
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
37,220

 
$
36,584

Accounts receivable, net of allowance for doubtful accounts of $2,295 and $1,808
105,153

 
110,656

Inventories, net
105,823

 
98,724

Prepaid expenses and other current assets
19,484

 
11,407

Total current assets
267,680

 
257,371

 
 
 
 
Property and equipment, net
91,487

 
88,338

Intangible assets, net
138,837

 
124,512

Goodwill
351,818

 
311,445

Other assets
5,348

 
4,707

Total assets
$
855,170

 
$
786,373

 
 
 
 
Liabilities and stockholders’ equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
28,361

 
$
27,469

Compensation payable
20,500

 
27,468

Accrued expenses
28,391

 
23,393

Deferred revenue
25,183

 
25,282

Income taxes payable
7,136

 
3,167

Total current liabilities
109,571

 
106,779

 
 
 
 
Long-term debt
168,000

 
126,000

Deferred income taxes
31,375

 
24,714

Other long-term liabilities
3,646

 
4,948

Total liabilities
312,592

 
262,441

Commitments and contingencies (Note 10)


 


 
 
 
 
Stockholders’ equity:
 

 
 

Preferred Stock, par value $1.00 per share; authorized 1,000,000 shares; none issued

 

Common Stock, par value $.10 per share; authorized 75,000,000 shares; issued October 31 - 46,332,826 shares, outstanding October - 41,805,879 shares; issued July 31 - 46,194,370 shares, outstanding July 31 - 41,728,934 shares
4,634

 
4,619

Additional paid-in capital
177,359

 
174,602

Retained earnings
430,519

 
407,590

Accumulated other comprehensive loss
(11,133
)
 
(9,900
)
Treasury Stock, at cost; October 31 - 4,526,947 shares; July 31 - 4,465,440 shares
(58,801
)
 
(52,979
)
Total stockholders’ equity
542,578

 
523,932

Total liabilities and stockholders' equity
$
855,170

 
$
786,373

See accompanying notes to Condensed Consolidated Financial Statements.


(dollar amounts in thousands except share and per share data or as otherwise noted) 1#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

Condensed Consolidated Statements of Income
(Unaudited) 
 
Three Months Ended October 31,
 
2017
 
2016
Net sales
 

 
 

Product sales
$
187,965

 
$
166,901

Product service
24,801

 
20,824

Total net sales
212,766

 
187,725

 
 
 
 
Cost of sales
 

 
 

Product sales
95,099

 
83,616

Product service
17,008

 
14,602

Total cost of sales
112,107

 
98,218

 
 
 
 
Gross profit
100,659

 
89,507

 
 
 
 
Expenses:
 

 
 

Selling
31,600

 
27,893

General and administrative
32,096

 
30,003

Research and development
5,329

 
4,548

Total operating expenses
69,025

 
62,444

 
 
 
 
Income from operations
31,634

 
27,063

 
 
 
 
Interest expense, net
1,189

 
1,093

Other income
(1,138
)
 

 
 
 
 
Income before income taxes
31,583

 
25,970

 
 
 
 
Income taxes
8,654

 
7,170

 
 
 
 
Net income
$
22,929

 
$
18,800

 
 
 
 
Earnings per common share:
 

 
 

Basic
$
0.55

 
$
0.45

Diluted
$
0.55

 
$
0.45

Dividends declared per common share
$

 
$
0.07

 
See accompanying notes to Condensed Consolidated Financial Statements.


(dollar amounts in thousands except share and per share data or as otherwise noted) 2#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Months Ended October 31,
 
2017
 
2016
Net income
$
22,929

 
$
18,800

 
 
 
 
Other comprehensive loss:
 

 
 

Foreign currency translation
(1,233
)
 
(6,521
)
Total other comprehensive loss
(1,233
)
 
(6,521
)
 
 
 
 
Comprehensive income
$
21,696

 
$
12,279

See accompanying notes to Condensed Consolidated Financial Statements.



(dollar amounts in thousands except share and per share data or as otherwise noted) 3#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended October 31,
 
2017
 
2016
Cash flows from operating activities
 

 
 

Net income
$
22,929

 
$
18,800

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation
4,036

 
3,454

Amortization
4,048

 
3,909

Stock-based compensation expense
1,851

 
2,922

Deferred income taxes
780

 
1,917

Other non-cash items, net
(67
)
 
333

Changes in assets and liabilities, net of effects of business acquisitions:
 

 
 

Accounts receivable
8,584

 
1,577

Inventories
(2,629
)
 
(1,824
)
Prepaid expenses and other assets
(6,273
)
 
(2,801
)
Accounts payable and other liabilities
(6,679
)
 
(5,290
)
Income taxes
3,492

 
1,911

Net cash provided by operating activities
30,072

 
24,908

 
 
 
 
Cash flows from investing activities
 

 
 

Capital expenditures
(6,492
)
 
(8,143
)
Proceeds from disposal of fixed assets

 
21

Acquisition of businesses, net of cash acquired
(60,345
)
 
(57,768
)
Other, net

 
255

Net cash used in investing activities
(66,837
)
 
(65,635
)
 
 
 
 
Cash flows from financing activities
 

 
 

Borrowings under revolving credit facility
61,300

 
61,000

Repayments under revolving credit facility
(19,300
)
 
(16,000
)
Purchases of treasury stock
(5,822
)
 
(6,216
)
Net cash provided by financing activities
36,178

 
38,784

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
1,223

 
(289
)
 
 
 
 
Increase (decrease) in cash and cash equivalents
636

 
(2,232
)
Cash and cash equivalents at beginning of period
36,584

 
28,367

Cash and cash equivalents at end of period
$
37,220

 
$
26,135

 
See accompanying notes to Condensed Consolidated Financial Statements.



(dollar amounts in thousands except share and per share data or as otherwise noted) 4#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

Notes to Condensed Consolidated Financial Statements (unaudited).
 
1.    Basis of Presentation
Throughout this document, references to “Cantel,” “us,” “we,” “our,” and the “Company” are references to Cantel Medical Corp. and its subsidiaries, except where the context makes it clear the reference is to Cantel itself and not its subsidiaries.
Cantel is a leading provider of infection prevention products and services in the healthcare market, specializing in the following reportable segments: Endoscopy, Water Purification and Filtration, Healthcare Disposables and Dialysis. See Note 13, “Reportable Segments.” Most of our equipment, consumables and supplies are used to help prevent the occurrence or spread of infections.
The unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles for interim financial reporting and the requirements of Form 10-Q and Rule 10.01 of Regulation S-X. Accordingly, they do not include certain information and note disclosures required by generally accepted accounting principles for annual financial reporting and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Annual Report of Cantel Medical Corp. on Form 10-K for the fiscal year ended July 31, 2017 (the “2017 Form 10-K”) and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. The unaudited interim financial statements reflect all adjustments (of a normal and recurring nature) which management considers necessary for a fair presentation of the results of operations for these periods. The results of operations for the interim periods are not necessarily indicative of the results for the full year. The Condensed Consolidated Balance Sheet at July 31, 2017 was derived from the audited Consolidated Balance Sheet of Cantel at that date.
Subsequent Events
We performed a review of events subsequent to October 31, 2017. Refer to Note 14, "Subsequent Events."
2.           Recent Accounting Pronouncements
Newly Adopted Accounting Standards
In September 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments (Topic 805)” (“ASU 2015-16”). The new guidance requires an acquirer in a business combination to recognize a measurement-period adjustment during the period in which it determines the amount, and eliminates the requirement for an acquirer to account for measurement-period adjustments retrospectively. The acquirer must also disclose the amounts and reasons for adjustments to the provisional amounts. ASU 2015-16 is effective for fiscal years beginning after December 15, 2016 (our fiscal year 2018), including interim periods within that reporting period. Accordingly, we adopted ASU 2015-06 on August 1, 2017. The adoption of ASU 2015-06 did not have a material impact upon on our financial position and results of operations.

