10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended April 30, 2008
or
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o |
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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- 04311
PALL CORPORATION
(Exact name of registrant as specified in its charter)
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New York
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11-1541330 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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2200 Northern Boulevard, East Hills, NY
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11548 |
(Address of principal executive offices)
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(Zip Code) |
(516) 484-5400
(Registrants telephone number, including area code)
Indicate by check mark whether the 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large
accelerated filer
þ
Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Accelerated
filer o
Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares of the registrants common stock outstanding as of June 2, 2008 was
119,875,974.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
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Apr. 30, 2008 |
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July 31, 2007 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
396,837 |
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$ |
443,036 |
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Accounts receivable |
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590,374 |
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551,393 |
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Inventories |
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524,867 |
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471,467 |
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Prepaid expenses |
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46,483 |
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34,135 |
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Other current assets |
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79,678 |
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106,346 |
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Total current assets |
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1,638,239 |
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1,606,377 |
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Property, plant and equipment, net |
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637,986 |
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607,900 |
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Goodwill |
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265,923 |
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260,205 |
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Intangible assets |
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47,366 |
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47,933 |
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Other non-current assets |
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314,124 |
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186,431 |
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Total assets |
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$ |
2,903,638 |
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$ |
2,708,846 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Notes payable |
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$ |
47,850 |
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$ |
39,949 |
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Accounts payable and other current liabilities |
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498,878 |
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499,075 |
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Income taxes payable |
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32,141 |
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291,395 |
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Current portion of long-term debt |
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1,771 |
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1,771 |
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Total current liabilities |
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580,640 |
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832,190 |
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Long-term debt, net of current portion |
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717,384 |
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591,591 |
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Income taxes payable non-current |
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231,509 |
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Deferred taxes and other non-current liabilities |
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228,202 |
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224,464 |
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Total liabilities |
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1,757,735 |
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1,648,245 |
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Stockholders equity: |
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Common stock, par value $.10 per share |
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12,796 |
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12,796 |
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Capital in excess of par value |
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172,718 |
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159,620 |
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Retained earnings |
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1,066,608 |
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974,945 |
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Treasury stock, at cost |
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(224,895 |
) |
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(164,454 |
) |
Stock option loans |
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(462 |
) |
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(679 |
) |
Accumulated other comprehensive income (loss): |
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Foreign currency translation |
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182,997 |
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142,691 |
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Minimum pension liability |
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(67,036 |
) |
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(67,036 |
) |
Unrealized investment gains |
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3,427 |
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2,801 |
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Unrealized losses on derivatives |
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(250 |
) |
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(83 |
) |
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119,138 |
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78,373 |
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Total stockholders equity |
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1,145,903 |
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1,060,601 |
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Total liabilities and stockholders equity |
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$ |
2,903,638 |
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$ |
2,708,846 |
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See accompanying notes to condensed consolidated financial statements.
3
PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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Apr. 30, 2008 |
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Apr. 30, 2007 |
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Apr. 30, 2008 |
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Apr. 30, 2007 |
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(As Restated) |
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(As Restated) |
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Net sales |
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$ |
661,680 |
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$ |
559,347 |
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$ |
1,848,434 |
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$ |
1,603,565 |
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Cost of sales |
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338,714 |
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282,227 |
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975,876 |
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846,303 |
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Gross profit |
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322,966 |
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277,120 |
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872,558 |
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757,262 |
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Selling, general and
administrative expenses |
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195,485 |
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167,677 |
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545,317 |
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493,255 |
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Research and development |
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18,537 |
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15,656 |
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53,524 |
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45,167 |
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Restructuring and other
charges/(gains), net |
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5,495 |
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8,620 |
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28,123 |
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22,060 |
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Interest expense, net |
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9,944 |
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9,171 |
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25,728 |
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29,626 |
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Earnings before income
taxes |
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93,505 |
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75,996 |
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219,866 |
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167,154 |
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Provision for income taxes |
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30,231 |
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25,625 |
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72,502 |
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56,435 |
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Net earnings |
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$ |
63,274 |
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$ |
50,371 |
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$ |
147,364 |
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$ |
110,719 |
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Earnings per share: |
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Basic |
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$ |
0.51 |
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$ |
0.41 |
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$ |
1.20 |
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$ |
0.90 |
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Diluted |
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$ |
0.51 |
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$ |
0.40 |
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$ |
1.19 |
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$ |
0.89 |
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Dividends declared per share |
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$ |
0.13 |
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$ |
0.12 |
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$ |
0.49 |
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$ |
0.35 |
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Average shares outstanding: |
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Basic |
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122,929 |
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123,399 |
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|
123,111 |
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123,110 |
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Diluted |
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|
124,159 |
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124,781 |
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124,316 |
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|
124,662 |
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See accompanying notes to condensed consolidated financial statements.
4
PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Nine Months Ended |
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Apr. 30, 2008 |
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Apr. 30, 2007 |
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Operating activities: |
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Net cash provided by operating activities |
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$ |
16,455 |
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$ |
213,554 |
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Investing activities: |
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Capital expenditures |
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(76,466 |
) |
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(54,086 |
) |
Proceeds from sale of retirement benefit assets |
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17,379 |
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18,965 |
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Purchases of retirement benefit assets |
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(19,922 |
) |
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(18,397 |
) |
Disposals of long lived assets |
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5,560 |
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44,609 |
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Acquisitions of businesses, net of disposals and cash acquired |
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(406 |
) |
Other |
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(3,578 |
) |
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(3,810 |
) |
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Net cash used by investing activities |
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(77,027 |
) |
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(13,125 |
) |
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Financing activities: |
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Notes payable |
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4,206 |
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|
6,474 |
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Dividends paid |
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(44,170 |
) |
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(41,521 |
) |
Net proceeds from stock plans |
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|
15,468 |
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|
36,612 |
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Purchase of treasury stock |
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(78,211 |
) |
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(51,016 |
) |
Long-term borrowings |
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|
161,495 |
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|
627 |
|
Repayments of long-term debt |
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(67,161 |
) |
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(116,903 |
) |
Excess tax benefits from stock-based compensation arrangements |
|
|
798 |
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4,794 |
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Net cash used by financing activities |
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(7,575 |
) |
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(160,933 |
) |
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Cash flow for period |
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(68,147 |
) |
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|
39,496 |
|
Cash and cash equivalents at beginning of year |
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|
443,036 |
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|
317,657 |
|
Effect of exchange rate changes on cash and cash equivalents |
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|
21,948 |
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|
7,519 |
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Cash and cash equivalents at end of period |
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$ |
396,837 |
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$ |
364,672 |
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Supplemental disclosures: |
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Interest paid |
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$ |
33,632 |
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$ |
30,478 |
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Income taxes paid (net of refunds) |
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|
215,141 |
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|
41,630 |
|
See accompanying notes to condensed consolidated financial statements.
5
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
The condensed consolidated financial information included herein is unaudited. Such
information reflects all adjustments of a normal recurring nature, which are, in the opinion of
Company management, necessary to present fairly the Companys consolidated financial position,
results of operations and cash flows as of the dates and for the periods presented herein. These
condensed consolidated financial statements should be read in conjunction with the consolidated
financial statements and notes set forth in the Companys Annual Report on Form 10-K for the fiscal
year ended July 31, 2007 (2007 Form 10-K).
NOTE 2 AUDIT COMMITTEE INQUIRY AND RESTATEMENT
As discussed in the 2007 Form 10-K, an inquiry was conducted by the Companys audit committee
into the Companys understatement of its United States (U.S.) federal income tax payments and its
provision for income taxes. The audit committee completed its inquiry in January 2008. On August 1,
2007, the audit committee, on the recommendation of management, concluded that the Companys
previously issued financial statements for each of the eight fiscal years in the period ended July
31, 2006 (including the interim periods within those years), and for each of the fiscal quarters
ended October 31, 2006, January 31, 2007 and April 30, 2007, should no longer be relied upon.
Accordingly, the Company restated its previously issued financial
statements for those periods presented in its 2007 Form 10-K. The Company has not amended its previously filed Annual Reports on Form 10-K
or Quarterly Reports on Form 10-Q for the periods affected by this restatement. The financial
information presented below for fiscal year 2007 has been restated as set forth in the 2007 Form
10-K.
The audit committee inquiry and restatement resulted in the Companys failure or inability to comply with certain
representations, warranties and covenants in its debt and other financing-related agreements,
including the Companys obligation to provide certain information (principally the Companys
periodic Securities and Exchange Commission (SEC) reports) to those lenders or counterparties.
The Company entered into amendments and/or waivers to address these matters with the lenders or
counterparties, as applicable, under its $500,000 unsecured senior revolving credit facility, Yen 9
billion variable-rate loan due June 20, 2010 and certain other debt and financing-related
agreements, as well as an amendment of the indenture relating to the $280,000 6% senior notes due
August 1, 2012. Under the terms of those amendments and covenant waivers, the Company was obligated
to return to compliance with its reporting obligations under the federal securities laws by March
31, 2008. As of March 28, 2008, the Company became compliant with its filing obligations under the
foregoing agreements, as amended.
The following tables present the effects of the adjustments made to the Companys previously
reported statements of earnings for the three and nine months ended April 30, 2007 for the
restatement of the Companys provision for income taxes and interest expense, net.
6
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
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Three Months Ended April 30, 2007 |
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As previously |
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reported |
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Adjustments |
|
|
As restated |
|
Net sales |
|
$ |
559,347 |
|
|
$ |
|
|
|
$ |
559,347 |
|
Cost of sales |
|
|
282,227 |
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|
|
|
|
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|
282,227 |
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|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
277,120 |
|
|
|
|
|
|
|
277,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
167,677 |
|
|
|
|
|
|
|
167,677 |
|
Research and development |
|
|
15,656 |
|
|
|
|
|
|
|
15,656 |
|
Restructuring and other charges, net |
|
|
8,620 |
|
|
|
|
|
|
|
8,620 |
|
Interest expense, net |
|
|
4,260 |
|
|
|
4,911 |
|
|
|
9,171 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
80,907 |
|
|
|
(4,911 |
) |
|
|
75,996 |
|
Provision for income taxes |
|
|
13,833 |
|
|
|
11,792 |
|
|
|
25,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
67,074 |
|
|
$ |
(16,703 |
) |
|
$ |
50,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.54 |
|
|
|
|
|
|
$ |
0.41 |
|
Diluted |
|
$ |
0.54 |
|
|
|
|
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
123,399 |
|
|
|
|
|
|
|
123,399 |
|
Diluted |
|
|
124,781 |
|
|
|
|
|
|
|
124,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended April 30, 2007 |
|
|
|
As previously |
|
|
|
|
|
|
|
|
|
reported |
|
|
Adjustments |
|
|
As restated |
|
Net sales |
|
$ |
1,603,565 |
|
|
$ |
|
|
|
$ |
1,603,565 |
|
Cost of sales |
|
|
846,303 |
|
|
|
|
|
|
|
846,303 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
757,262 |
|
|
|
|
|
|
|
757,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
493,255 |
|
|
|
|
|
|
|
493,255 |
|
Research and development |
|
|
45,167 |
|
|
|
|
|
|
|
45,167 |
|
Restructuring and other charges, net |
|
|
22,060 |
|
|
|
|
|
|
|
22,060 |
|
Interest expense, net |
|
|
14,894 |
|
|
|
14,732 |
|
|
|
29,626 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
181,886 |
|
|
|
(14,732 |
) |
|
|
167,154 |
|
Provision for income taxes |
|
|
34,575 |
|
|
|
21,860 |
|
|
|
56,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
147,311 |
|
|
$ |
(36,592 |
) |
|
$ |
110,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.20 |
|
|
|
|
|
|
$ |
0.90 |
|
Diluted |
|
$ |
1.18 |
|
|
|
|
|
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
123,110 |
|
|
|
|
|
|
|
123,110 |
|
Diluted |
|
|
124,662 |
|
|
|
|
|
|
|
124,662 |
|
7
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
NOTE 3 ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued Financial
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48). FIN No. 48
establishes a recognition threshold and measurement process for recording income tax positions in
an enterprises financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
FIN No. 48 prescribes a two-step evaluation process for income tax positions. The first step is
recognition and, if the recognition threshold is met, a second step, measurement, is applied. For
recognition, an enterprise judgmentally determines whether it is more-likely-than-not that an
income tax position will be sustained upon examination, including resolution of related appeals or
litigation processes, based on the technical merits of the position. If the income tax position
meets the more-likely-than-not recognition threshold it is measured and the appropriate amount is
recognized in the financial statements as the largest amount of income tax benefit that has a greater
than 50% likelihood of being realized. If an income tax position does not meet the more-likely-than-not
recognition threshold, no benefit for that position is recognized in the financial statements.
Income tax positions that meet the more-likely-than-not recognition threshold at the effective date
of FIN No. 48 may be recognized, or continue to be recognized, upon adoption of FIN No. 48.
Effective August 1, 2007, the Company adopted FIN No. 48 and in accordance with FIN No. 48,
the Company recognized a cumulative-effect adjustment of $5,600, reducing its liability for
unrecognized income tax benefits and interest and increasing the August 1, 2007 balance of Retained
Earnings.
At August 1, 2007, the Company had $210,000 in gross tax reserves for unrecognized income tax
benefits. The Companys uncertain income tax positions, if recognized, would reduce its income tax
expense by approximately $135,000 thus favorably affecting the Companys effective tax rate.