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330) Simplifying the Measurement of Inventory,” (“ASU 2015-11”). The new guidance requires companies using the first-in, first-out and average costs methods to measure inventory using the lower of cost and net realizable value, where net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016 (our fiscal year 2018), including interim periods within that reporting period. Accordingly, we adopted ASU 2015-11 on August 1, 2017. The adoption of ASU 2015-11 did not have a material impact upon on our financial position and results of operations.

Recently Issued Accounting Standards

In August 2017, the FASB issued ASU 2017-12, "Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12") to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 (our fiscal year 2020), including interim periods within that reporting period. We are currently in the process of evaluating the impact of ASU 2017-12 on our financial position and result of operations.

In May 2017, the FASB issued ASU 2017-09, "Scope of Modification Accounting" ("ASU 2017-09") to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 (our fiscal year 2019), including interim periods within that reporting period. We are currently in the process of evaluating the impact of ASU 2017-09 on our financial position and result of operations.


(dollar amounts in thousands except share and per share data or as otherwise noted) 5#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q


In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other” (“ASU 2017-04”) to simplify the test for goodwill impairment. The revised guidance eliminates the existing Step 2 of the goodwill impairment test which required an entity to compute the implied fair value of its goodwill at the testing date in order to measure the amount of the impairment charge when the fair value of the reporting unit failed Step 1 of the goodwill impairment test. Under the revised guidance, an entity would recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to the reporting unit. The guidance will be applied on a prospective basis on or after the effective date. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 (our fiscal year 2021) and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 is not expected to have a significant impact on our financial position and result of operations.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805)” (“ASU 2017-01”) to clarify the definition of a business. The revised guidance creates a more robust framework to use in determining whether a set of assets and activities is a business. The guidance will be applied on a prospective basis on or after the effective date. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017 (our fiscal year 2019), including interim periods within that reporting period. We are currently in the process of evaluating the impact of ASU 2017-01 on our financial position and result of operations.

In February 2016, FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The new guidance requires the recording of assets and liabilities arising from leases on the balance sheet accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements. The new guidance is expected to provide transparency of information and comparability among organizations. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (our fiscal year 2020), including interim periods within that reporting period. Early adoption is permitted as of the beginning of an interim or annual period. We are currently in the process of evaluating the impact of ASU 2016-02 on our financial position and results of operations.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which will supersede the revenue recognition requirements in Accounting Standards Codification 605, “Revenue Recognition” ("ASC 605"). ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606),” which defers the effective date of ASU 2014-09 by one year to fiscal years beginning after December 15, 2017 (our fiscal year 2019), including interim periods within that reporting period. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2016-12”), which provided narrow scope improvements and practical expedients relating to ASU 2014-09. In preparation for our adoption of ASU 2014-09 and ASU 2016-12 on August 1, 2018, we are obtaining representative samples of contracts and other forms of agreements with our customers in the United States and international locations and plan to evaluate the provisions contained therein in light of the five-step model specified by the new guidance. We are also evaluating the impact of the new standard on certain common practices currently employed by us and by other health care manufacturers and service providers, such as multiple-element arrangements, deferred revenues, warranties, rebates and other pricing allowances. We anticipate adopting the standard using the modified retrospective method. There may be differences in timing of revenue recognition under the new standard compared to recognition under ASC 605.

3.
Acquisitions
 
Fiscal 2018
 
BHT Group

On August 23, 2017, we purchased all of the issued and outstanding stock of BHT Hygienetechnik Holding GmbH ("BHT Group"), a leader in the German market in automated endoscope reprocessing and related equipment and services for total consideration (net of cash acquired), excluding acquisition related costs, of $60,345. The BHT Group consists of a portfolio of high-quality automatic endoscope reprocessors, advanced endoscope storage and drying cabinets (products globally distributed by our Company prior to the acquisition under an agreement with BHT Group), washer-disinfectors for central sterile applications, associated technical service and parts as well as flexible endoscope repair services. BHT Group is included in our Endoscopy segment. We anticipate completing the purchase price allocation before or during the fourth quarter of fiscal 2018.



(dollar amounts in thousands except share and per share data or as otherwise noted) 6#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

Fiscal 2017

CR Kennedy

On April 1, 2017, we purchased certain endoscopy-related net assets of CR Kennedy & Company Pty Ltd. ("CR Kennedy") related to its distribution and sale of our Medivators endoscopy products in Australia for total consideration, excluding acquisition related costs, of $11,999. The CR Kennedy business includes a full sales and service organization and our Medivators-branded automated endoscope reprocessors, chemistries, endoscopy procedure products and other consumables in Australia, and is included in our Endoscopy segment.

Vantage Endoscopy Inc.’s Medivators® Endoscopy Business

On September 26, 2016, we acquired certain net assets of Vantage Endoscopy Inc. ("Vantage") related to its distribution and sale of our Medivators endoscopy products in Canada for total consideration, excluding acquisition-related costs, of $4,044. Vantage was our exclusive distributor of Medivators capital equipment (e.g., automated endoscope reprocessors) and related consumables and accessories in Canada, and is included in our Endoscopy segment.

Accutron, Inc.

On August 1, 2016, we acquired all of the issued and outstanding stock of Accutron Inc. ("Accutron"), a Phoenix-based company, for total consideration, excluding acquisition-related costs, of $53,049. The Accutron business designs, manufactures and sells nitrous oxide conscious sedation equipment and single use nasal masks for use in dental procedures, and is included in our Healthcare Disposables segment.
 
 
2018
 
2017
Purchase Price Allocation
 
BHT Group(1)
 
CR Kennedy
 
Vantage(1)
 
Accutron(1)
Purchase Price:
 
 
 
 
 
 
 
 
Cash paid (net of cash acquired)
 
$
60,345

 
$
11,999

 
$
4,044

 
$
53,049

Debt acquired
 

 

 

 

Total
 
$
60,345

 
$
11,999

 
$
4,044

 
$
53,049

 
 
 
 
 
 
 
 
 
Allocation:
 
 
 
 
 
 
 
 
Property and equipment
 
835

 

 
433

 
1,676

Amortizable intangible assets:
 
 
 
 
 
 
 
 
Customer relationships
 
12,500

 
4,200

 
992

 
12,800

Technology
 
6,200

 

 

 
10,000

Brand names
 

 

 

 
2,000

Goodwill
 
41,509

 
5,894

 
2,299

 
21,989

Deferred income taxes
 
(5,881
)
 

 

 
112

Other working capital
 
5,182

 
1,905

 
320

 
4,472

Total
 
$
60,345

 
$
11,999

 
$
4,044

 
$
53,049

_______________________________________________
(1)
The excess purchase price over net assets acquired was assigned to goodwill, all of which is deductible for income tax purposes.

Unaudited Pro Forma Summary of Operations

The acquisitions above, both individually and in the aggregate, were not material to our consolidated results of operations or financial position and, therefore, pro forma financial information is not presented.



(dollar amounts in thousands except share and per share data or as otherwise noted) 7#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

4.      Stock-Based Compensation
2016 Equity Incentive Plan
 
At October 31, 2017, 206,289 unvested restricted stock shares were outstanding under the 2016 plan. No options were outstanding under the 2016 plan. At October 31, 2017, 970,421 shares are collectively available pursuant to restricted stock and other stock awards, stock options and stock appreciation rights.
 
2006 Equity Incentive Plan
 
The 2006 Plan was terminated on January 7, 2016 in conjunction with the adoption of the 2016 Plan. At October 31, 2017, options to purchase 70,000 shares of common stock were outstanding, and 49,275 unvested restricted stock shares were outstanding under the 2006 Plan. No additional awards will be granted under this plan.

The following table shows the income statement components of stock-based compensation expense recognized in the condensed consolidated statements of income:
 
Three Months Ended October 31,
 
2017
 
2016
Cost of sales
$
115

 
$
110

Operating expenses:
 

 
 

Selling
365

 
629

General and administrative
1,333

 
2,153

Research and development
38

 
30

Total operating expenses
1,736

 
2,812

Stock-based compensation before income taxes
$
1,851

 
$
2,922

 
At October 31, 2017, total unrecognized stock-based compensation expense, before income taxes, related to total nonvested stock options and restricted stock awards was $20,129 with a remaining weighted average period of 26 months over which such expense is expected to be recognized.