In addition, consistent with the provisions of FIN No. 48, the Company reclassified $210,000
of income tax liabilities from current to non-current liabilities because payment of cash is not
anticipated within one year of the balance sheet date. These non-current income tax liabilities are
recorded in Income taxes payable- non-current in the condensed consolidated balance sheet.
The Company and its subsidiaries are currently subject to examination by various taxing
authorities. While it is possible that one or more of these examinations may be resolved within the
next twelve months, the Company does not anticipate a significant impact to the unrecognized income
tax benefits.
The Company recognizes accrued interest expense related to unrecognized income tax benefits in
interest expense and the balance at the end of a reporting period is recorded in accrued interest
payable on the Companys condensed consolidated balance sheet. Penalties are accrued as part of
income tax expense and the unpaid balance at the end of a reporting period is recorded as part of
the current or non-current reserve for uncertain income tax positions. At August 1, 2007, the
Company had accrued $64,000 for the potential payment of interest and penalties. At April 30,
2008, the accrued balance for the potential payment of interest and penalties was $74,000.
As of August 1, 2007, the Company is subject to U.S. federal and state and local income tax
examinations for the fiscal tax years ended in 1996 through 2007, and to non-U.S. income tax
examinations for the fiscal tax years ended in 2000 through 2007.
The balance of the Companys gross uncertain income tax positions at the end of the third
quarter of fiscal year 2008 is $232,000.
8
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
NOTE 4 BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
|
|
|
|
|
|
|
|
|
|
|
Apr. 30, 2008 |
|
|
July 31, 2007 |
|
Accounts receivable: |
|
|
|
|
|
|
|
|
Billed |
|
$ |
548,809 |
|
|
$ |
510,991 |
|
Unbilled |
|
|
54,376 |
|
|
|
52,212 |
|
|
|
|
|
|
|
|
Total |
|
|
603,185 |
|
|
|
563,203 |
|
Less: Allowances for doubtful accounts |
|
|
(12,811 |
) |
|
|
(11,810 |
) |
|
|
|
|
|
|
|
|
|
$ |
590,374 |
|
|
$ |
551,393 |
|
|
|
|
|
|
|
|
Unbilled receivables principally relate to long-term contracts recorded under the
percentage-of-completion method of accounting.
|
|
|
|
|
|
|
|
|
|
|
Apr. 30, 2008 |
|
|
July 31, 2007 |
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials and components |
|
$ |
148,633 |
|
|
$ |
136,248 |
|
Work-in-process |
|
|
89,057 |
|
|
|
73,725 |
|
Finished goods |
|
|
287,177 |
|
|
|
261,494 |
|
|
|
|
|
|
|
|
|
|
$ |
524,867 |
|
|
$ |
471,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apr. 30, 2008 |
|
|
July 31, 2007 |
|
Property, plant and equipment: |
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
$ |
1,467,844 |
|
|
$ |
1,370,287 |
|
Less: Accumulated depreciation
and amortization |
|
|
(829,858 |
) |
|
|
(762,387 |
) |
|
|
|
|
|
|
|
|
|
$ |
637,986 |
|
|
$ |
607,900 |
|
|
|
|
|
|
|
|
NOTE 5 GOODWILL AND INTANGIBLE ASSETS
The following table presents goodwill, net of accumulated amortization recorded prior to
adopting SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), allocated by
reportable segment, in accordance with SFAS No. 142.
|
|
|
|
|
|
|
|
|
|
|
Apr. 30, 2008 |
|
|
July 31, 2007 |
|
Life Sciences |
|
$ |
72,657 |
|
|
$ |
69,433 |
|
Industrial |
|
|
193,266 |
|
|
|
190,772 |
|
|
|
|
|
|
|
|
|
|
$ |
265,923 |
|
|
$ |
260,205 |
|
|
|
|
|
|
|
|
The change in the carrying amount of goodwill is primarily attributable to changes in foreign
exchange rates used to translate the goodwill contained in the financial statements of foreign
subsidiaries using the rates at each respective balance sheet date.
Intangible assets, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apr. 30, 2008 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
Patents and unpatented technology |
|
$ |
84,667 |
|
|
$ |
42,261 |
|
|
$ |
42,406 |
|
Trademarks |
|
|
4,885 |
|
|
|
3,006 |
|
|
|
1,879 |
|
Other |
|
|
5,071 |
|
|
|
1,990 |
|
|
|
3,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
94,623 |
|
|
$ |
47,257 |
|
|
$ |
47,366 |
|
|
|
|
|
|
|
|
|
|
|
9
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
Patents and unpatented technology |
|
$ |
82,561 |
|
|
$ |
37,369 |
|
|
$ |
45,192 |
|
Trademarks |
|
|
4,818 |
|
|
|
2,671 |
|
|
|
2,147 |
|
Other |
|
|
2,275 |
|
|
|
1,681 |
|
|
|
594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
89,654 |
|
|
$ |
41,721 |
|
|
$ |
47,933 |
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets for the three and nine months ended April 30, 2008
was $1,876 and $5,969, respectively. Amortization expense for intangible assets for the three and
nine months ended April 30, 2007 was $2,038 and $6,101, respectively. Amortization expense is
estimated to be approximately $1,855 for the remainder of fiscal year 2008, $7,225 in fiscal year
2009, $6,981 in fiscal year 2010, $6,766 in fiscal year 2011, $6,517 in fiscal year 2012 and $3,784
in fiscal year 2013.
NOTE 6 TREASURY STOCK
On October 14, 2004, the Companys board of directors authorized the expenditure of up to
$200,000 for the repurchase of shares of the Companys common stock. On November 15, 2006, the
board of directors authorized an additional expenditure of $250,000 to repurchase shares. The
Companys shares may be purchased over time, as market and business conditions warrant. There is no
time restriction on this authorization. During the nine months ended April 30, 2008, the Company
purchased 2,138 shares in open-market transactions at an aggregate cost of $78,211 with an average
price per share of $36.58. At April 30, 2008, approximately $270,021 remained available to be
expended under the current stock repurchase programs. In May 2008, the
Company purchased 1,135 shares in open-market transactions at an
aggregate cost of $40,000 with an average price per share of $35.23. Repurchased shares are held in treasury for
use in connection with the Companys stock-based compensation plans and for general corporate
purposes.
During the nine months ended April 30, 2008, 594 shares were issued under the Companys
stock-based compensation plans. At April 30, 2008, the Company held 6,956 treasury shares.
NOTE 7 CONTINGENCIES AND COMMITMENTS
With respect to the matters described below under the headings Federal Securities Class
Actions, Shareholder Derivative Lawsuits and Other Proceedings, no liabilities or insurance
recoveries have been reflected in the condensed consolidated financial statements as of April 30,
2008 as these amounts are not currently estimable.
Federal Securities Class Actions:
Four putative class action lawsuits have been filed against the Company and certain members of
its management team alleging violations of the federal securities laws relating to the Companys
understatement of certain of its U.S. income tax payments and of its provision for income taxes in
certain prior periods described in Note 2, Audit Committee Inquiry and Restatement. These lawsuits
were filed between August 14, 2007 and October 11, 2007 in the United States District Court for the
Eastern District of New York. The plaintiffs principally allege that the defendants violated the
federal securities laws by issuing materially false and misleading public statements about the
Companys financial results, financial statements, income tax liability, effective tax rate and
internal controls. The plaintiffs seek unspecified compensatory damages, costs and expenses. By
Order dated May 28, 2008, the Court consolidated the cases under the caption In re Pall Corp, No.
07-CV-3359 (E.D.N.Y.) (JS) (ARL), appointed a lead plaintiff and ordered that the lead plaintiff
file a consolidated amended complaint within 45 days of the entry of the Order.
10
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
Shareholder Derivative Lawsuits:
On October 5, 2007, two plaintiffs filed identical derivative lawsuits in New York Supreme
Court, Nassau County relating to the tax matter described above. These actions purport to bring
claims on behalf of the Company based on allegations that certain current and former directors and
officers of the Company breached their fiduciary duties by failing to evaluate and otherwise inform
themselves about the Companys internal controls and financial reporting systems and procedures.
In addition, plaintiffs allege that certain officers of the Company were unjustly enriched as a
result of the Companys inaccurate financial results over fiscal years 1999-2006. The complaints
seek unspecified compensatory damages on behalf of Pall Corporation, disgorgement of defendants
salaries, bonuses, stock grants and stock options, equitable relief and costs and expenses. The
Company, acting in its capacity as nominal defendant, moved to dismiss the complaints for failure
to make a demand upon the Companys board of directors, which motions were granted.
Another shareholder derivative lawsuit relating to the tax matter described above was filed in
the United States District Court for the Eastern District of New York on January 10, 2008. This
action purports to bring claims on behalf of the Company based on allegations that certain of the
current directors of the Company breached their fiduciary duties and were unjustly enriched in
connection with the tax matter described above. The complaint seeks unspecified compensatory damages on behalf of
Pall Corporation, disgorgement of defendants profits, benefits and other compensation, equitable
and non-monetary relief, and costs and expenses. The Company, acting in its capacity as nominal
defendant, moved to dismiss the complaint for lack of subject matter jurisdiction over the
complaint. On May 23, 2008, the plaintiff filed a notice of voluntary dismissal without prejudice,
which was subsequently granted by the Court.
Other Proceedings:
The SEC and U.S. Attorneys Office for the Eastern District of New York are conducting
investigations in connection with the tax matter described above. The Company is cooperating with
these investigations.
Environmental Matters:
The Companys condensed consolidated balance sheet at April 30, 2008 includes liabilities for
environmental matters of approximately $15,566, which relate primarily to the previously reported
environmental proceedings involving a Company subsidiary, Gelman Sciences Inc., pertaining to
groundwater contamination. In the opinion of management, the Company is in substantial compliance
with applicable environmental laws and its current accruals for environmental remediation are
adequate. However, as regulatory standards under environmental laws are becoming increasingly
stringent, there can be no assurance that future developments, additional information and
experience gained will not cause the Company to incur material environmental liabilities or costs
beyond those accrued in its condensed consolidated financial statements.
11
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
NOTE 8 RESTRUCTURING AND OTHER CHARGES/(GAINS), NET
The following tables summarize the restructuring and other charges/(gains) (ROTC) recorded
for the three and nine months ended April 30, 2008 and April 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Apr. 30, 2008 |
|
|
Nine Months Ended Apr. 30, 2008 |
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Charges |
|
|
|
|
|
|
|
|
|
|
Charges |
|
|
|
|
|
|
Restructuring |
|
|
/(Gains) |
|
|
|
|
|
|
Restructuring |
|
|
/(Gains) |
|
|
|
|
|
|
(1) |
|
|
(2) |
|
|
Total |
|
|
(1) |
|
|
(2) |
|
|
Total |
|
Costs related to
inquiry (2a) |
|
$ |
|
|
|
$ |
4,436 |
|
|
$ |
4,436 |
|
|
$ |
|
|
|
$ |
18,102 |
|
|
$ |
18,102 |
|
Severance |
|
|
575 |
|
|
|
|
|
|
|
575 |
|
|
|
8,232 |
|
|
|
|
|
|
|
8,232 |
|
Other exit costs |
|
|
284 |
|
|
|
|
|
|
|
284 |
|
|
|
1,908 |
|
|
|
|
|
|
|
1,908 |
|
Gain on disposal of
assets, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(158 |
) |
|
|
(484 |
) |
|
|
(642 |
) |
Environmental
matters (2b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600 |
|
|
|
600 |
|
Other |
|
|
|
|
|
|
469 |
|
|
|
469 |
|
|
|
|
|
|
|
482 |
|
|
|
482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
859 |
|
|
$ |
4,905 |
|
|
$ |
5,764 |
|
|
$ |
9,982 |
|
|
$ |
18,700 |
|
|
$ |
28,682 |
|
Reversal of excess
restructuring
reserves |
|
|
(269 |
) |
|
|
|
|
|
|
(269 |
) |
|
|
(559 |
) |
|
|
|
|
|
|
(559 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
590 |
|
|
$ |
4,905 |
|
|
$ |
5,495 |
|
|
$ |
9,423 |
|
|
$ |
18,700 |
|
|
$ |
28,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
590 |
|
|
$ |
4,446 |
|
|
$ |
5,036 |
|
|
$ |
9,393 |
|
|
$ |
18,241 |
|
|
$ |
27,634 |
|
Non-cash |
|
|
|
|
|
|
459 |
|
|
|
459 |
|
|
|
30 |
|
|
|
459 |
|
|
|
489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
590 |
|
|
$ |
4,905 |
|
|
$ |
5,495 |
|
|
$ |
9,423 |
|
|
$ |
18,700 |
|
|
$ |
28,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Apr. 30, 2007 |
|
|
Nine Months Ended Apr. 30, 2007 |
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Charges |
|
|
|
|
|
|
|
|
|
|
Charges |
|
|
|
|
|
|
Restructuring |
|
|
/(Gains) |
|
|
|
|
|
|
Restructuring |
|
|
/(Gains) |
|
|
|
|
|
|
(1) |
|
|
(2) |
|
|
Total |
|
|
(1) |
|
|
(2) |
|
|
Total |
|
Severance |
|
$ |
5,411 |
|
|
$ |
|
|
|
$ |
5,411 |
|
|
$ |
20,136 |
|
|
$ |
|
|
|
$ |
20,136 |
|
Gain on sale and
impairment of
assets, net |
|
|
1,898 |
|
|
|
|
|
|
|
1,898 |
|
|
|
(3,216 |
) |
|
|
|
|
|
|
(3,216 |
) |
Other exit costs |
|
|
1,245 |
|
|
|
|
|
|
|
1,245 |
|
|
|
2,066 |
|
|
|
|
|
|
|
2,066 |
|
Environmental
matters (2b) |
|
|
|
|
|
|
200 |
|
|
|
200 |
|
|
|
|
|
|
|
2,761 |
|
|
|
2,761 |
|
Other |
|
|
|
|
|
|
(4 |
) |
|
|
(4 |
) |
|
|
1,117 |
|
|
|
971 |
|
|
|
2,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,554 |
|
|
$ |
196 |
|
|
$ |
8,750 |
|
|
$ |
20,103 |
|
|
$ |
3,732 |
|
|
$ |
23,835 |
|
Reversal of excess
reserves |
|
|
(130 |
) |
|
|
|
|
|
|
(130 |
) |
|
|
(1,775 |
) |
|
|
|
|
|
|
(1,775 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,424 |
|
|
$ |
196 |
|
|
$ |
8,620 |
|
|
$ |
18,328 |
|
|
$ |
3,732 |
|
|
$ |
22,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
6,526 |
|
|
$ |
196 |
|
|
$ |
6,722 |
|
|
$ |
13,181 |
|
|
$ |
3,732 |
|
|
$ |
16,913 |
|
Non-cash |
|
|
1,898 |
|
|
|
|
|
|
|
1,898 |
|
|
|
5,147 |
|
|
|
|
|
|
|
5,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,424 |
|
|
$ |
196 |
|
|
$ |
8,620 |
|
|
$ |
18,328 |
|
|
$ |
3,732 |
|
|
$ |
22,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
(1) Restructuring:
Following the completion of the integration of the Filtration and Separations Group (FSG),
which was acquired in fiscal year 2002, Company management began a much broader initiative to
examine the overall structure of the Company and the manner in which it conducted business
activities with the objective of increasing revenue growth and achieving cost reduction. This
resulted in a series of restructuring activities, including the realignment of the overall business
structure into vertically integrated businesses, which commenced at the end of fiscal year 2004,
the Companys facilities rationalization initiative and European cost reduction (EuroPall)
initiative, which commenced in fiscal year 2006, and the Western Hemisphere cost reduction
(AmeriPall) initiative, which commenced in fiscal year 2007.