We determine the fair value of each stock award with market conditions using a Monte Carlo simulation on the date of grant using the following assumptions:
 
Three Months Ended October 31,
 
2017
 
2016
Volatility of common stock
26.60
%
 
27.75
%
Average volatility of peer companies
33.72
%
 
32.98
%
Average correlation coefficient of peer companies
32.26
%
 
35.35
%
Risk-free interest rate
1.62
%
 
0.96
%



(dollar amounts in thousands except share and per share data or as otherwise noted) 8#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

A summary of nonvested stock award activity for the three months ended October 31, 2017 follows:
 
 
Number of Time-based Shares
 
Number of Performance-based Shares
 
Number of Market-based Shares
 
Number of Total Shares
 
Weighted Average Fair Value
July 31, 2017
 
196,818

 
16,235

 
9,245

 
222,298

 
$
66.28

Granted
 
91,234

 
18,647

 
10,465

 
120,346

 
$
101.55

Vested(1)
 
(80,931
)
 
(4,834
)
 

 
(85,765
)
 
$
57.72

Forfeited
 
(1,315
)
 

 

 
(1,315
)
 
$
76.81

October 31, 2017
 
205,806

 
30,048

 
19,710

 
255,564

 
$
85.76

_______________________________________________
(1)
The aggregate fair value of all nonvested stock awards which vested was approximately $4,950.

A summary of stock option activity for the three months ended October 31, 2017 follows:
 
Number of shares
 
Weighted Average Exercise Price
 
Weighted Average Contractual Life Remaining (Years)
 
Aggregate Intrinsic Value
Outstanding at July 31, 2017
122,500

 
$
29.36

 
 
 
 
Granted

 

 
 
 
 
Exercised
(52,500
)
 
17.04

 
 
 
 
Outstanding at October 31, 2017
70,000

 
$
38.60

 
1.79
 
$
4,221

Exercisable at October 31, 2017
65,000

 
$
37.31

 
1.69
 
$
4,003

 
During the three months ended October 31, 2017, 5,000 options vested, with an aggregate fair value of approximately $132. During the three months ended October 31, 2017, 52,500 options were exercised, with an aggregate fair value of approximately $4,049. As of October 31, 2017, all of the outstanding options had vested or were expected to vest in future periods. No options were granted during the three months ended October 31, 2017.

Excess tax benefits arise when the ultimate tax effect of the deduction for tax purposes is greater than the income tax benefit on stock-based compensation described above. For the three months ended October 31, 2017, income tax deductions of $4,125 were generated, of which $1,839 were previously recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax benefit of $2,286 was recorded as a reduction in income tax expense. For the three months ended October 31, 2016, income tax deductions of $5,376 were generated, of which $3,135 were previously recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax benefit of $2,241 was recorded as a reduction in income tax expense.

5.    Inventories, Net
 
A summary of inventories is as follows:
 
October 31, 2017
 
July 31, 2017
Raw materials and parts
$
50,281

 
$
45,831

Work-in-process
15,974

 
13,484

Finished goods
48,593

 
48,262

Reserve for excess and obsolete inventory
(9,025
)
 
(8,853
)
Total
$
105,823

 
$
98,724

 


(dollar amounts in thousands except share and per share data or as otherwise noted) 9#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

6.    Derivatives
In order to hedge against the impact of fluctuations in the value of the Euro, British Pound, Canadian dollar, Australian dollar and Singapore dollar relative to the U.S. dollar on the conversion of such net assets into the functional currencies, we enter into short-term forward contracts to purchase Euros, British Pounds, Canadian dollars, Australian dollars and Singapore dollars, which contracts are one-month in duration. These short-term contracts are designated as fair value hedge instruments. These foreign currency forward contracts are continually replaced with new one-month contracts as long as we have significant net assets that are denominated and ultimately settled in currencies other than each entity’s functional currency. Gains and losses related to hedging contracts to buy Euros, British Pounds, Canadian dollars, Australian dollars and Singapore dollars forward are immediately realized within general and administrative expenses due to the short-term nature of such contracts. We do not currently hedge against the impact of fluctuations in the value of the Chinese Renminbi relative to the U.S. dollar because the overall foreign currency exposures relating to those currencies are currently not deemed significant.

There were seven foreign currency forward contracts with an aggregate notional value of $23,077 and $24,762 at October 31, 2017 and July 31, 2017, respectively, which covered certain assets and liabilities that were denominated in currencies other than each entity’s functional currency. For the three months ended October 31, 2017 and 2016, our forward contracts resulted in an immaterial amount of net currency conversion losses, net of tax, on the hedged items.

7.    Fair Value Measurements
Fair Value Hierarchy
 
We apply the provisions of Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” (“ASC 820”), for our financial assets and liabilities that are re-measured and reported at fair value each reporting period and our nonfinancial assets and liabilities that are re-measured and reported at fair value on a non-recurring basis. We define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three level fair value hierarchy to prioritize the inputs used in valuations, as defined below:
Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets.
 
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
 
Level 3: Unobservable inputs for the asset or liability.
 
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
 
Our financial assets that are re-measured at fair value on a recurring basis include money market funds that are classified as cash and cash equivalents in the consolidated balance sheets. These money market funds are classified within Level 1 of the fair value hierarchy and are valued using quoted market prices for identical assets.

In connection with the Jet Prep Ltd. ("Jet Prep") acquisition in fiscal 2014, we assumed a contingent obligation payable to the Israeli Government based on future sales. This fair value measurement was based on significant inputs not observed in the market and thus represent Level 3 measurements. In November 2017, the Israeli Government formally notified us that they would forgive any future amounts payable due to our decision to exit the Jet Prep business and we reduced the fair value of this obligation to $0 as of October 31, 2017. See Note 10, "Commitments and Contingencies."



(dollar amounts in thousands except share and per share data or as otherwise noted) 10#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

The fair values of the Company’s financial instruments measured on a recurring basis were categorized as follows:
 
October 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Cash and cash equivalents:
 

 
 

 
 

 
 

Money markets
$
102

 
$

 
$

 
$
102

Total assets
$
102

 
$

 
$

 
$
102

Liabilities:
 

 
 

 
 

 
 

Accrued expenses:
 

 
 

 
 

 
 

Assumed contingent obligation

 

 

 

Contingent guaranteed obligation

 

 

 

Total accrued expenses

 

 

 

Long-term debt(1)

 
168,000

 

 
168,000

Other long-term liabilities:
 

 
 

 
 

 
 

Assumed contingent obligation

 

 

 

Contingent guaranteed obligation

 

 

 

Total other long-term liabilities:

 

 

 

Total liabilities
$

 
$
168,000

 
$

 
$
168,000

________________________________________________
(1)
Fair value estimated using Level 2 inputs, which were quoted prices for identical or similar instruments in markets that are not active.
 
July 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Cash and cash equivalents:
 

 
 

 
 

 
 

Money markets
$
102

 
$

 
$

 
$
102

Total assets
$
102

 
$

 
$

 
$
102

Liabilities:
 

 
 

 
 

 
 

Accrued expenses:
 

 
 

 
 

 
 

Assumed contingent obligation

 

 
12

 
12

Contingent guaranteed obligation

 

 

 

Total accrued expenses

 

 
12

 
12

Long-term debt(1)

 
126,000

 

 
126,000

Other long-term liabilities:
 

 
 

 
 

 
 

Assumed contingent obligation

 

 
1,126

 
1,126

Contingent guaranteed obligation

 

 

 

Total other long-term liabilities:

 

 
1,126

 
1,126

Total liabilities
$

 
$
126,000

 
$
1,138

 
$
127,138

________________________________________________
(1)
Fair value estimated using Level 2 inputs, which were quoted prices for identical or similar instruments in markets that are not active.

With the exception of the resolution of the Jet Prep obligation, there was no Level 3 activity during the three months ended October 31, 2017. The Level 3 activity during the three months ended October 31, 2016 was not material.
 