Three and Nine Months Ended April 30, 2007:
|
|
|
The Company continued its cost reduction initiatives, including its facilities
rationalization and EuroPall initiatives. As a result, the Company recorded severance
liabilities for the termination of certain employees worldwide as well as other costs
related to these initiatives. |
|
|
|
|
The Company recorded impairment
charges of $1,898 and $7,670, respectively, related to the planned disposal of buildings
and the early retirement of certain long-lived assets, as part of the Companys facilities
rationalization initiative. The nine months ended April 30, 2007 also includes a gain on
the sale of the Companys corporate headquarters of $10,886. |
Three and Nine Months Ended April 30, 2008:
|
|
|
The Company continued its cost reduction initiatives, including its facilities
rationalization, EuroPall and AmeriPall initiatives. As a result, the Company recorded
severance liabilities for the termination of certain employees worldwide as well as other
costs related to these initiatives. |
The following table summarizes the activity related to restructuring liabilities that were
recorded in the nine months ended April 30, 2008 and in fiscal years 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
|
|
|
|
|
|
|
|
Liabilities & |
|
|
|
|
|
|
Severance |
|
|
Other |
|
|
Total |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Original charge |
|
$ |
8,232 |
|
|
$ |
1,908 |
|
|
$ |
10,140 |
|
Utilized |
|
|
(6,627 |
) |
|
|
(1,604 |
) |
|
|
(8,231 |
) |
Other changes (a) |
|
|
211 |
|
|
|
9 |
|
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Apr. 30, 2008 |
|
$ |
1,816 |
|
|
$ |
313 |
|
|
$ |
2,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Original charge |
|
$ |
22,083 |
|
|
$ |
4,321 |
|
|
$ |
26,404 |
|
Utilized |
|
|
(6,146 |
) |
|
|
(3,573 |
) |
|
|
(9,719 |
) |
Other changes (a) |
|
|
611 |
|
|
|
9 |
|
|
|
620 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Jul. 31, 2007 |
|
|
16,548 |
|
|
|
757 |
|
|
|
17,305 |
|
Utilized |
|
|
(11,132 |
) |
|
|
(724 |
) |
|
|
(11,856 |
) |
Reversal of excess reserves (b) |
|
|
(295 |
) |
|
|
(65 |
) |
|
|
(360 |
) |
Other changes (a) |
|
|
1,273 |
|
|
|
56 |
|
|
|
1,329 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Apr. 30, 2008 |
|
$ |
6,394 |
|
|
$ |
24 |
|
|
$ |
6,418 |
|
|
|
|
|
|
|
|
|
|
|
13
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
|
|
|
|
|
|
|
|
Liabilities & |
|
|
|
|
|
|
Severance |
|
|
Other |
|
|
Total |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Original charge |
|
$ |
13,335 |
|
|
$ |
3,043 |
|
|
$ |
16,378 |
|
Utilized |
|
|
(7,221 |
) |
|
|
(2,900 |
) |
|
|
(10,121 |
) |
Other changes (a) |
|
|
182 |
|
|
|
9 |
|
|
|
191 |
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2006 |
|
|
6,296 |
|
|
|
152 |
|
|
|
6,448 |
|
Utilized |
|
|
(2,712 |
) |
|
|
(108 |
) |
|
|
(2,820 |
) |
Reversal of excess reserves (b) |
|
|
(1,385 |
) |
|
|
(40 |
) |
|
|
(1,425 |
) |
Other changes (a) |
|
|
126 |
|
|
|
2 |
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Jul. 31, 2007 |
|
|
2,325 |
|
|
|
6 |
|
|
|
2,331 |
|
Utilized |
|
|
(1,143 |
) |
|
|
(3 |
) |
|
|
(1,146 |
) |
Reversal of excess reserves (b) |
|
|
(35 |
) |
|
|
|
|
|
|
(35 |
) |
Other changes (a) |
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at Apr. 30, 2008 |
|
$ |
1,143 |
|
|
$ |
3 |
|
|
$ |
1,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Original charge |
|
$ |
17,496 |
|
|
$ |
2,928 |
|
|
$ |
20,424 |
|
Utilized |
|
|
(8,404 |
) |
|
|
(2,739 |
) |
|
|
(11,143 |
) |
Other changes (a) |
|
|
(86 |
) |
|
|
4 |
|
|
|
(82 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2005 |
|
|
9,006 |
|
|
|
193 |
|
|
|
9,199 |
|
Utilized |
|
|
(3,243 |
) |
|
|
(87 |
) |
|
|
(3,330 |
) |
Reversal of excess reserves (b) |
|
|
(1,905 |
) |
|
|
(96 |
) |
|
|
(2,001 |
) |
Other changes (a) |
|
|
57 |
|
|
|
3 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2006 |
|
|
3,915 |
|
|
|
13 |
|
|
|
3,928 |
|
Utilized |
|
|
(2,531 |
) |
|
|
|
|
|
|
(2,531 |
) |
Reversal of excess reserves (b) |
|
|
(811 |
) |
|
|
(15 |
) |
|
|
(826 |
) |
Other changes (a) |
|
|
31 |
|
|
|
2 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Jul. 31, 2007 |
|
|
604 |
|
|
|
|
|
|
|
604 |
|
Utilized |
|
|
(442 |
) |
|
|
|
|
|
|
(442 |
) |
Reversal of excess reserves (b) |
|
|
(164 |
) |
|
|
|
|
|
|
(164 |
) |
Other changes (a) |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Apr 30, 2008 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Other changes primarily reflect translation impact. |
|
(b) |
|
Reflects the reversal of excess restructuring reserves originally recorded in fiscal
years 2007, 2006 and 2005. |
(2) Other Charges/(Gains):
|
(a) |
|
Costs related to inquiry: |
|
|
|
|
In the three months and nine months ended April 30, 2008, the Company recorded costs of
$4,436 and $18,102, respectively, primarily comprised of legal and other professional fees
related to the audit committees inquiry into the Companys understatement of its U.S.
federal income tax payments and its provision for income taxes. See Note 2, Audit
Committee Inquiry and Restatement, for a description of this inquiry. |
14
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
|
(b) |
|
Environmental matters: |
|
|
|
|
In the three and nine months ended April 30, 2007, the Company recorded additional charges
of $200 and $2,761, respectively, to increase its previously established environmental
reserves primarily related to environmental matters in Ann Arbor, Michigan and Pinellas
Park, Florida. |
|
|
|
|
In the nine months ended April 30, 2008, the Company increased its previously established
environmental reserves by $600 related to environmental matters in Ann Arbor, Michigan and
Pinellas Park, Florida. |
NOTE 9 INCOME TAXES
The Companys effective tax rate for the nine months ended April 30, 2008 and April 30, 2007
was 33.0% and 33.8% (as restated), respectively. During the nine months ended April 30, 2008, a
discrete tax charge was recorded resulting from tax legislation enacted in Germany. The Company is
required to revalue its deferred tax assets and liabilities to reflect newly enacted rates which
were reduced by the new tax law from approximately 38% to approximately 28% resulting in a
reduction of net deferred tax assets. The German tax rate change as well as other discrete net
charges increased the tax rate for the nine month period ended April 30, 2008 by approximately
0.7%.
In September 2007, the Company deposited $135,000 with the Internal Revenue Service. A
portion of this deposit has been reflected as a reduction of current income taxes payable and the
remainder is reflected as an other non-current asset in the condensed consolidated balance sheet.
NOTE 10 COMPONENTS OF NET PERIODIC PENSION COST
The Company provides substantially all domestic and foreign employees with retirement
benefits. Net periodic pension benefit cost for the Companys defined benefit pension plans
includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
U.S. Plans |
|
|
Foreign Plans |
|
|
Total |
|
|
|
Apr. 30, |
|
|
Apr. 30, |
|
|
Apr. 30, |
|
|
Apr. 30, |
|
|
Apr. 30, |
|
|
Apr. 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Service cost |
|
$ |
2,000 |
|
|
$ |
1,952 |
|
|
$ |
1,065 |
|
|
$ |
909 |
|
|
$ |
3,065 |
|
|
$ |
2,861 |
|
Interest cost |
|
|
2,893 |
|
|
|
2,759 |
|
|
|
4,803 |
|
|
|
4,126 |
|
|
|
7,696 |
|
|
|
6,885 |
|
Expected return on plan assets |
|
|
(2,190 |
) |
|
|
(2,125 |
) |
|
|
(3,953 |
) |
|
|
(3,280 |
) |
|
|
(6,143 |
) |
|
|
(5,405 |
) |
Amortization of prior service
cost |
|
|
276 |
|
|
|
275 |
|
|
|
90 |
|
|
|
154 |
|
|
|
366 |
|
|
|
429 |
|
Amortization of net
transition asset |
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
Recognized actuarial loss |
|
|
467 |
|
|
|
578 |
|
|
|
1,091 |
|
|
|
2,174 |
|
|
|
1,558 |
|
|
|
2,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
3,446 |
|
|
$ |
3,429 |
|
|
$ |
3,096 |
|
|
$ |
4,083 |
|
|
$ |
6,542 |
|
|
$ |
7,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
U.S. Plans |
|
|
Foreign Plans |
|
|
Total |
|
|
|
Apr. 30, |
|
|
Apr. 30, |
|
|
Apr. 30, |
|
|
Apr. 30, |
|
|
Apr. 30, |
|
|
Apr. 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Service cost |
|
$ |
6,000 |
|
|
$ |
5,856 |
|
|
$ |
3,026 |
|
|
$ |
2,711 |
|
|
$ |
9,026 |
|
|
$ |
8,567 |
|
Interest cost |
|
|
8,679 |
|
|
|
8,279 |
|
|
|
14,316 |
|
|
|
12,153 |
|
|
|
22,995 |
|
|
|
20,432 |
|
Expected return on plan assets |
|
|
(6,570 |
) |
|
|
(6,373 |
) |
|
|
(11,921 |
) |
|
|
(9,669 |
) |
|
|
(18,491 |
) |
|
|
(16,042 |
) |
Amortization of prior service
cost |
|
|
828 |
|
|
|
825 |
|
|
|
254 |
|
|
|
458 |
|
|
|
1,082 |
|
|
|
1,283 |
|
Amortization of net
transition asset |
|
|
|
|
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32 |
) |
Recognized actuarial loss |
|
|
1,401 |
|
|
|
1,736 |
|
|
|
3,298 |
|
|
|
6,404 |
|
|
|
4,699 |
|
|
|
8,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
10,338 |
|
|
$ |
10,291 |
|
|
$ |
8,973 |
|
|
$ |
12,057 |
|
|
$ |
19,311 |
|
|
$ |
22,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 11 STOCK-BASED PAYMENT
The Company applies the provisions of SFAS No. 123(R), Share-Based Payment, which establishes
the accounting for employee stock-based awards. The Company currently has four stock-based employee
and directors compensation plans (Stock Option Plans, Management Stock Purchase Plan (MSPP),
Employee Stock Purchase Plan (ESPP) and Restricted Stock Unit Plans), which are more fully
described in Note 17, Common Stock, to the consolidated financial statements included in the 2007
Form 10-K.
The detailed components of stock-based compensation expense recorded in the condensed
consolidated statements of earnings for the three and nine months ended April 30, 2008 and April
30, 2007 are reflected in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
Apr. 30, |
|
|
Apr. 30, |
|
|
Apr. 30, |
|
|
Apr. 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Stock options |
|
$ |
683 |
|
|
$ |
795 |
|
|
$ |
2,157 |
|
|
$ |
3,203 |
|
Restricted stock units |
|
|
1,329 |
|
|
|
1,016 |
|
|
|
4,955 |
|
|
|
3,840 |
|
ESPP |
|
|
1,057 |
|
|
|
1,376 |
|
|
|
2,932 |
|
|
|
2,136 |
|
MSPP |
|
|
628 |
|
|
|
461 |
|
|
|
1,746 |
|
|
|
1,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,697 |
|
|
$ |
3,648 |
|
|
$ |
11,790 |
|
|
$ |
10,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table illustrates the income tax effects related to stock-based compensation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
Apr. 30, |
|
Apr. 30, |
|
Apr. 30, |
|
Apr. 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Tax excess benefits in cash
flows from financing activities |
|
$ |
38 |
|
|
$ |
1,875 |
|
|
$ |
798 |
|
|
$ |
4,794 |
|
Tax benefit recognized related to
total stock-based compensation expense |
|
|
875 |
|
|
|
406 |
|
|
|
3,136 |
|
|
|
1,824 |
|
Actual tax benefit realized for tax
deductions
from option exercises of stock-based
payment arrangements |
|
|
65 |
|
|
|
1,965 |
|
|
|
1,992 |
|
|
|
6,340 |
|
16
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
Stock
Options and ESPP
A summary of option activity for all stock option plans during the nine months ended April 30,
2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual Term |
|
|
Intrinsic |
|
Options |
|
Shares |
|
|
Price |
|
|
(in years) |
|
|
Value |
|
Outstanding at August 1, 2007 |
|
|
2,829 |
|
|
$ |
25.29 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
4 |
|
|
|
38.20 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(21 |
) |
|
|
19.91 |
|
|
|
|
|
|
|
|
|
Forfeited or Expired |
|
|
(1 |
) |
|
|
28.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 31, 2007 |
|
|
2,811 |
|
|
|
25.35 |
|
|
|
4.9 |
|
|
$ |
42,615 |
|
Granted |
|
|
30 |
|
|
|
39.07 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1 |
) |
|
|
18.67 |
|
|
|
|
|
|
|
|
|
Forfeited or Expired |
|
|
(22 |
) |
|
|
30.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2008 |
|
|
2,818 |
|
|
|
25.46 |
|
|
|
4.6 |
|
|
$ |
33,714 |
|
Granted |
|
|
419 |
|
|
|
35.75 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(6 |
) |
|
|
22.54 |
|
|
|
|
|
|
|
|
|
Forfeited or Expired |
|
|
(2 |
) |
|
|
26.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at April 30, 2008 |
|
|
3,229 |
|
|
$ |
26.80 |
|
|
|
4.7 |
|
|
$ |
28,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at April 30, 2008 |
|
|
1,211 |
|
|
$ |
34.31 |
|
|
|
5.9 |
|
|
$ |
2,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at April 30, 2008 |
|
|
1,996 |
|
|
$ |
22.12 |
|
|
|
4.0 |
|
|
$ |
25,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2008, there was $8,355 of total unrecognized compensation cost related to
nonvested stock options, which is expected to be recognized over a weighted-average period of 2.9
years. The total intrinsic value of options exercised during the three and nine months ended April
30, 2008 was $82 and $494, respectively. The total intrinsic value of options exercised during the
three and nine months ended April 30, 2007 was $6,637 and $17,808, respectively.
The ESPP enables participants to purchase shares of the Companys common stock through payroll
deductions at a price equal to 85% of the lower of the market price at the beginning or end of each
semi-annual stock purchase period. The semi-annual offering periods end in April and October. A
total of 262 and 264 shares were issued under the ESPP during the semi-annual stock purchase
periods ended April 30, 2008 and April 30, 2007, respectively. A total of 200 shares and 233 shares
were issued under the ESPP during the semi-annual stock purchase periods ended October 31, 2007 and
October 31, 2006, respectively.
17
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
The following weighted average assumptions were used in estimating the fair value of stock
options and ESPP shares granted during the three and nine months ended April 30, 2008 and April 30,
2007 (there were no stock options granted during the three months ended April 30, 2007):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
Apr. 30, 2008 |
|
|
Apr. 30, 2007 |
|
|
Apr. 30, 2008 |
|
|
Apr. 30, 2007 |
|
Stock Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair
value at grant date |
|
$ |
7.84 |
|
|
|
N/A |
|
|
$ |
7.94 |
|
|
$ |
8.84 |
|
Valuation assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
|
1.8 |
% |
|
|
N/A |
|
|
|
1.7 |
% |
|
|
1.9 |
% |
Expected volatility |
|
|
25.0 |
% |
|
|
N/A |
|
|
|
25.0 |
% |
|
|
26.0 |
% |
Expected life (years) |
|
|
5.0 |
|
|
|
N/A |
|
|
|
5.0 |
|
|
|
5.0 |
|
Risk-free interest rate |
|
|
2.7 |
% |
|
|
N/A |
|
|
|
2.8 |
% |
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair
value at grant date |
|
$ |
10.13 |
|
|
$ |
6.89 |
|
|
$ |
10.13 |
|
|
$ |
6.89 |
|
Valuation assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
|
1.2 |
% |
|
|
1.6 |
% |
|
|
1.2 |
% |
|
|
1.6 |
% |
Expected volatility |
|
|
37.1 |
% |
|
|
22.0 |
% |
|
|
37.1 |
% |
|
|
22.0 |
% |
Expected life (years) |
|
1/2 year |
|
1/2 year |
|
1/2 year |
|
1/2 year |
Risk-free interest rate |
|
|
4.0 |
% |
|
|
5.1 |
% |
|
|
4.0 |
% |
|
|
5.1 |
% |
The fair value of the options and ESPP shares granted is estimated using a
Black-Scholes-Merton option-pricing formula and amortized to expense over the options service
periods. The Company has placed exclusive reliance on historical volatility in its estimate of
expected volatility. The Company used a sequential period of historical data equal to the expected
term (or expected life) of the options and ESPP shares granted using a simple average calculation
based upon the daily closing prices of the aforementioned period.
The expected life (years) represents the period of time for which the options and ESPP shares
granted are expected to be outstanding. This estimate was derived from historical share option
exercise experience, which management believes provides the best estimate of the expected term.
MSPP
The purpose of the MSPP is to encourage key employees of the Company to increase their
ownership of shares of the Companys common stock by providing such employees with an opportunity
to elect to have portions of their total annual compensation paid in the form of restricted units,
to make cash purchases of restricted units and to earn additional matching restricted units which
vest over a three year period for matches prior to August 1, 2003 and vest over a four year period
for matches made thereafter. Such restricted units aggregated 822 and 799 as of April 30, 2008 and
April 30, 2007, respectively. As of April 30, 2008, there was $5,888 of total unrecognized
compensation cost related to nonvested restricted stock units granted under the MSPP, which is
expected to be recognized over a weighted-average period of 2.8 years.
The following is a summary of MSPP activity during the three and nine months ended April 30,
2008 and April 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
Apr. 30, |
|
Apr. 30, |
|
Apr. 30, |
|
Apr. 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Deferred compensation and cash
contributions |
|
$ |
283 |
|
|
$ |
|
|
|
$ |
3,372 |
|
|
$ |
2,967 |
|
Fair value of restricted stock units vested |
|
$ |
|
|
|
$ |
102 |
|
|
$ |
1,022 |
|
|
$ |
257 |
|
Vested units distributed |
|
|
|
|
|
|
1 |
|
|
|
140 |
|
|
|
75 |
|
18
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
RSUs
A summary of restricted stock unit activity, related to employees, for the 2005 Stock Plan
during the nine months ended April 30, 2008, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
Nonvested at August 1, 2007 |
|
|
718 |
|
|
$ |
33.19 |
|
Granted |
|
|
18 |
|
|
|
38.20 |
|
Vested |
|
|
(1 |
) |
|
|
28.34 |
|
Forfeited |
|
|
(2 |
) |
|
|
34.55 |
|
|
|
|
|
|
|
|
|
Nonvested at October 31, 2007 |
|
|
733 |
|
|
|
33.31 |
|
Granted |
|
|
1 |
|
|
|
36.55 |
|
Vested |
|
|
(2 |
) |
|
|
30.02 |
|
Forfeited |
|
|
(17 |
) |
|
|
33.96 |
|
|
|
|
|
|
|
|
|
Nonvested at January 31, 2008 |
|
|
715 |
|
|
|
33.31 |
|
Granted |
|
|
93 |
|
|
|
35.75 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(3 |
) |
|
|
35.12 |
|
|
|
|
|
|
|
|
|
Nonvested at April 30, 2008 |
|
|
805 |
|
|
$ |
33.59 |
|
|
|
|
|
|
|
|
As of April 30, 2008, there was $16,599 of total unrecognized compensation cost related to
nonvested restricted stock units granted under the 2005 Stock Plan, which is expected to be
recognized over a weighted-average period of 2.9 years.
Non-employee directors of the Company were granted 18 annual award units of restricted stock
during the three and nine months ended April 30, 2008, with a weighted-average fair market value of
$39.00 per share.
The Company uses treasury shares that have been repurchased through the Companys stock
repurchase program to satisfy share award exercises.
NOTE 12 EARNINGS PER SHARE
The condensed consolidated statements of earnings present basic and diluted earnings per
share. Basic earnings per share is determined by dividing income available to common shareholders
by the weighted average number of common shares outstanding for the period. Diluted earnings per
share considers the potential effect of dilution on basic earnings per share assuming potentially
dilutive shares that meet certain criteria, such as those issuable upon exercise of stock options,
were outstanding. The treasury stock method reduces the dilutive effect of potentially dilutive
securities as it assumes that cash proceeds (from the issuance of potentially dilutive securities)
are used to buy back shares at the average share price during the period. Employee stock options
and units aggregating 916 and 290 shares were not included in the computation of diluted shares for
the three months ended April 30, 2008 and April 30, 2007, respectively, because their effect would
have been antidilutive. For the nine months ended April 30, 2008 and April 30, 2007, 1,032 and 721
antidilutive shares, respectively, were excluded. The following is a reconciliation between basic
shares outstanding and diluted shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
Apr. 30, 2008 |
|
Apr. 30, 2007 |
|
Apr. 30, 2008 |
|
Apr. 30, 2007 |
Basic shares outstanding |
|
|
122,929 |
|
|
|
123,399 |
|
|
|
123,111 |
|
|
|
123,110 |
|
Effect of stock plans |
|
|
1,230 |
|
|
|
1,382 |
|
|
|
1,205 |
|
|
|
1,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares outstanding |
|
|
124,159 |
|
|
|
124,781 |
|
|
|
124,316 |
|
|
|
124,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
NOTE 13 COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
Apr. 30, 2008 |
|
|
Apr. 30, 2007 |
|
|
Apr. 30, 2008 |
|
|
Apr. 30, 2007 |
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
(As Restated) |
|
Net earnings (a) |
|
$ |
63,274 |
|
|
$ |
50,371 |
|
|
$ |
147,364 |
|
|
$ |
110,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized translation adjustment (a) |
|
|
12,908 |
|
|
|
13,539 |
|
|
|
34,720 |
|
|
|
20,783 |
|
Income taxes |
|
|
1,683 |
|
|
|
1,661 |
|
|
|
5,586 |
|
|
|
1,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized translation adjustment, net |
|
|
14,591 |
|
|
|
15,200 |
|
|
|
40,306 |
|
|
|
22,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized investment (losses)
gains |
|
|
(725 |
) |
|
|
427 |
|
|
|
955 |
|
|
|
2,528 |
|
Income taxes |
|
|
261 |
|
|
|
(150 |
) |
|
|
(329 |
) |
|
|
(1,567 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized investment (losses)
gains, net |
|
|
(464 |
) |
|
|
277 |
|
|
|
626 |
|
|
|
961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on derivatives |
|
|
640 |
|
|
|
117 |
|
|
|
(230 |
) |
|
|
127 |
|
Income taxes |
|
|
(224 |
) |
|
|
7 |
|
|
|
63 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on derivatives,
net |
|
|
416 |
|
|
|
124 |
|
|
|
(167 |
) |
|
|
154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
77,817 |
|
|
$ |
65,972 |
|
|
$ |
188,129 |
|
|
$ |
134,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Net earnings and unrealized translation adjustment have been restated for the three and
nine months ended April 30, 2007 as more fully described in Note 2, Audit Committee Inquiry
and Restatement. |
Unrealized investment gains on available-for-sale securities, net of related taxes, consist of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
Apr. 30, 2008 |
|
|
Apr. 30, 2007 |
|
|
Apr. 30, 2008 |
|
|
Apr. 30, 2007 |
|
Unrealized (losses)
gains arising
during the period |
|
$ |
(776 |
) |
|
$ |
427 |
|
|
$ |
904 |
|
|
$ |
2,209 |
|
Income taxes |
|
|
261 |
|
|
|
(150 |
) |
|
|
(329 |
) |
|
|
(1,567 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized
(losses) gains
arising during the
period |
|
|
(515 |
) |
|
|
277 |
|
|
|
575 |
|
|
|
642 |
|
Reclassification
adjustment for
losses included in
net earnings |
|
|
51 |
|
|
|
|
|
|
|
51 |
|
|
|
319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
unrealized
investment (losses)
gains, net |
|
$ |
(464 |
) |
|
$ |
277 |
|
|
$ |
626 |
|
|
$ |
961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
NOTE 14 SEGMENT INFORMATION
The Companys reportable segments as identified in accordance with the provisions of SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information, which are also its
operating segments, consist of the Companys two vertically integrated businesses, Life Sciences
and Industrial.