Disclosure of Fair Value of Financial Instruments
 
As of October 31, 2017 and July 31, 2017, the carrying amounts for cash and cash equivalents (excluding money markets), accounts receivable and accounts payable approximated fair value due to the short maturity of these instruments.




(dollar amounts in thousands except share and per share data or as otherwise noted) 11#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

8.
Intangibles and Goodwill
 
The Company’s intangible assets consist of the following:
 
October 31, 2017
 
July 31, 2017
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Intangible assets with finite lives:
 

 
 

 
 

 
 
 
 
 
 
Customer relationships
$
131,810

 
$
(37,403
)
 
$
94,407

 
$
119,576

 
$
(34,773
)
 
$
84,803

Technology(1)
44,744

 
(15,931
)
 
28,813

 
39,064

 
(15,260
)
 
23,804

Brand names
8,210

 
(3,426
)
 
4,784

 
8,188

 
(3,225
)
 
4,963

Non-compete agreements
3,092

 
(1,487
)
 
1,605

 
3,092

 
(1,428
)
 
1,664

Patents and other registrations
2,801

 
(1,092
)
 
1,709

 
2,783

 
(1,053
)
 
1,730

 
190,657

 
(59,339
)
 
131,318

 
172,703

 
(55,739
)
 
116,964

Trademarks and tradenames
7,519

 

 
7,519

 
7,548

 

 
7,548

Total intangible assets
$
198,176

 
$
(59,339
)
 
$
138,837

 
$
180,251

 
$
(55,739
)
 
$
124,512

_______________________________________________
(1)
The gross and accumulated amortization amounts previously reported as of July 31, 2017 have been revised to exclude the $3,730 fully amortized technology related intangible asset and associated accumulated amortization related to the Jet Prep business. This did not result in any change to the net technology related intangible asset as of July 31, 2017.

Amortization expense related to intangible assets was $4,048 and $3,909 for the three months ended 2018 and 2017, respectively. We expect to recognize an additional $12,726, of amortization expense related to intangible assets for the remainder of fiscal 2018, and thereafter $16,521, $14,768, $14,767, $14,429 and $14,046 of amortization expense for fiscal year 2019, 2020, 2021, 2022 and 2023, respectively.

Goodwill changed during the three months ended October 31, 2017 as follows:
 
Endoscopy
 
Water Purification and Filtration
 
Healthcare Disposables
 
Dialysis
 
Total
Goodwill
Balance, July 31, 2017
129,945

 
59,088

 
114,279

 
8,133

 
311,445

Acquisitions
41,509

 

 

 

 
41,509

Foreign currency translation
(968
)
 
(168
)
 

 

 
(1,136
)
Balance, October 31, 2017
$
170,486

 
$
58,920

 
$
114,279

 
$
8,133

 
$
351,818


9.    Financing Arrangements
Borrowings under our Third Amended and Restated Credit Agreement (the "2014 Credit Agreement") bear interest at rates ranging from 0.25% to 1.25% above the lender’s base rate, or at rates ranging from 1.25% to 2.25% above the London Interbank Offered Rate (“LIBOR”), depending upon the Company’s “Consolidated Leverage Ratio,” which is defined as the consolidated ratio of total funded debt to earnings before interest, taxes, depreciation and amortization, and as further adjusted under the terms of the 2014 Credit Agreement (“Consolidated EBITDA”). At October 31, 2017, the lender’s base rate was 4.25% and the LIBOR rates ranged from 1.24% to 1.46%. The margins applicable to our outstanding borrowings were 0.25% above the lender’s base rate or 1.25% above LIBOR. All of our outstanding borrowings were under LIBOR contracts at October 31, 2017. The 2014 Credit Agreement also provides for fees on the unused portion of our facility at rates ranging from 0.20% to 0.40%, depending upon our Consolidated Leverage Ratio, which was 0.20% at October 31, 2017.
 
The 2014 Credit Agreement contains affirmative and negative covenants reasonably customary for similar credit facilities and is secured by (i) substantially all assets of Cantel and its U.S.-based subsidiaries, (ii) a pledge by Cantel of all of the outstanding shares of its U.S.-based subsidiaries and 65% of the outstanding shares of certain of Cantel’s foreign-based subsidiaries and (iii) a guaranty by Cantel’s domestic subsidiaries. We are in compliance with all financial and other covenants under the 2014 Credit Agreement.
 
As of October 31, 2017 and July 31, 2017, we had $168,000 and $126,000, respectively, of outstanding borrowings under the 2014 Credit Agreement.



(dollar amounts in thousands except share and per share data or as otherwise noted) 12#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

Debt issuance costs associated with our credit facilities are capitalized and amortized to interest expense over the term of the credit facilities. As of October 31, 2017 and July 31, 2017, such debt issuance costs, net of related amortization, were included in other assets, and amounted to $488 and $580, respectively.

10.    Commitments and Contingencies

Contingent Consideration and Assumed Contingent Liability

During fiscal 2017, we decided to exit the Jet Prep business that was acquired in fiscal 2014. At the time of the acquisition, we assumed a contingent obligation payable to the Israeli Government based on future sales. In November 2017, the Israeli Government formally notified us that they would forgive any future amounts payable due to our decision to exit the Jet Prep business. As a result of this formal notification, we reduced the $1,138 contingent obligation to $0, resulting in a benefit through other income for the three months ended October 31, 2017.

Legal Proceedings

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

11.    Earnings Per Common Share
Basic EPS is computed based upon the weighted average number of common shares outstanding for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the year. We include participating securities (unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents) in the computation of EPS pursuant to the two-class method. Our participating securities consist solely of unvested restricted stock awards, which have contractual participation rights equivalent to those of stockholders of unrestricted common stock. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities.



(dollar amounts in thousands except share and per share data or as otherwise noted) 13#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

The following table sets forth the computation of basic and diluted EPS available to stockholders of common stock (excluding participating securities):
 
Three Months Ended October 31,
 
2017
 
2016
Numerator for basic and diluted earnings per share:
 

 
 

Net income
$
22,929

 
$
18,800

Less income allocated to participating securities
(124
)
 
(134
)
Net income available to common shareholders
$
22,805

 
$
18,666

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
41,521,952

 
41,403,050

Dilutive effect of stock options using the treasury stock method and the average market price for the year
66,233

 
72,015

Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock
41,588,185

 
41,475,065

Earnings per share attributable to common stock:
 

 
 

Basic earnings per share
$
0.55

 
$
0.45

Diluted earnings per share
$
0.55

 
$
0.45

Stock options excluded from weighted average dilutive common shares outstanding because their inclusion would have been anti-dilutive

 


A reconciliation of weighted average number of shares and common stock equivalents attributable to common stock, as determined above, to the Company’s total weighted average number of shares and common stock equivalents, including participating securities, is set forth in the following table:
 
Three Months Ended October 31,
 
2017
 
2016
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock
41,588,185

 
41,475,065

Participating securities
225,675

 
309,831

Total weighted average number of shares and common stock equivalents attributable to both common stock and participating securities
41,813,860

 
41,784,896


12.    Accumulated Other Comprehensive Loss
 
The components and changes in accumulated other comprehensive loss income were as follows:
 
Three Months Ended October 31,
 
2017
 
2016
Beginning balance
$
(9,900
)
 
$
(11,795
)
Other comprehensive loss for foreign currency translation
(1,233
)
 
(6,521
)
Ending balance
$
(11,133
)
 
$
(18,316
)
 
13.    Reportable Segments
In accordance with FASB ASC Topic 280, “Segment Reporting,” (“ASC 280”), we have determined our reportable business segments based upon an assessment of product types, organizational structure, customers and internally prepared financial statements. The primary factors used by us in analyzing segment performance are net sales and operating income.
The Company’s reportable segments are as follows:
 
Endoscopy:  designs, develops, manufactures, sells and installs a comprehensive offering of products and services comprising a complete circle of infection prevention solutions. Our products include endoscope reprocessing and endoscopy procedure products.
 