The following table presents sales and operating profit by segment reconciled to earnings
before income taxes, for the three and nine months ended April 30, 2008 and April 30, 2007.
|
|
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|
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|
|
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|
|
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Three Months Ended |
|
|
Nine Months Ended |
|
|
|
Apr. 30, 2008 |
|
|
Apr. 30, 2007 |
|
|
Apr. 30, 2008 |
|
|
Apr. 30, 2007 |
|
|
|
|
|
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|
(As Restated) |
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|
(As Restated) |
|
SALES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences |
|
$ |
252,996 |
|
|
$ |
229,044 |
|
|
$ |
712,090 |
|
|
$ |
633,981 |
|
Industrial |
|
|
408,684 |
|
|
|
330,303 |
|
|
|
1,136,344 |
|
|
|
969,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
661,680 |
|
|
$ |
559,347 |
|
|
$ |
1,848,434 |
|
|
$ |
1,603,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
OPERATING PROFIT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences |
|
$ |
55,928 |
|
|
$ |
50,121 |
|
|
$ |
143,864 |
|
|
$ |
116,345 |
|
Industrial |
|
|
66,181 |
|
|
|
54,246 |
|
|
|
166,701 |
|
|
|
135,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit |
|
|
122,109 |
|
|
|
104,367 |
|
|
|
310,565 |
|
|
|
252,253 |
|
General corporate expenses |
|
|
13,165 |
|
|
|
10,203 |
|
|
|
36,848 |
|
|
|
30,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before ROTC, interest
expense, net and income taxes
(a) |
|
|
108,944 |
|
|
|
94,164 |
|
|
|
273,717 |
|
|
|
221,733 |
|
ROTC (a) |
|
|
5,495 |
|
|
|
8,997 |
|
|
|
28,123 |
|
|
|
24,953 |
|
Interest expense, net (b) |
|
|
9,944 |
|
|
|
9,171 |
|
|
|
25,728 |
|
|
|
29,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes (b) |
|
$ |
93,505 |
|
|
$ |
75,996 |
|
|
$ |
219,866 |
|
|
$ |
167,154 |
|
|
|
|
|
|
|
|
|
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|
|
|
|
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(a) |
|
Included in ROTC for the purposes of evaluation of segment profitability are other
adjustments recorded in cost of sales for the three and nine months ended April 30, 2007 of
$377 and $2,893, respectively. Such adjustments are primarily comprised of incremental
depreciation and other adjustments recorded in conjunction with the Companys facilities
rationalization initiative. |
|
(b) |
|
Interest expense, net and earnings before income taxes have been restated for the
quarter and nine months ended April 30, 2007 as more fully described in Note 2, Audit
Committee Inquiry and Restatement. |
NOTE 15
FINANCIAL INSTRUMENTS
In June 2005, pursuant to the execution of a Yen 3.5 billion loan from a U.S. dollar
functional Netherlands subsidiary of the Company (PNBV) to a Japanese subsidiary of the Company
(NPL), PNBV entered into a cross currency swap with a financial institution. Under the terms of
the agreement, PNBV will make interest payments to the financial institution at a fixed rate, based
upon a notional amount of Yen 3.5 billion. In return, the financial institution will make interest
payments to PNBV, at a fixed rate, based upon a $32,154 notional amount (the U.S. dollar equivalent
of the Yen 3.5 billion based upon the spot rate on the date of the closing of this transaction).
At the
end of this arrangement, PNBV will remit the Yen 3.5 billion principal, which it will receive
from NPL, to the financial institution, who in turn will remit the $32,154 to PNBV.
On December 12, 2007, the cross currency interest rate swap was settled and the intercompany
loan was repaid. The cross currency swap had a gain of $980 and the Japanese Yen intercompany loan
had a foreign exchange loss of $820. Both of these positions were recorded in the statement of
earnings during the three months ended January 31, 2008.
21
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Forward-Looking Statements and Risk Factors
You should read the following discussion together with the accompanying condensed consolidated
financial statements and notes thereto and other financial information in this Form 10-Q and in the
2007 Form 10-K. The discussions regarding sales under the subheading Review of Operating Segments
below are in local currency unless otherwise indicated. Company management considers local currency
growth an important measure because by excluding the volatility of exchange rates, underlying
volume growth is clearer. Dollar amounts discussed below are in thousands, unless otherwise
indicated, except per share dollar amounts. In addition, per share dollar amounts are discussed on
a diluted basis.
The matters discussed in this Quarterly Report on Form 10-Q contain forward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking
statements contained in this and other written and oral reports are based on current Company
expectations and are subject to risks and uncertainties, which could cause actual results to differ
materially. All statements regarding future performance, earnings projections, earnings guidance,
managements expectations about its future cash needs and effective tax rate, and other future
events or developments are forward-looking statements. Such risks and uncertainties include, but
are not limited to: risks relating to the Companys restatement of prior period financial
statements, including the risks associated with the pending Internal Revenue Service (IRS) audit
and pending Securities and Exchange Commission (SEC) and Department of Justice investigations and
litigation proceedings; risks associated with the Companys planned cash management initiatives,
which may result in changes in the Companys effective tax rate; changes in product mix and product
pricing may affect the Companys operating results particularly as the systems business expands in
which significantly longer sales cycles are experienced with less predictable revenue and
profitability and less certainty of future revenue streams from related consumable product
offerings and services; increases in costs of manufacturing and operating costs, including energy
and raw materials; the Companys ability to achieve the savings anticipated from its cost reduction
and margin improvement initiatives including the timing of completion of its facilities
rationalization initiative; fluctuations in foreign currency exchange rates and interest rates;
regulatory approval or market acceptance of new technologies; changes in demand for the Companys
products and business relationships with key customers and suppliers including delays or
cancellations in shipments; success in enforcing patents and protecting proprietary products and
manufacturing techniques; risks associated with the completion or integration of acquisitions;
domestic and international competition; and global and regional economic conditions, including
particularly the impact of current challenging conditions in the United States that may also have
global implications; and legislative, regulatory and political developments. The Company makes
these statements as of the date of this disclosure and undertakes no obligation to update them.
Audit Committee Inquiry and Restatement
As discussed in the 2007 Form 10-K, an inquiry was conducted by the Companys audit committee
into the Companys understatement of its U.S. federal income tax payments and its provision for
income taxes. The audit committee completed its inquiry in January 2008. On August 1, 2007, the
audit committee, on the recommendation of management, concluded that the Companys previously
issued financial statements for each of the eight fiscal years in the period ended July 31, 2006
(including the interim periods within those years), and for each of the fiscal quarters ended
October 31, 2006, January 31, 2007 and April 30, 2007, should no longer be relied upon.
Accordingly, the Company restated its previously issued financial statements for those periods.
The Company has not amended its previously filed Annual Reports on Form 10-K or Quarterly Reports
on Form 10-Q for the periods affected by this restatement. The financial information presented
below for fiscal year 2007 has been restated as set forth in the 2007 Form 10-K.
Results of Operations
Review of Consolidated Results
Sales in the quarter increased 18.3% to $661,680 from $559,347 in the third quarter of fiscal
year 2007. For the nine months, sales increased 15.3%, to $1,848,434. Exchange rates increased
reported sales by $48,820 and $112,641 in the quarter and nine months, respectively, primarily due
to the weakening of the U.S. dollar against the Euro, the British Pound, the Yen and various other
Asian currencies. In local currency (i.e., had exchange rates not changed year over year), sales
increased 9.6% and 8.3% in the quarter and nine months, respectively. Increased pricing achieved in
both Life Sciences and Industrial contributed about 1.3% and 1% to overall sales growth in the
quarter and nine months, respectively.
22
Life Sciences segment sales increased 3.1% and 6% (in local currency) in the quarter and nine
months, respectively. The increase in the quarter was attributable to growth in the BioPharmaceuticals market partly offset by a decrease in the Medical market. The growth in the nine
months was driven by the BioPharmaceuticals market, while Medical sales were flat. Industrial segment
sales increased 14.1% and 9.7% (in local currency) in the quarter and nine months, respectively,
driven by growth in the General Industrial and Aerospace and Transportation markets. Overall
systems sales increased 65.7% and 44.1% in the quarter and nine months, respectively, primarily
attributable to strong sales in the BioPharmaceuticals and General Industrial markets. Company
management expects overall sales in local currency to increase in the mid-single digit range for
the full fiscal year 2008, with growth in Industrial slightly outpacing Life Sciences. For a
detailed discussion of sales, refer to the section Review of Operating Segments below.
Gross margin, as a percentage of sales, decreased 70 basis points in the quarter to 48.8% from
49.5% in the third quarter of fiscal year 2007. The decrease in gross margins was principally
driven by a shift in product mix, to a higher percentage of systems sales (approximately 12%
compared to 8% in the third quarter of fiscal year 2007), which are typically at lower margins than
consumables. Improved pricing, which contributed approximately 50 basis points in margin and savings generated
from the Companys facilities rationalization initiative and other manufacturing cost reduction
and efficiency programs, outpaced estimated inflationary pressures. The impact of improved profitability of certain systems sales, and product portfolio
rationalization also favorably offset.
For the nine months, gross margin, as a percentage of sales, was 47.2%, on par with the same
period of fiscal year 2007. Gross margins were favorably impacted by improved pricing that
contributed approximately 50 basis points in margin, savings generated from the Companys
facilities rationalization initiative and other manufacturing cost reduction and efficiency
programs. These factors were offset by the impact of a shift in product mix, to a higher percentage
of systems sales (about 12% compared to 9% in the nine months of fiscal year 2007), mix change to
lower margin consumables and incremental costs in Europe related to the facilities rationalization
initiative. Company management expects gross margin to be flat to slightly improved for the full
fiscal year 2008 compared to fiscal year 2007.
Selling, general and administrative (SG&A) expenses in the quarter increased by $27,808, or
about 17% (approximately 9% in local currency). As a percentage of sales, SG&A expenses decreased
to 29.5% from 30% in the third quarter of fiscal year 2007. SG&A expenses in the nine months
increased by $52,062, or about 11% (approximately 4% in local currency). As a percentage of sales,
SG&A expenses in the nine months decreased to 29.5% from 30.8% in the same period of fiscal year
2007. The decrease in SG&A as a percentage of sales in the quarter and nine months reflects the
leveraging of growth in sales, and the impact of cost reduction initiatives, including the
initiative to optimize the Companys European operations (EuroPall). In fiscal year 2007, the
Company launched the equivalent of the EuroPall program in the Western Hemisphere (AmeriPall).
This program is in the early implementation phase with the majority of the impact expected in
fiscal year 2009 and beyond. For the full fiscal year 2008, Company management is expecting SG&A
expenses, as a percentage of sales, to be approximately 29% of sales compared to 30% in fiscal year 2007.
Research and development expenses increased
about 18% in both the third quarter and nine months compared with the same periods of fiscal year 2007. As
a percentage of sales,
research and development expenses were 2.8% in the quarter and 2.9% in the nine months compared
with 2.8% in the same periods of fiscal year 2007. Company management expects research and
development expenses for the full fiscal year to increase approximately 15% compared to fiscal year
2007.
In the third quarter of fiscal year 2008, the Company recorded restructuring and other
charges/(gains), net, (ROTC) of $5,495. ROTC in the quarter was primarily comprised of legal and
other professional fees related to matters under inquiry by the audit committee, as more fully
described in Note 2, Audit Committee Inquiry and Restatement, to the accompanying condensed
consolidated financial statements. Additionally, ROTC includes severance and other exit
costs related to the Companys on-going cost reduction initiatives (including its facilities
rationalization, EuroPall and AmeriPall initiatives). Such charges were partly offset by the
reversal of excess restructuring reserves previously recorded in the Companys consolidated statements of
earnings in fiscal years 2007 and 2006. In the nine months of fiscal year 2008, the Company
recorded ROTC of $28,123. ROTC in the nine months was primarily comprised of legal and other
professional fees related to matters under inquiry by the audit committee, as discussed above.
Additionally, ROTC in the nine months includes severance and other exit costs related
to the Companys on-going cost reduction initiatives as well as an increase to a previously
established environmental reserve. Such charges were partly offset by the reversal of excess
restructuring reserves previously recorded in the Companys consolidated statements of earnings in fiscal
years 2007, 2006 and 2005.
23
In the third quarter of fiscal year 2007, the Company recorded ROTC of $8,620 primarily
related to the Companys on-going cost reduction initiatives (including its facilities
rationalization and EuroPall initiatives). The ROTC in the quarter was primarily comprised of
severance liabilities, impairment charges related to the planned disposal of buildings and early
retirement of certain long-lived assets, and other costs in connection with such initiatives.
Additionally, the charges in the quarter include an increase to previously established
environmental reserves. Such charges were partly offset by the reversal of excess restructuring
reserves recorded in the consolidated statements of earnings in fiscal years 2005 and 2006. In the
nine months of fiscal year 2007, the Company recorded ROTC of $22,060 primarily related to the
Companys on-going cost reduction initiatives. The charges in the nine months were primarily
comprised of severance liabilities and impairment charges as discussed above. Additionally, the
charges in the nine months include an increase to previously established environmental reserves.
Such charges were partly offset by the gain on the sale of the Companys corporate headquarters and
the reversal of excess restructuring reserves recorded in the consolidated statements of earnings
in fiscal years 2005 and 2006.
The details of ROTC for the three and nine months ended April 30, 2008 and April 30, 2007 can
be found in Note 8, Restructuring and Other Charges/(Gains), Net, to the accompanying condensed
consolidated financial statements.
The following table summarizes the activity related to restructuring liabilities that were
recorded in the nine months ended April 30, 2008 and in fiscal years 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
|
|
|
|
|
|
|
|
Liabilities & |
|
|
|
|
|
|
Severance |
|
|
Other |
|
|
Total |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Original charge |
|
$ |
8,232 |
|
|
$ |
1,908 |
|
|
$ |
10,140 |
|
Utilized |
|
|
(6,627 |
) |
|
|
(1,604 |
) |
|
|
(8,231 |
) |
Other changes (a) |
|
|
211 |
|
|
|
9 |
|
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Apr. 30, 2008 |
|
$ |
1,816 |
|
|
$ |
313 |
|
|
$ |
2,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Original charge |
|
$ |
22,083 |
|
|
$ |
4,321 |
|
|
$ |
26,404 |
|
Utilized |
|
|
(6,146 |
) |
|
|
(3,573 |
) |
|
|
(9,719 |
) |
Other changes (a) |
|
|
611 |
|
|
|
9 |
|
|
|
620 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Jul. 31, 2007 |
|
|
16,548 |
|
|
|
757 |
|
|
|
17,305 |
|
Utilized |
|
|
(11,132 |
) |
|
|
(724 |
) |
|
|
(11,856 |
) |
Reversal of excess reserves
(b) |
|
|
(295 |
) |
|
|
(65 |
) |
|
|
(360 |
) |
Other changes (a) |
|
|
1,273 |
|
|
|
56 |
|
|
|
1,329 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Apr. 30, 2008 |
|
$ |
6,394 |
|
|
$ |
24 |
|
|
$ |
6,418 |
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
|
|
|
|
|
|
|
|
Liabilities & |
|
|
|
|
|
|
Severance |
|
|
Other |
|
|
Total |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Original charge |
|
$ |
13,335 |
|
|
$ |
3,043 |
|
|
$ |
16,378 |
|
Utilized |
|
|
(7,221 |
) |
|
|
(2,900 |
) |
|
|
(10,121 |
) |
Other changes (a) |
|
|
182 |
|
|
|
9 |
|
|
|
191 |
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2006 |
|
|
6,296 |
|
|
|
152 |
|
|
|
6,448 |
|
Utilized |
|
|
(2,712 |
) |
|
|
(108 |
) |
|
|
(2,820 |
) |
Reversal of excess reserves
(b) |
|
|
(1,385 |
) |
|
|
(40 |
) |
|
|
(1,425 |
) |
Other changes (a) |
|
|
126 |
|
|
|
2 |
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Jul. 31, 2007 |
|
|
2,325 |
|
|
|
6 |
|
|
|
2,331 |
|
Utilized |
|
|
(1,143 |
) |
|
|
(3 |
) |
|
|
(1,146 |
) |
Reversal of excess reserves
(b) |
|
|
(35 |
) |
|
|
|
|
|
|
(35 |
) |
Other changes (a) |
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at Apr. 30, 2008 |
|
$ |
1,143 |
|
|
$ |
3 |
|
|
$ |
1,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Original charge |
|
$ |
17,496 |
|
|
$ |
2,928 |
|
|
$ |
20,424 |
|
Utilized |
|
|
(8,404 |
) |
|
|
(2,739 |
) |
|
|
(11,143 |
) |
Other changes (a) |
|
|
(86 |
) |
|
|
4 |
|
|
|
(82 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2005 |
|
|
9,006 |
|
|
|
193 |
|
|
|
9,199 |
|
Utilized |
|
|
(3,243 |
) |
|
|
(87 |
) |
|
|
(3,330 |
) |
Reversal of excess reserves (b) |
|
|
(1,905 |
) |
|
|
(96 |
) |
|
|
(2,001 |
) |
Other changes (a) |
|
|
57 |
|
|
|
3 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2006 |
|
|
3,915 |
|
|
|
13 |
|
|
|
3,928 |
|
Utilized |
|
|
(2,531 |
) |
|
|
|
|
|
|
(2,531 |
) |
Reversal of excess reserves (b) |
|
|
(811 |
) |
|
|
(15 |
) |
|
|
(826 |
) |
Other changes (a) |
|
|
31 |
|
|
|
2 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Jul. 31, 2007 |
|
|
604 |
|
|
|
|
|
|
|
604 |
|
Utilized |
|
|
(442 |
) |
|
|
|
|
|
|
(442 |
) |
Reversal of excess reserves (b) |
|
|
(164 |
) |
|
|
|
|
|
|
(164 |
) |
Other changes (a) |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Apr. 30, 2008 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Other changes primarily reflect translation impact. |
|
(b) |
|
Reflects the reversal of excess restructuring reserves originally recorded in fiscal
years 2007, 2006 and 2005. |
Earnings before interest and income taxes (EBIT) were $103,449 in the quarter compared to
$85,167 in the third quarter of fiscal year 2007 reflecting the
factors discussed above. As a percentage of sales, EBIT was 15.6% in the
quarter compared to 15.2% in the same period of fiscal year 2007. EBIT for the nine months were $245,594 compared to $196,780 in
the same period of fiscal year 2007 reflecting the factors discussed
above. As a percentage of sales, EBIT was 13.3% in the nine months
compared to 12.3% in the same period of fiscal year 2007.
25
Net interest expense in the quarter increased to $9,944 from $9,171 (as restated) in the third
quarter of fiscal year 2007. The increase in net interest expense reflects increased interest
expense due to higher debt levels compared to the same period last year, partly offset by a
decrease in interest expense recorded related to the tax matter resulting from a payment of
$135,000 to the Internal Revenue Service as discussed further in Note 2, Audit Committee Inquiry
and Restatement, to the accompanying condensed consolidated financial statements. Net interest
expense in the nine months decreased to $25,728 from $29,626 (as restated) in the same period of
fiscal year 2007. The decline in net interest expense in the nine months was principally
attributable to a decrease in the amount of interest expense recorded related to the tax matter as
discussed above and an increase in interest income. These favorable factors were partly offset by
increased interest expense related to higher debt levels compared to the same period last year.
Company management expects net interest expense for the full fiscal year 2008 to decrease compared
to fiscal year 2007.
In the third quarter of fiscal year 2008, the Companys effective tax rate was 32.3% as
compared to 33.7% (as restated) in the third quarter of fiscal year 2007. For the nine months of
fiscal year 2008, the Companys effective tax rate was 33.0% as compared to 33.8% (as restated) in
the same period of fiscal year 2007. See Note 9, Income Taxes, to the accompanying condensed
consolidated financial statements for further details on the components of the Companys effective
tax rate. The Company expects its effective tax rate to be approximately 33% for the full fiscal
year 2008, inclusive of discrete items recognized in the nine month period ended April 30, 2008.
The actual effective tax rate may materially differ based on several factors including discrete
items recognized in future periods. The Companys effective tax rate may change year to year based
on recurring factors such as the geographical mix of earnings in tax jurisdictions that have a
broad range of enacted tax rates, the timing and amount of foreign dividends, state and local
taxes, the ratio of permanent items to pretax book income, and the implementation of various global
tax strategies, as well as nonrecurring factors.
Net earnings in the quarter were $63,274, or 51 cents per share compared with net earnings of
$50,371, or 40 cents per share (as restated) in the third quarter of fiscal year 2007. In summary,
net earnings reflect the growth in EBIT and a decrease in the effective tax rate partly offset by
an increase in net interest expense. Net earnings in the nine months were $147,364, or $1.19 per
share, compared with net earnings of $110,719, or 89 cents per share (as restated) in the same
period of fiscal year 2007. In summary, the increase in net earnings in the nine months reflects
the increase in EBIT, a decrease in net interest expense and a decrease in the effective tax rate.
Company management estimates that foreign currency translation increased net earnings by
approximately 4 cents per share in the quarter and 8 cents per share in the nine months.
Review of Operating Segments
Presented below is a summary of sales and operating profit by segment reconciled to earnings
before income taxes, for the three and nine months ended April 30, 2008 and April 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Apr. 30, 2008 |
|
|
% Margin |
|
|
Apr. 30, 2007 |
|
|
% Margin |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
|
|
|
SALES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences |
|
$ |
252,996 |
|
|
|
|
|
|
$ |
229,044 |
|
|
|
|
|
|
|
10.5 |
|
Industrial |
|
|
408,684 |
|
|
|
|
|
|
|
330,303 |
|
|
|
|
|
|
|
23.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
661,680 |
|
|
|
|
|
|
$ |
559,347 |
|
|
|
|
|
|
|
18.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING PROFIT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences |
|
$ |
55,928 |
|
|
|
22.1 |
|
|
$ |
50,121 |
|
|
|
21.9 |
|
|
|
11.6 |
|
Industrial |
|
|
66,181 |
|
|
|
16.2 |
|
|
|
54,246 |
|
|
|
16.4 |
|
|
|
22.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit |
|
|
122,109 |
|
|
|
18.5 |
|
|
|
104,367 |
|
|
|
18.7 |
|
|
|
17.0 |
|
General corporate expenses |
|
|
13,165 |
|
|
|
|
|
|
|
10,203 |
|
|
|
|
|
|
|
29.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before ROTC,
interest expense, net and
income taxes |
|
|
108,944 |
|
|
|
16.5 |
|
|
|
94,164 |
|
|
|
16.8 |
|
|
|
15.7 |
|
ROTC (a) |
|
|
5,495 |
|
|
|
|
|
|
|
8,997 |
|
|
|
|
|
|
|
|
|
Interest expense, net (b) |
|
|
9,944 |
|
|
|
|
|
|
|
9,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income
taxes (b) |
|
$ |
93,505 |
|
|
|
|
|
|
$ |
75,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Apr. 30, 2008 |
|
|
% Margin |
|
|
Apr. 30, 2007 |
|
|
% Margin |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
|
|
|
SALES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences |
|
$ |
712,090 |
|
|
|
|
|
|
$ |
633,981 |
|
|
|
|
|
|
|
12.3 |
|
Industrial |
|
|
1,136,344 |
|
|
|
|
|
|
|
969,584 |
|
|
|
|
|
|
|
17.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,848,434 |
|
|
|
|
|
|
$ |
1,603,565 |
|
|
|
|
|
|
|
15.3 |
|
OPERATING PROFIT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences |
|
$ |
143,864 |
|
|
|
20.2 |
|
|
$ |
116,345 |
|
|
|
18.4 |
|
|
|
23.7 |
|
Industrial |
|
|
166,701 |
|
|
|
14.7 |
|
|
|
135,908 |
|
|
|
14.0 |
|
|
|
22.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit |
|
|
310,565 |
|
|
|
16.8 |
|
|
|
252,253 |
|
|
|
15.7 |
|
|
|
23.1 |
|
General corporate expenses |
|
|
36,848 |
|
|
|
|
|
|
|
30,520 |
|
|
|
|
|
|
|
20.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before ROTC,
interest expense, net and
income taxes |
|
|
273,717 |
|
|
|
14.8 |
|
|
|
221,733 |
|
|
|
13.8 |
|
|
|
23.4 |
|
ROTC (a) |
|
|
28,123 |
|
|
|
|
|
|
|
24,953 |
|
|
|
|
|
|
|
|
|
Interest expense, net (b) |
|
|
25,728 |
|
|
|
|
|
|
|
29,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income
taxes (b) |
|
$ |
219,866 |
|
|
|
|
|
|
$ |
167,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Included in ROTC for the purposes of evaluation of segment profitability are other
adjustments recorded in cost of sales for the three and nine months ended April 30, 2007 of
$377 and $2,893, respectively. Such adjustments are primarily comprised of incremental
depreciation and other adjustments recorded in conjunction with the Companys facilities
rationalization initiative. |
|
(b) |
|
Interest expense, net and Earnings before income taxes have been restated for the
quarter and nine months ended April 30, 2007, as more fully described in Note 2, Audit
Committee Inquiry and Restatement, to the accompanying condensed consolidated financial
statements. |
Life Sciences:
Presented below are Summary Statements of Operating Profit for the Life Sciences segment for
the three and nine months ended April 30, 2008 and April 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Apr. 30, 2008 |
|
|
% of Sales |
|
|
Apr. 30, 2007 |
|
|
% of Sales |
|
Sales |
|
$ |
252,996 |
|
|
|
|
|
|
$ |
229,044 |
|
|
|
|
|
Cost of sales |
|
|
119,169 |
|
|
|
47.1 |
|
|
|
106,994 |
|
|
|
46.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
133,827 |
|
|
|
52.9 |
|
|
|
122,050 |
|
|
|
53.3 |
|
SG&A |
|
|
67,763 |
|
|
|
26.8 |
|
|
|
63,369 |
|
|
|
27.7 |
|
Research and
development |
|
|
10,136 |
|
|
|
4.0 |
|
|
|
8,560 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
$ |
55,928 |
|
|
|
22.1 |
|
|
$ |
50,121 |
|
|
|
21.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Apr. 30, 2008 |
|
|
% of Sales |
|
|
Apr. 30, 2007 |
|
|
% of Sales |
|
Sales |
|
$ |
712,090 |
|
|
|
|
|
|
$ |
633,981 |
|
|
|
|
|
Cost of sales |
|
|
345,772 |
|
|
|
48.6 |
|
|
|
310,691 |
|
|
|
49.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
366,318 |
|
|
|
51.4 |
|
|
|
323,290 |
|
|
|
51.0 |
|
SG&A |
|
|
192,492 |
|
|
|
27.0 |
|
|
|
182,897 |
|
|
|
28.8 |
|
Research and
development |
|
|
29,962 |
|
|
|
4.2 |
|
|
|
24,048 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
$ |
143,864 |
|
|
|
20.2 |
|
|
$ |
116,345 |
|
|
|
18.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
The tables below present sales by market and geography within the Life Sciences segment for
the three and nine months ended April 30, 2008 and April 30, 2007, including the effect of exchange
rates for comparative purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange |
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
Rate |
|
|
Local |
|
Three Months Ended |
|
Apr. 30, 2008 |
|
|
Apr. 30, 2007 |
|
|
Change |
|
|
Impact |
|
|
Currency |
|
By Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical |
|
$ |
124,555 |
|
|
$ |
121,934 |
|
|
|
2.1 |
|
|
$ |
6,182 |
|
|
|
(2.9 |
) |
BioPharmaceuticals |
|
|
128,441 |
|
|
|
107,110 |
|
|
|
19.9 |
|
|
|
10,715 |
|
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life Sciences |
|
$ |
252,996 |
|
|
$ |
229,044 |
|
|
|
10.5 |
|
|
$ |
16,897 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Geography |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Hemisphere |
|
$ |
95,387 |
|
|
$ |
97,419 |
|
|
|
(2.1 |
) |
|
$ |
439 |
|
|
|
(2.5 |
) |
Europe |
|
|
125,068 |
|
|
|
102,934 |
|
|
|
21.5 |
|
|
|
13,240 |
|
|
|
8.6 |
|
Asia |
|
|
32,541 |
|
|
|
28,691 |
|
|
|
13.4 |
|
|
|
3,218 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life Sciences |
|
$ |
252,996 |
|
|
$ |
229,044 |
|
|
|
10.5 |
|
|
$ |
16,897 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange |
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
Rate |
|
|
Local |
|
Nine Months Ended |
|
Apr. 30, 2008 |
|
|
Apr. 30, 2007 |
|
|
Change |
|
|
Impact |
|
|
Currency |
|
By Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical |
|
$ |
360,004 |
|
|
$ |
345,051 |
|
|
|
4.3 |
|
|
$ |
14,877 |
|
|
|
|
|
BioPharmaceuticals |
|
|
352,086 |
|
|
|
288,930 |
|
|
|
21.9 |
|
|
|
24,890 |
|
|
|
13.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life Sciences |
|
$ |
712,090 |
|
|
$ |
633,981 |
|
|
|
12.3 |
|
|
$ |
39,767 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Geography |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Hemisphere |
|
$ |
278,286 |
|
|
$ |
271,056 |
|
|
|
2.7 |
|
|
$ |
1,197 |
|
|
|
2.2 |
|
Europe |
|
|
343,561 |
|
|
|
282,855 |
|
|
|
21.5 |
|
|
|
31,866 |
|
|
|
10.2 |
|
Asia |
|
|
90,243 |
|
|
|
80,070 |
|
|
|
12.7 |
|
|
|
6,704 |
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life Sciences |
|
$ |
712,090 |
|
|
$ |
633,981 |
|
|
|
12.3 |
|
|
$ |
39,767 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences segment sales increased 3.1% in the quarter compared to the third quarter of
fiscal year 2007. Overall, increased pricing in the Medical and BioPharmaceuticals markets
contributed about 1.9% to sales growth in the quarter, and as such, the overall volume increase was
about 1.2%. For the nine months, Life Sciences segment sales increased 6% compared to the same
period in fiscal year 2007. Overall, increased pricing in the Medical and BioPharmaceuticals
markets contributed about 1.7% to sales growth in the nine months and, as such, the overall volume
increase was about 4.3%. Life Sciences represented about 38% of total sales in the quarter and 39%
in the nine months compared with 41% and 40%, respectively, in the same periods of fiscal year 2007. Company
management expects overall Life Sciences sales to increase about 4% for the full fiscal year 2008
compared to fiscal year 2007.
28
Within Life Sciences, Medical sales, which represented approximately one-half of Life Sciences
sales, were down 2.9% in the quarter reflecting a 14.6% decrease in Blood Filtration, the largest
market served by Medical. Increases in the BioSciences and Hospital markets of 11.4% and 4.2%,
respectively, partly mitigated this impact. The decrease in the Blood Filtration market in the
quarter primarily relates to a decline in Canada due to the non-renewal of a contract with one of
the major blood centers in the quarter, reduced volume to U.S. independent blood centers and
decreases in Europe, related to lost or uncontested tenders. The increase in the BioSciences market
was primarily driven by double-digit growth in original equipment manufacturer (OEM) sales
(contributed by all geographies) and near double-digit growth in laboratory sales (contributed by
Europe and Asia). The growth in Hospital sales reflects increased Aquasafe and breathing filter
sales in the Western Hemisphere. For the nine months, Medical sales were flat as a decrease in the
Blood Filtration market of 4.4% was offset by increases in the BioSciences and Hospital markets of
3.9% and 6.7%, respectively. The decline in the Blood Filtration market reflects decreases in
Europe as discussed above. Blood Filtration sales in the Western Hemisphere were flat, reflecting
the non-renewal of a contract with a major blood center in Canada and reduced volume to U.S.
independent blood centers in the quarter as discussed above, which offset the sales growth to these
blood centers that was achieved in the first half of fiscal year 2008. The increase in the
BioSciences market was primarily driven by strong OEM and laboratory sales in Europe and Asia. The
growth in Hospital sales reflects increased Aquasafe sales in the Western Hemisphere, new tender
awards in Europe and increased breathing filter sales in the Western Hemisphere and Asia. Company
management expects overall Medical sales to be down slightly for the full fiscal year 2008 compared
to fiscal year 2007.
BioPharmaceuticals sales increased 9.9% driven by growth in systems sales of about 71%
accompanied by growth in sales of consumables of about 6%. Systems
sales represented 8% of total BioPharmaceuticals sales in the quarter
compared with 5% in the same period of fiscal year 2007. By geography, growth in this market was
led by Europe (+13.5%), which is the Companys largest geographic market in BioPharmaceuticals,
accompanied by an increase in the Western Hemisphere (+8.3%). Sales in Asia were flat in the
quarter. The growth in systems sales in the quarter primarily reflects investment by the
biotechnology sector in the Western Hemisphere. The growth in consumables was attributable to
double-digit sales growth in Europe as a result of manufacturing transfers from the U.S., the
impact of new plants coming on stream and strong demand for vaccines and single use technologies. A
high single-digit decrease in consumables sales in the Western Hemisphere partly offset the above.
This reduction was caused by sales downturns and inventory reduction programs in a number of large
U.S. biotechnology customers. Consumables sales were up modestly in Asia (low single-digits).
For
the nine months, BioPharmaceuticals sales increased 13.2%, as systems sales more than doubled
compared to the same period in fiscal year 2007, and consumables sales grew about 7%. By geography,
growth in this market was led by Europe (+19.1%), accompanied by increases in the Western
Hemisphere (+6.3%) and Asia (+4.7%). The growth in systems sales in the nine months primarily
reflects investment by the biotechnology sector in the Western Hemisphere and Europe. The growth in
consumables was attributable to double-digit sales growth in Europe partly offset by a high
double-digit decrease in consumables sales in the Western Hemisphere, reflecting the same factors
as in the quarter. Consumables sales were up modestly in Asia (low single-digits). Overall, key
products driving growth are the Companys virus removal filters for biotechnology and plasma
derived therapeutics, and its increasing portfolio of single-use processing technologies including
the Kleenpak connector. Company management continued to see strong investment in the Western
Hemisphere and Europe in systems and new manufacturing facilities and is seeing the second signs of
large biotechnology manufacturing moving into Asia. Continuing customer investment in new manufacturing
capacity is providing future growth opportunities in consumable sales
as these new plants progressively come on stream. For the full
fiscal year 2008, Company management expects double-digit sales growth in the BioPharmaceuticals
market compared to fiscal year 2007.
Life Sciences gross margins decreased 40 basis points to 52.9% from 53.3% in the third quarter
of fiscal year 2007. The decrease in gross margins was principally driven by inflation of
manufacturing and related overhead costs and a shift in product mix, to a higher percentage of
systems sales (about 4% of total Life Sciences sales compared to 2.5% in the third quarter of
fiscal year 2007), which are typically at lower margins than consumables, partly offset by improved
pricing that contributed approximately 80 basis points in margin and savings generated from cost
reduction initiatives. For the nine months, Life Sciences gross margins increased 40 basis points
to 51.4% from 51% in the same period of fiscal year 2007. The improvement in gross margins was
principally driven by improved pricing that contributed approximately 70 basis points in margin and
savings generated from cost reduction initiatives. These factors were partly offset by a shift in
product mix, to a higher percentage of systems sales (about 6% of total Life Sciences sales
compared to 3% in the same period of fiscal year 2007) and inflation of manufacturing and related
overhead costs.
29
SG&A expenses increased by $4,394, or about 7% (approximately 1% in local currency), compared
to the third quarter of fiscal year 2007. For the nine months, SG&A expenses increased by $9,595,
or about 5% (flat in local currency). SG&A expenses as a percentage of sales in the quarter
decreased to 26.8% from 27.7% in the third quarter of fiscal year 2007. For the nine months, SG&A
expenses as a percentage of sales decreased to 27% from 28.8%. The decrease in SG&A as a percentage
of sales for the nine months reflects the impact of the Companys cost reduction and efficiency
initiatives and the leveraging of growth in sales.
R&D expenses were up about 18% in the quarter (approximately 17% in local currency); coming in
at $10,136 compared to $8,560 in the third quarter of fiscal year 2007. For the nine months, R&D
expenses increased about 25% (approximately 23% in local currency). As a percentage of sales, R&D
expenses were 4.0% and 4.2% in the quarter and nine months, respectively, compared to 3.7% and 3.8%
in the same periods of fiscal year 2007. Increased spending reflects
investments in both Medical and BioPharmaceuticals projects, including prion and cell
harvesting.
As a result of the above factors, operating profit dollars in the quarter increased about 12%
to $55,928 and operating margin improved to 22.1% from 21.9% in the third quarter of fiscal year
2007. For the nine months, operating profit dollars increased about 24% to $143,864 and operating
margin improved to 20.2% from 18.4% in the same period of fiscal year 2007.