(dollar amounts in thousands except share and per share data or as otherwise noted) 14#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

Water Purification and Filtration: designs, develops, manufactures, sells, and installs water purification systems for medical, pharmaceutical and other bacteria controlled applications. We also provide filtration/separation and disinfectant technologies to the medical and life science markets through a worldwide distributor network. Two customers collectively accounted for approximately 53.4% and 46.3% of our Water Purification and Filtration segment net sales for the three months ended October 31, 2017 and 2016, respectively.

Healthcare Disposables: designs, manufactures, sells, supplies and distributes a broad selection of infection prevention healthcare products, the majority of which are single-use products used by dental practitioners. Three customers collectively accounted for approximately 49.1% and 51.6% of our Healthcare Disposables segment net sales for the three months ended October 31, 2017 and 2016, respectively.

Dialysis: designs, develops, manufactures, sells and services reprocessing systems and sterilants for dialyzers (a device serving as an artificial kidney), as well as dialysate concentrates and supplies utilized for renal dialysis. Two customers accounted for approximately 43.1% and 45.5% of our Dialysis segment net sales for the three months ended October 31, 2017 and 2016, respectively.
 
Information as to reportable segments is summarized below:
 
Three Months Ended October 31,
 
2017
 
2016
Net sales:
 

 
 

Endoscopy
$
112,385

 
$
93,828

Water Purification and Filtration
53,555

 
49,873

Healthcare Disposables
38,892

 
36,799

Dialysis
7,934

 
7,225

Total
$
212,766

 
$
187,725


None of our customers accounted for 10% or more of our consolidated net sales for the three months ended October 31, 2017 and 2016.
 
Three Months Ended October 31,
 
2017
 
2016
Segment operating income:
 

 
 

Endoscopy
$
19,684

 
$
17,561

Water Purification and Filtration
10,150

 
8,920

Healthcare Disposables
8,900

 
7,396

Dialysis
2,099

 
1,813

 
40,833

 
35,690

General corporate expenses(1)
9,199

 
8,627

Operating income
$
31,634

 
$
27,063

 _______________________________________________
(1)
General corporate expenses relate to unallocated corporate costs primarily related to executive management personnel as well as costs associated with certain facets of our acquisition program and being a publicly traded company.

14.    Subsequent Events

Dividend Announcement

On November 1, 2017, our Board of Directors approved a 21% increase in the semi-annual cash dividend to $0.085 per share of outstanding common stock, which will be paid on January 31, 2018 to shareholders of record at the close of business on January 17, 2018.



(dollar amounts in thousands except share and per share data or as otherwise noted) 15#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand Cantel Medical Corp. (“Cantel”). The MD&A is provided as a supplement to and should be read in conjunction with our financial statements and the accompanying notes.

Overview
Cantel is a leading provider of infection prevention products and services in the healthcare market, specializing in the following reportable segments: Endoscopy, Water Purification and Filtration, Healthcare Disposables and Dialysis. Most of our equipment, consumables and supplies are used to help prevent the occurrence or spread of infections.
Fiscal 2018 Highlights
Some of our key financial results for the three months ended October 31, 2017 compared with the three months ended October 31, 2016 were as follows:

Net sales increased by 13.3% to $212,766 from $187,725, with organic net sales growth of 8.6%,
    
Net income increased by 22.0% to $22,929 from $18,800

Non-GAAP net income increased by12.7% to $24,041 from $21,323

Diluted EPS increased by 21.9% to $0.55 from $0.45

Non-GAAP diluted EPS increased by 12.7% to $0.57 from $0.51

Adjusted EBITDAS increased by 10.8% to $44,395 from $40,060

* See Non-GAAP Financial Measures below.

Acquisitions

On August 23, 2017, we purchased all of the issued and outstanding stock of BHT Group, a leader in the German market in automated endoscope reprocessing and related equipment and services for total consideration (net of cash acquired), excluding acquisition related costs, of $60,345. The BHT Group consists of a portfolio of high-quality automatic endoscope reprocessors, advanced endoscope storage and drying cabinets (products globally distributed by our Company prior to the acquisition under an agreement with BHT Group), washer-disinfectors for central sterile applications, associated technical service and parts as well as flexible endoscope repair services. BHT Group is included in our Endoscopy segment.



(dollar amounts in thousands except share and per share data or as otherwise noted) 16#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

Results of Operations
The following table gives information as to the percentages of net sales represented by selected items reflected in our condensed consolidated statements of income.
 
Three Months Ended October 31,
 
Percentage Change
Statement of Income Data:
2017
 
2016
 
Net sales
$
212,766

100.0
 %
 
$
187,725

100.0
%
 
13.3
%
Cost of sales
112,107

52.7
 %
 
98,218

52.3
%
 
14.1
%
Gross profit
100,659

47.3
 %
 
89,507

47.7
%
 
12.5
%
 
 
 
 
 
 
 
 
Selling
31,600

14.9
 %
 
27,893

14.9
%
 
13.3
%
General and administrative
32,096

15.1
 %
 
30,003

16.0
%
 
7.0
%
Research and development
5,329

2.5
 %
 
4,548

2.4
%
 
17.2
%
  
69,025

32.4
 %
 
62,444

33.3
%
 
10.5
%
 
 
 
 
 
 
 
 
Operating income
31,634

14.9
 %
 
27,063

14.4
%
 
16.9
%
 
 
 
 
 
 
 
 
Interest expense, net
1,189

0.6
 %
 
1,093

0.6
%
 
8.8
%
Other income
(1,138
)
(0.5
)%
 

%
 
%
Income before income taxes
31,583

14.8
 %
 
25,970

13.8
%
 
21.6
%
Income taxes
8,654

4.0
 %
 
7,170

3.8
%
 
20.7
%
Net income
$
22,929

10.8
 %
 
$
18,800

10.0
%
 
22.0
%
The following table gives information as to the net sales by reportable segment and geography, as well as the related percentage of such net sales to the total net sales.
 
Three Months Ended October 31,
Net Sales by Segment
2017
 
2016
Endoscopy
$
112,385

52.8
%
 
$
93,828

50.0
%
Water Purification and Filtration
53,555

25.2
%
 
49,873

26.6
%
Healthcare Disposables
38,892

18.3
%
 
36,799

19.6
%
Dialysis
7,934

3.7
%
 
7,225

3.8
%
Total net sales
$
212,766

100.0
%
 
$
187,725

100.0
%
Net Sales by Geography
 
 

 
 
 

United States
$
160,940

75.6
%
 
$
150,507

80.2
%
International
51,826

24.4
%
 
37,218

19.8
%
Total net sales
$
212,766

100.0
%
 
$
187,725

100.0
%
The following table gives information as to the amount of operating income, as well as operating income as a percentage of net sales, for each of our reportable segments.
 
Three Months Ended October 31,
 
2017
 
2016
Endoscopy
$
19,684

17.5
%
 
$
17,561

18.7
%
Water Purification and Filtration
10,150

19.0
%
 
8,920

17.9
%
Healthcare Disposables
8,900

22.9
%
 
7,396

20.1
%
Dialysis
2,099

26.5
%
 
1,813

25.1
%
Operating income by segment
40,833

19.2
%
 
35,690

19.0
%
General corporate expenses
9,199

4.3
%
 
8,627

4.6
%
Income from operations
$
31,634

14.9
%
 
$
27,063

14.4
%
 


(dollar amounts in thousands except share and per share data or as otherwise noted) 17#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

Net Sales
Total net sales increased by $25,041 or 13.3%, to $212,766 for the three months ended October 31, 2017 from $187,725 for the three months ended October 31, 2016. The 13.3% increase in net sales for the three months ended October 31, 2017 includes an increase of 8.6% in organic sales, an increase of 4.3% in net sales due to acquisitions and an increase of 0.4% due to foreign currency translation.

International net sales increased by $14,608, or 39.2%, to $51,826 for the three months ended October 31, 2017 from $37,218 for the three months ended October 31, 2016. The 39.2% increase in net sales consists of a 21.5% increase due to acquisitions, 15.7% organic sales growth and an increase of 2.0% due to foreign currency translation. 
 
Endoscopy. Net sales of endoscopy products and services increased by $18,557, or 19.8%, for the three months ended October 31, 2017 compared with the three months ended October 31, 2016. The 19.8% increase in net sales consists of 10.7% organic sales growth, an 8.5% increase due to acquisitions and an increase of 0.6% due to foreign currency translation. The increase in organic net sales was primarily due to volume increases in the United States and internationally for endoscopy procedure products, storage cabinets and mobile medical carts, disinfectants and service due to the increased installed base of our endoscope reprocessing equipment.

Water Purification and Filtration. Net sales of water purification and filtration products and services increased by $3,682, or 7.4%, for the three months ended October 31, 2017 compared with the three months ended October 31, 2016. The 7.4% increase in net sales was primarily due to an increase in demand for our water purification equipment.

Healthcare Disposables. Net sales of healthcare disposables products increased by $2,093, or 5.7%, for the three months ended October 31, 2017 compared with the three months ended October 31, 2016. The increase in net sales was primarily driven by our higher margin products such as sterility assurance and waterline disinfection products, as well as our branded products.

Dialysis. Net sales of dialysis products and services increased by $709, or 9.8%, for the three months ended October 31, 2017 compared with the three months ended October 31, 2016, primarily due to the increase in sales volume for our domestic concentrate partially offset by decrease in demand for our reprocessing equipment, both internationally and in the United States, due to the continued market shift from reusable to single-use dialyzers.

Gross Profit
 
Gross profit increased by $11,152 or 12.5%, to $100,659 for the three months ended October 31, 2017 from $89,507 for the three months ended October 31, 2016. Gross profit as a percentage of net sales for the three months ended October 31, 2017 and 2016 was 47.3% and 47.7%, respectively. Excluding the impact of acquisition related items, gross profit as a percentage of net sales for the three months ended October 31, 2017 and 2016 was 48.0% and 47.8%, respectively.
 
The lower gross profit as a percentage of net sales for the three months ended October 31, 2017 and 2016 was primarily due to the reclassification of certain salary and benefit related costs that had previously been recorded in operating expenses into costs of goods sold. This negatively impacted gross profit as a percentage of net sales by approximately 0.7% in the prior year. In addition, the mix of sales associated with lower margin capital equipment from our recent BHT Group acquisition negatively impacted gross profit in the current quarter. This was partially offset by favorable gross profit for our water purification equipment within our Water Purification and Filtration segment and lower warranty expense.
 
Operating Expenses
 
Operating expenses as a percentage of net sales for the three months ended October 31, 2017 and 2016 was 32.4% and 33.3%, respectively. As stated above, there was a reclassification of certain salary and benefit related costs that had previously been recorded in operating expenses into costs of good sold, which positively impacted operating expenses as a percentage of net sales by approximately 0.7% in the prior year.

Selling expenses increased by $3,707, or 13.3%, to $31,600 for the three months ended October 31, 2017 from $27,893 for the three months ended October 31, 2016. Selling expenses increased due to higher sales incentive compensation-related costs primarily in our Endoscopy segment, additional sales and marketing initiatives to expand into new markets (including international markets) and the inclusion of selling and marketing expenses of our recent acquisitions. Selling expenses as a percentage of net sales remained flat at 14.9%.
 


(dollar amounts in thousands except share and per share data or as otherwise noted) 18#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

General and administrative expenses increased by $2,093, or 7.0%, to $32,096 for the three months ended October 31, 2017 from $30,003 for the three months ended October 31, 2016. General and administrative expenses increased primarily due to incremental internal and external resources to address various growth initiatives and compliance requirements and higher acquisition related items such as transaction and integration costs. This was partially offset by a decrease in costs associated with the retirement of our former Chief Executive Officer and lower stock-based compensation expense. General and administrative expenses as a percentage of net sales were 15.1% and 16.0% for the three months ended October 31, 2017 and 2016, respectively.

 Research and development expenses (which include continuing engineering costs) increased by $781, or 17.2%, to $5,329 for the three months ended October 31, 2017 from $4,548 for the three months ended October 31, 2016. The increase was primarily due to additional product development initiatives primarily in our Endoscopy segment. Research and development expenses as a percentage of net sales were 2.5% and 2.4% for the three months ended October 31, 2017 and 2016, respectively.
 
Operating Income

Endoscopy. The Endoscopy segment’s operating income increased by $2,123, or 12.1%, for the three months ended October 31, 2017 compared with the three months ended October 31, 2016, primarily due to increased sales volume in the United States and internationally for our endoscopy products and services, as further explained above. This was partially offset by increases in acquisition and restructuring-related costs, sales commission expense, other compensation-related costs and legal fees.

Water Purification and Filtration. The Water Purification and Filtration segment’s operating income increased by $1,230, or 13.8%, for the three months ended October 31, 2017 compared with the three months ended October 31, 2016, primarily as a result of higher sales and decreased bad debt and warranty expenses, partially offset by other compensation-related costs and higher sales commission expenses.

Healthcare Disposables. The Healthcare Disposables segment’s operating income increased by $1,504, or 20.3%, for the three months ended October 31, 2017 compared with the three months ended October 31, 2016, primarily due to the sales impact of our recent acquisition, improved gross margins resulting from both productivity and costing improvements, and favorable product mix, partially offset by inventory adjustments.

Dialysis. The Dialysis segment’s operating income increased by $286, or 15.8%, for the three months ended October 31, 2017 compared with the three months ended October 31, 2016, primarily due higher net sales and cost control initiatives.

General Corporate Expenses
 
General corporate expenses relate to unallocated corporate costs primarily related to executive management personnel as well as costs associated with certain facets of our acquisition program and being a publicly traded company. Such expenses increased by $572, or 6.6%, to $9,199 for the three months ended October 31, 2017 from $8,627 for the three months ended October 31, 2016, primarily due to the addition of internal and external resources to address various growth initiatives and compliance requirements, partially offset by a decrease in costs associated with the retirement of our former Chief Executive Officer and lower stock-based compensation expense.

Interest
 
Interest expense, net increased by $96, or 8.8%, to $1,189 for the three months ended October 31, 2017 from $1,093 for the three months ended October 31, 2016, as a result of an increase in the average outstanding borrowings due to the funding of our recent acquisitions.

Other Income
 
Other income increased $1,138 for the three months ended October 31, 2017 as a result of the favorable resolution of the contingent liability associated with the Jet Prep acquisition.

Income Taxes
 
The consolidated effective tax rate decreased by 0.2% to 27.4% for the three months ended October 31, 2017 from 27.6% for the three months ended October 31, 2016, due to the impact of the final resolution of a contingent liability associated with the Jet Prep acquisition. We did not record any tax expense associated with this benefit due to the availability of net operating losses. This was partially offset by the excess tax benefits related to share-based awards.



(dollar amounts in thousands except share and per share data or as otherwise noted) 19#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

Non-GAAP Financial Measures
In evaluating our operating performance, we supplement the reporting of our financial information determined under generally accepted accounting principles in the United States (“GAAP”) with certain non-GAAP financial measures including (i) non-GAAP net income; (ii) non-GAAP earnings per diluted share ("EPS"); (iii) earnings before interest, taxes, depreciation, amortization, loss on disposal of fixed assets, and stock-based compensation expense (“EBITDAS”); (iv) adjusted EBITDAS; (v) net debt; and (vi) organic sales. These non-GAAP financial measures are indicators of the Company's performance that are not required by, or presented in accordance with, GAAP. They are presented with the intent of providing greater transparency to financial information used by us in our financial analysis and operational decision-making. We believe that these non-GAAP measures provide meaningful information to assist investors, stockholders and other readers of our consolidated financial statements in making comparisons to our historical operating results and analyzing the underlying performance of our results of operations. These non-GAAP financial measures are not intended to be, and should not be, considered separately from, or as an alternative to, the most directly comparable GAAP financial measures.

To measure earnings performance on a consistent and comparable basis, we exclude certain items that affect comparability of operating results and the trend of earnings. These adjustments are irregular in timing, may not be indicative of our past and future performance and are therefore excluded to allow investors to better understand underlying operating trends. The following are examples of the types of adjustments that are excluded: (i) amortization of purchased intangible assets; (ii) acquisition related items; (iii) business optimization and restructuring-related charges; (iv) certain significant and discrete tax matters; and (v) other significant items management deems irregular or non-operating in nature.

Amortization expense of purchased intangible assets is a non-cash expense related to intangibles that were primarily the result of business acquisitions. Our history of acquiring businesses has resulted in significant increases in amortization of intangible assets that reduced the Company’s net income. The removal of amortization from our overall operating performance helps in assessing our cash generated from operations including our return on invested capital, which we believe is an important analysis for measuring our ability to generate cash and invest in our continued growth.
 
Acquisition related items consist of (i) fair value adjustments to contingent consideration and other contingent liabilities resulting from acquisitions, (ii) due diligence, integration, legal fees and other transaction costs associated with our acquisition program and (iii) acquisition accounting charges for the amortization of the initial fair value adjustments of acquired inventory and deferred revenue. The adjustments of contingent consideration and other contingent liabilities are periodic adjustments to record such amounts at fair value at each balance sheet date. Given the subjective nature of the assumptions used in the determination of fair value calculations, fair value adjustments may potentially cause significant earnings volatility that are not representative of our operating results. Similarly, due diligence, integration, legal and other acquisition costs associated with our acquisition program, including acquisition accounting charges relating to recording acquired inventory and deferred revenue at fair market value, can be significant and also adversely impact our effective tax rate as certain costs are often not tax-deductible. Since these acquisition related items are irregular and often mask underlying operating performance, we excluded these amounts for purposes of calculating these non-GAAP financial measures to facilitate an evaluation of our current operating performance and a comparison to past operating performance.

Excess tax benefits resulting from stock compensation are recorded as a reduction of income tax expense. The magnitude of the impact of excess tax benefits generated in the future, which may be favorable or unfavorable, are dependent upon our future grants of equity awards, our future share price on the date awards vest in relation to the fair value of awards on grant date and the exercise behavior of our stock option holders. Since these favorable tax benefits are largely unrelated to our results and unrepresentative of our normal effective tax rate, we excluded its impact on net income and diluted EPS to arrive at our non-GAAP financial measures.

In fiscal 2016, we announced the retirement plans of our former Chief Executive Officer and recorded the majority of the costs associated with his retirement in our consolidated financial statements. Since these costs are irregular and mask our underlying operating performance, we made an adjustment to our net income and diluted EPS for the three months ended October 31, 2016 to exclude such costs to arrive at our non-GAAP financial measures.
 
Three Months Ended October 31, 2017

We made adjustments to net income and diluted EPS to exclude (i) amortization expense of purchased intangible assets, (ii) acquisition related items, (iii) other business optimization and restructuring-related charges and (iv) the resolution of the contingent liability associated with the Jet Prep acquisition to arrive at our non-GAAP financial measures, non-GAAP net income and non-GAAP diluted EPS.



(dollar amounts in thousands except share and per share data or as otherwise noted) 20#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

Three Months Ended October 31, 2016

We made adjustments to net income and diluted EPS to exclude (i) amortization expense of purchased intangible assets, (ii) acquisition related items and (iii) costs associated with the retirement of our former Chief Executive Officer to arrive at our non-GAAP financial measures, non-GAAP net income and non-GAAP diluted EPS.
 
The reconciliations of net income and diluted EPS to non-GAAP net income and non-GAAP diluted EPS were calculated as follows:
 
Three Months Ended October 31,
 
2017
 
2016
Net income/Diluted EPS, as reported
$
22,929

 
$
0.55

 
$
18,800

 
$
0.45

Intangible amortization, net of tax(1)
2,869

 
0.07

 
2,748

 
0.07

Acquisition related items, net of tax(2)
1,081

 
0.03

 
768

 
0.02

CEO retirement costs, net of tax(1)

 

 
1,248

 
0.03

Restructuring-related charges, net of tax(3)
586

 
0.01

 

 

Excess tax benefit(4)
(2,286
)
 
(0.05
)
 
(2,241
)
 
(0.05
)
Resolution of Jet Prep contingent liability(5)
(1,138
)
 
(0.03
)
 

 

Non-GAAP net income/Non-GAAP diluted EPS
$
24,041

 
$
0.57

 
$
21,323

 
$
0.51

________________________________________________
(1)
Amounts were recorded in general and administrative expenses.
(2)
For the three months ended October 31, 2017, pre-tax acquisition related items of $893 were recorded in cost of sales and $916 were recorded in general and administrative expenses. For the three months ended October 31, 2016, pre-tax acquisition related items of $170 were recorded in cost of sales and $905 were recorded in general and administrative expenses.
(3)
For the three months ended October 31, 2017, pre-tax restructuring-related items of $505 were recorded in cost of sales and $443 were recorded in general and administrative expenses.
(4)
Amounts were recorded in income taxes.
(5)
Amounts were recorded in other income

We believe EBITDAS is an important valuation measurement for management and investors given the increasing effect that non-cash charges, such as stock-based compensation, amortization related to acquisitions and depreciation of capital equipment have on net income. In particular, acquisitions have historically resulted in significant increases in amortization of purchased intangible assets that reduce net income. Additionally, we regard EBITDAS as a useful measure of operating performance and cash flow before the effect of interest expense and is a complement to operating income, net income and other GAAP financial performance measures.
 
We define adjusted EBITDAS as EBITDAS excluding the same non-GAAP adjustments to net income discussed previously in this document. We use adjusted EBITDAS when evaluating operating performance because we believe the exclusion of such adjustments, of which a significant portion are non-cash items, is necessary to provide the most accurate measure of on-going core operating results and to evaluate comparative results period over period.



(dollar amounts in thousands except share and per share data or as otherwise noted) 21#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

The reconciliations of net income to EBITDAS and adjusted EBITDAS were calculated as follows:
 
Three Months Ended October 31,
 
2017
 
2016
Net income, as reported
$
22,929

 
$
18,800

Interest expense, net
1,189

 
1,093

Income taxes
8,654

 
7,170

Depreciation
4,036

 
3,454

Amortization
4,048

 
3,909

Loss on disposal of fixed assets
69

 
224

Stock-based compensation expense
1,851

 
2,922

EBITDAS
42,776

 
37,572

Acquisition related items
1,809

 
1,075

CEO retirement costs(1)

 
1,413

Restructuring related charges
948

 

Resolution of Jet Prep contingent liability
(1,138
)
 

Adjusted EBITDAS
$
44,395

 
$
40,060

________________________________________________
(1)
For comparative purposes, we have revised the amounts associated with CEO retirement costs for the three months ended October 31, 2016 to exclude stock-based compensation expense which was reported in "Stock-based compensation expense" above.

We define net debt as long-term debt less cash and cash equivalents. Each of the components of net debt appears on our consolidated balance sheets. We believe that the presentation of net debt provides useful information to investors because we review net debt as part of our management of our overall liquidity, financial flexibility, capital structure and leverage.
 
October 31, 2017
 
July 31, 2017
Long-term debt
$
168,000

 
$
126,000

Less cash and cash equivalents
(37,220
)
 
(36,584
)
Net debt
$
130,780

 
$
89,416


We define organic sales as net sales less (i) the impact of foreign currency translation and (ii) net sales related to acquired businesses during the first twelve months of ownership and (iii) divestitures during the periods being compared. We believe that reporting organic sales provides useful information to investors by helping identify underlying growth trends in our business and facilitating easier comparisons of our revenue performance with prior periods. We exclude the effect of foreign currency translation from organic sales because foreign currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends. We exclude the effect of acquisitions because the nature, size, and number of acquisitions can vary dramatically from period to period and can obscure underlying business trends and make comparisons of financial performance difficult. The reconciliation of net sales to organic sales can be found elsewhere in this MD&A in “Net Sales.”

Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund operating, investing and financing activities. Significant factors affecting the management of liquidity are cash flows generated from operating activities, capital expenditures, acquisitions of businesses and cash dividends. Cash provided by operating activities continues to be a primary source of funds. As necessary, we supplement operating cash flow with borrowings from our revolving credit facility to fund our business activities.
 
Cash Flows
 
Net Cash Provided by Operating Activities. Net cash provided by operating activities increased by $5,164, or 20.7%, to $30,072 for the three months ended October 31, 2017 from $24,908 for the three months ended October 31, 2016, primarily due to the increase in net income, increased cash collections associated with outstanding accounts receivables, the timing of income tax payments, partially offset by increases in accounts payable due to the timing of payments and inventories to support increasing demand of our products.
 


(dollar amounts in thousands except share and per share data or as otherwise noted) 22#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

Net Cash Used in Investing Activities. Net cash used in investing activities increased by $1,202, or 1.8%, to $66,837 for the three months ended October 31, 2017 from $65,635 for the three months ended October 31, 2016, primarily due to an increase in cash paid for acquisitions, partially offset by a decrease in capital expenditures.
 
Net Cash Provided by Financing Activities. Net cash provided by financing activities decreased by $2,606, or 6.7%, to $36,178 for the three months ended October 31, 2017 from $38,784 for the three months ended October 31, 2016, primarily due to higher repayments under our credit facility, offset by a slight increase in borrowings to fund acquisitions.
 
Dividends
 
On November 1, 2017, our Board of Directors approved a 21% increase in the semi-annual cash dividend to $0.085 per share of outstanding common stock, which will be paid on January 31, 2018 to shareholders of record at the close of business on January 17, 2018. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination of the Company's Board of Directors.

Debt

On October 31, 2017, we had $168,000 of outstanding borrowings under our Third Amended and Restated Credit Agreement (the “2014 Credit Agreement”).

For further information regarding the 2014 Credit Agreement, including a description of affirmative and negative covenants, see Note 9 to our condensed consolidated financial statements in Part I, Item 1 of this report.

Financing Needs
 
On October 31, 2017, our long-term debt of $168,000, net of our cash and cash equivalents of $37,220, was $130,780. Stockholders' equity as of that date was $542,578.

Our operating segments generate significant cash from operations. At October 31, 2017, we had a cash balance of $37,220, of which $15,821 was held by foreign subsidiaries. Our foreign cash is needed by our foreign subsidiaries for working capital purposes as well as for current international growth initiatives. Accordingly, our foreign unremitted earnings are considered indefinitely reinvested and unavailable for repatriation.
 
We believe that our current cash position, anticipated cash flows from operations and the funds available under our 2014 Credit Agreement will be sufficient to satisfy our worldwide cash operating requirements for the foreseeable future based upon our existing operations, particularly given that we historically have not needed to borrow for working capital purposes. At December 7, 2017, approximately $84,000 was available under our 2014 Credit Agreement.

Critical Accounting Policies
There were no changes to our critical accounting policies from those disclosed in our 2017 Annual Report on Form 10-K.

Forward Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates, or forecasts about our businesses, the industries in which we operate, and the current beliefs and assumptions of management; they do not relate strictly to historical or current facts. Without limiting the foregoing, words or phrases such as “expect,” “anticipate,” “goal,” “will continue,” “project,” “intend,” “plan,” “believe,” “seek,” “may,” “could” and variations of such words and similar expressions generally identify forward-looking statements. In addition, any statements that refer to predictions or projections of our future financial performance, anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions about future events, activities or developments and are subject to numerous risks, uncertainties, and assumptions that are difficult to predict. We caution that undue reliance should not be placed on such forward-looking statements, which speak only as of the date made.  Some of the factors which could cause results to differ from those expressed in any forward-looking statement are set forth under Item 1A of the 2017 Annual Report on Form 10-K, entitled Risk Factors. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.


(dollar amounts in thousands except share and per share data or as otherwise noted) 23#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q


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

Item 3.    Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in information reported in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our 2017 Form 10-K. 
Item 4.    Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that the design and operation of these disclosure controls and procedures were effective and designed to ensure that material information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports is (i) recorded, processed, summarized and reported within the time periods specified by the SEC and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
We have evaluated our internal controls over financial reporting and determined that no changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting, except as described below.
On August 23, 2017, we acquired BHT Group, as more fully described in Note 3 to the condensed consolidated financial statements. During the initial transition period following the acquisition, we enhanced our internal control process to ensure that all financial information related to this acquisition was properly reflected in our condensed consolidated financial statements. We expect all aspects of the BHT Group business will be fully integrated into our existing overall internal control structure by the end of fiscal 2018.



24


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

PART II – OTHER INFORMATION

Item 1.    Legal Proceedings
None.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our 2017 Annual Report on Form 10‑K. The risk factors disclosed in Part I, Item 1A to our 2017 Annual Report on Form 10-K, in addition to the other information set forth in this report, could materially affect our business, financial condition, or results of operations.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
The following table represents information with respect to purchases of common stock made by the Company during the current quarter:
Period
 
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
August 1 - August 31
 
823

 
$
76.44

 

 

September 1 - September 30
 
325

 
84.06

 

 

October 1 - October 31
 
60,359

 
94.94

 

 

Total
 
61,507

 
$
94.64

 

 

The Company does not currently have a repurchase program. All of the shares purchased during the current quarter represent shares surrendered to the Company to pay employee withholding taxes due upon the vesting of restricted stock.
Item 3.    Defaults Upon Senior Securities
None.
Item 4.    Mine Safety Disclosures
None.
Item 5.    Other Information
None.
Item 6.    Exhibits
 
 
Certification of Principal Executive Officer.
 
 
 
 
 
 
Certification of Principal Financial Officer.
 
 
 
 
 
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
101
 
The following materials from this report, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.



(dollar amounts in thousands except share and per share data or as otherwise noted) 25#


Cantel Medical Corp.                                 2018 First Quarter Form 10-Q

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
CANTEL MEDICAL CORP.
 
 
Date: December 7, 2017
 
 
 
 
By:
/s/ Jorgen B. Hansen
 
 
Jorgen B. Hansen,
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
 
 
By:
/s/ Peter G. Clifford
 
 
Peter G. Clifford,
 
 
Executive Vice President and Chief Financial Officer
 
 
(Principal Financial Officer)
 
 
 
 
 
By:
/s/ Brian R. Capone
 
 
Brian R. Capone
 
 
Vice President and Chief Accounting Officer
 
 
(Principal Accounting Officer)



26


EXHIBIT 31.1
 
CERTIFICATIONS
 
I, Jorgen B. Hansen, certify that:
 
1.
I have reviewed this Quarterly Report on Form 10-Q of Cantel Medical Corp.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

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

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

d)
Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
 
Date:
December 7, 2017
 
By:
/s/ Jorgen B. Hansen
Jorgen B. Hansen, President and Chief Executive Officer
(Principal Executive Officer)




EXHIBIT 31.2
 
CERTIFICATIONS
 
I, Peter G. Clifford, certify that:
 
1.
I have reviewed this Quarterly Report on Form 10-Q of Cantel Medical Corp.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)
Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
 
Date:
December 7, 2017
 
 
By:
/s/ Peter G. Clifford
Peter G. Clifford, Executive Vice President and Chief Financial Officer
(Principal Financial Officer)





Exhibit 32
 
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF
TITLE 18, UNITED STATES CODE)
 
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of Title 18, United States Code), the undersigned officers of Cantel Medical Corp. (the “Company”), do hereby certify with respect to the Quarterly Report of the Company on Form 10-Q for the quarter ended October 31, 2017 as filed with the Securities and Exchange Commission  (the “Form 10-Q”) that, to the best of their knowledge:
 
1.
The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.
The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company, as of the date and for the period referred to in this report.
 
Date:
December 7, 2017
 
 
 
 
 
 
 
 
 
/s/ Jorgen B. Hansen
 
 
Jorgen B. Hansen
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
 
/s/ Peter G. Clifford
 
 
Peter G. Clifford
 
 
Executive Vice President and Chief Financial Officer
 
 
(Principal Financial Officer)



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