Industrial:
Presented below are Summary Statements of Operating Profit for the Industrial segment for the
three and nine months ended April 30, 2008 and April 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Apr. 30, 2008 |
|
|
% of Sales |
|
|
Apr. 30, 2007 |
|
|
% of Sales |
|
Sales |
|
$ |
408,684 |
|
|
|
|
|
|
$ |
330,303 |
|
|
|
|
|
Cost of sales |
|
|
219,545 |
|
|
|
53.7 |
|
|
|
174,856 |
|
|
|
52.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
189,139 |
|
|
|
46.3 |
|
|
|
155,447 |
|
|
|
47.1 |
|
SG&A |
|
|
114,557 |
|
|
|
28.0 |
|
|
|
94,105 |
|
|
|
28.5 |
|
Research and
development |
|
|
8,401 |
|
|
|
2.1 |
|
|
|
7,096 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
$ |
66,181 |
|
|
|
16.2 |
|
|
$ |
54,246 |
|
|
|
16.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Apr. 30, 2008 |
|
|
% of Sales |
|
|
Apr. 30, 2007 |
|
|
% of Sales |
|
Sales |
|
$ |
1,136,344 |
|
|
|
|
|
|
$ |
969,584 |
|
|
|
|
|
Cost of sales |
|
|
630,104 |
|
|
|
55.5 |
|
|
|
532,719 |
|
|
|
54.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
506,240 |
|
|
|
44.5 |
|
|
|
436,865 |
|
|
|
45.1 |
|
SG&A |
|
|
315,977 |
|
|
|
27.8 |
|
|
|
279,838 |
|
|
|
28.9 |
|
Research and
development |
|
|
23,562 |
|
|
|
2.0 |
|
|
|
21,119 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
$ |
166,701 |
|
|
|
14.7 |
|
|
$ |
135,908 |
|
|
|
14.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tables below present sales by market and geography within the Industrial segment for the
three and nine months ended April 30, 2008 and April 30, 2007, including the effect of exchange
rates for comparative purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange |
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
Rate |
|
|
Local |
|
Three Months Ended |
|
Apr. 30, 2008 |
|
|
Apr. 30, 2007 |
|
|
Change |
|
|
Impact |
|
|
Currency |
|
By Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Industrial |
|
$ |
252,253 |
|
|
$ |
193,231 |
|
|
|
30.5 |
|
|
$ |
22,102 |
|
|
|
19.1 |
|
Aerospace and
Transportation |
|
|
79,143 |
|
|
|
62,417 |
|
|
|
26.8 |
|
|
|
4,202 |
|
|
|
20.1 |
|
Microelectronics |
|
|
77,288 |
|
|
|
74,655 |
|
|
|
3.5 |
|
|
|
5,619 |
|
|
|
(4.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Industrial |
|
$ |
408,684 |
|
|
$ |
330,303 |
|
|
|
23.7 |
|
|
$ |
31,923 |
|
|
|
14.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Geography |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Hemisphere |
|
$ |
108,621 |
|
|
$ |
93,811 |
|
|
|
15.8 |
|
|
$ |
876 |
|
|
|
14.9 |
|
Europe |
|
|
170,688 |
|
|
|
128,279 |
|
|
|
33.1 |
|
|
|
19,261 |
|
|
|
18.1 |
|
Asia |
|
|
129,375 |
|
|
|
108,213 |
|
|
|
19.6 |
|
|
|
11,786 |
|
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Industrial |
|
$ |
408,684 |
|
|
$ |
330,303 |
|
|
|
23.7 |
|
|
$ |
31,923 |
|
|
|
14.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange |
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
Rate |
|
|
Local |
|
Nine Months Ended |
|
Apr. 30, 2008 |
|
|
Apr. 30, 2007 |
|
|
Change |
|
|
Impact |
|
|
Currency |
|
By Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Industrial
|
|
$ |
692,947 |
|
|
$ |
565,279 |
|
|
|
22.6 |
|
|
$ |
51,295 |
|
|
|
13.5 |
|
Aerospace
and Transportation |
|
|
216,415 |
|
|
|
183,484 |
|
|
|
17.9 |
|
|
|
10,398 |
|
|
|
12.3 |
|
Microelectronics |
|
|
226,982 |
|
|
|
220,821 |
|
|
|
2.8 |
|
|
|
11,181 |
|
|
|
(2.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Industrial |
|
$ |
1,136,344 |
|
|
$ |
969,584 |
|
|
|
17.2 |
|
|
$ |
72,874 |
|
|
|
9.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Geography |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Hemisphere |
|
$ |
304,530 |
|
|
$ |
279,726 |
|
|
|
8.9 |
|
|
$ |
2,622 |
|
|
|
7.9 |
|
Europe |
|
|
452,456 |
|
|
|
379,399 |
|
|
|
19.3 |
|
|
|
44,943 |
|
|
|
7.4 |
|
Asia |
|
|
379,358 |
|
|
|
310,459 |
|
|
|
22.2 |
|
|
|
25,309 |
|
|
|
14.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Industrial |
|
$ |
1,136,344 |
|
|
$ |
969,584 |
|
|
|
17.2 |
|
|
$ |
72,874 |
|
|
|
9.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial segment sales grew 14.1% in the quarter and 9.7% in the nine months, driven by
growth in the General Industrial and Aerospace and Transportation markets. Overall, increased
pricing contributed about 0.9% to the overall sales growth in the quarter and as such, the overall
volume growth was 13.2%. For the nine months, increased pricing contributed about 0.5% to the
overall sales growth in the period and as such, the overall volume growth was 9.2%. Industrial
systems sales increased 64.8% and 35% in the quarter and nine months, respectively. The Companys
Total Fluid Managementsm strategy presents many opportunities for growth in this regard.
All markets in Industrial contributed to the growth in systems sales in the quarter, with the
Municipal Water and Food and Beverage markets being the most significant growth drivers. For the
nine months, all markets with the exception of the energy-related market contributed to the growth
in systems sales (Municipal Water and Food and Beverage markets were the most significant
contributors). Industrial consumables sales grew 7.5% in the quarter and 6.1% in the nine months,
with all markets contributing with the exception of Microelectronics. Industrial represented about
62% of total sales in the quarter and 61% in the nine months compared with 59% and 60%, respectively, in the same
periods of fiscal year 2007. Company management expects overall Industrial sales to increase about
7% for the full fiscal year 2008 compared to fiscal year 2007.
Within the Industrial segment, General Industrial market sales, which account for about 61% of
the Industrial segment, were up 19.1% and 13.5% in the quarter and nine months, respectively, with
all markets contributing to this gain.
Municipal Water sales, which are
primarily comprised of systems, increased 65.6% compared to the third quarter of fiscal year 2007,
with all geographies contributing to this gain. In the Western Hemisphere, sales increased 22.4%
primarily attributable to surface water treatment projects driven by government regulations. Sales
in Europe doubled in the quarter driven by surface water treatment in the United Kingdom, sales of
leachate treatment systems to developing countries in Eastern Europe and North Africa and OEM
cartridge sales in France and Germany. In Asia, sales also doubled in the quarter primarily driven
by drought-related projects in Australia and sales of leachate treatment systems in various
countries in Asia. For the nine months, Municipal Water sales increased 49.6% compared to the same
period in fiscal year 2007, generated by double-digit growth in all geographies. Growth in the
Western Hemisphere (+24.7%) and Europe (+45.3%) reflect the same drivers evident in the quarter. In
Asia, growth increased over 300% reflecting the same factors evident in the quarter as well as a
large wastewater recycle project in Australia in the first half of the year. Overall, backlog in
this market is up about 30%.
31
Sales in the energy-related market increased 12.9% in the quarter reflecting strong
growth in consumables sales (Europe and Asia) and systems sales (Western Hemisphere and Europe),
although a portion of the growth is attributable to the timing of capital projects. For the nine
months, sales in the energy-related market increased 8.4% reflecting growth in consumables in
all geographies partly offset by a decline in systems sales. The decrease in systems sales reflects
a decline in Europe due to tough comparables to last year, partly offset by growth in the Western
Hemisphere and Asia. The growth in Asia primarily related to a large water system project for an
energy customer. Market opportunities and growth drivers in the energy-related market include
alternative energy, including wind and coal gasification. Overall, backlog in this market is up
almost 7%.
Food and Beverage sales were up 22.9% in the quarter reflecting double-digit growth in systems
sales (contributed by Europe and Asia) accompanied by high-single digit growth in consumables (all
geographies contributing). For the nine months, Food and Beverage sales were up 9.8% reflecting
double-digit growth in systems sales (contributed by Europe and Asia) and mid-single digit growth
in consumables (all geographies contributing). Sales in Europe, the Companys largest geographic
Food & Beverage market, were up in the double-digit range in both the quarter and nine months. The
Companys Total Fluid Managementsm approach continues to succeed and the sales growth in
the quarter reflects the sale of a water system in Hungary and a large sale to a brewery in Romania
to provide for all their filtration needs. In general, key growth drivers in Europe in the quarter
and nine months include sales of OenoFlow product to the wine market, Aria systems for process water and
expanding sales to the beer market. In Asia, sales increased about 66% in the quarter and about
16% in the nine months attributable to the overall growth in this region in various countries. In
the Western Hemisphere, sales increased in the low-single digit range in the quarter; however, they
were down in the nine months (low single-digit range) due to timing of shipments. Backlog in this market is up about 23%
compared to the same period last year.
Sales in the Industrial Manufacturing market increased 10.3% in the quarter, generated by
double-digit growth in Europe and Asia. Sales in the Western Hemisphere were down (low single-digit
range). For the nine months, sales in the Industrial Manufacturing market increased 13.4% generated
by growth in all geographies, with the most significant growth achieved in Asia and Europe. Demand
in the metal and mining sectors were key growth drivers.
Company management is expecting high-single digit growth in General Industrial for the full
fiscal year 2008, with the largest growth expected in the Municipal Water market.
Aerospace and Transportation sales increased 20.1% driven by strong growth in the Military,
Commercial and Transportation markets. All geographies contributed to the growth in each market in
the quarter. The growth in Military sales (+31.4%) was primarily driven by military water system
projects and CH-47 helicopter upgrade projects. The growth in the Commercial portion of this market
(+16%) primarily reflects strong after-market sales, some of
which were timing related, and increased OEM sales generated by an
increase in airframe build rates. The increase in the Transportation market (+9.5%) was driven by
demand in the construction and mining equipment sectors. For the nine months, Aerospace and
Transportation sales increased 12.3% with all markets, Military, Commercial and Transportation
contributing to this gain. The growth in Military sales (+14.6%) was primarily driven by strong
growth in Asia, where sales more than tripled primarily related to a large water systems project with the Australian Military. The growth in Military sales in the nine months also reflects CH-47 helicopter upgrade
projects in the Western Hemisphere. Sales in the Commercial and Transportation markets increased
12.4% and 8.2%, respectively, reflecting the same trends evident in the quarter. Company management
is expecting double-digit growth in the Aerospace and Transportation market for the full fiscal
year 2008.
Microelectronics sales declined 4% in the quarter attributable to decreases in Europe (14.9%)
and in Asia (3.4%), the Companys largest Microelectronics market. Sales in the Western Hemisphere
increased 2.5%. For the nine months, Microelectronics sales decreased 2.3% reflecting decreases in
the Western Hemisphere (9.9%) and Europe (5.1%), with Asia, the Companys largest geographic Microelectronics market, flat. Overall, the sales decrease in
the quarter and nine months reflects tough comparables against the strong growth achieved in the
same periods last year and the current cyclical downturn in the market which impacted OEM sales.
These factors were partly mitigated by sales growth in the thin film rigid disc, inkjet and home
server markets. Based upon various market indicators, Company management is expecting sales in the
Microelectronics market to be down slightly for the full fiscal year 2008 compared to fiscal year
2007.
32
Industrial gross margins in the quarter decreased 80 basis points to 46.3% from 47.1% in the
third quarter of fiscal year 2007. The decrease in gross margins reflects the impact of a shift in
product mix quarter over quarter, to a higher percentage of systems sales (approximately 17% of
total Industrial sales compared to 12% in the third quarter of fiscal year 2007). Improved pricing, which contributed
approximately 40 basis points in margin, the impact of the Companys facilities rationalization
initiative and other manufacturing cost reduction and efficiency programs, the impact of improved
profitability of certain systems sales, and product portfolio rationalization, outpaced the estimated inflation of manufacturing costs.
For the nine months, Industrial gross margins decreased 60 basis points to 44.5% from 45.1% in
the same period of fiscal year 2007. The decrease in gross margins reflects the impact of a shift
in product mix (systems sales were 16% of total Industrial sales compared to 13% in the same period
of fiscal year 2007) and market mix, the estimated inflation of manufacturing costs and incremental
costs in Europe related to the facilities rationalization initiative. These decreases were
partially offset by the impact of improved profitability of certain systems sales, and product
portfolio rationalization, the impact of the Companys manufacturing cost reduction programs and
improved pricing that contributed about 30 basis points in margin.
SG&A expenses increased by $20,452, or about 22% (approximately 12% in local currency),
compared to the third quarter of fiscal year 2007. The increase in SG&A in the quarter primarily reflects increased variable selling costs related to the growth in sales. For the nine months, SG&A expenses increased by
$36,139, or about 13% (approximately 6% in local currency). SG&A expenses in the quarter improved
to 28% as a percentage of sales from 28.5% in the third quarter of fiscal year 2007. For the nine
months, SG&A expenses improved to 27.8% as a percentage of sales from 28.9% in the same period last
year. The improvement in SG&A as a percentage of sales reflects the impact of cost reduction and
efficiency initiatives and the leveraging of growth in sales.
R&D expenses were up about 18% (approximately 15% in local currency), in the quarter; coming
in at $8,401 compared to $7,096 in the third quarter of fiscal year 2007. For the nine months, R&D
expenses increased approximately 12% (approximately 9% in local currency). As a percentage of
sales, R&D expenses were 2.1% in the quarter and 2% in the nine months compared to 2.2% in the same
periods of fiscal year 2007. Increased spending reflects investments in new technologies across various markets within Industrial.
As a result of the above factors, operating profit dollars in the quarter increased about 22%
to $66,181 and operating margin was 16.2% compared with 16.4% in the third quarter of fiscal year
2007. For the nine months, operating profit dollars increased about 23% to $166,701 and operating
margin improved to 14.7% from 14% in the same period of fiscal year 2007.
Corporate:
Corporate expenses increased by $2,962, or about 29% to $13,165 from $10,203 in the third
quarter of fiscal year 2007. For the nine months of fiscal year 2008, Corporate expenses increased
$6,328, or about 21% to $36,848 from $30,520 in the same period of fiscal year 2007. The increase
in Corporate expenses in the quarter and nine months primarily reflects the addition of tax and
treasury function personnel and increased professional fees related to tax and audit services.
Liquidity and Capital Resources
Non-cash working capital, which is defined as working capital excluding cash and cash
equivalents, notes receivable, notes payable and the current portion of long-term debt, was
approximately $709,400, a turnover ratio of 4.4, at April 30, 2008 as compared with $372,400, a
turnover ratio of 5.9, at July 31, 2007. Non-cash working capital at April 30, 2007 was $390,600, a
turnover ratio of 5.6. Accounts receivable days sales outstanding (DSO) was 77 days in the third
quarter of fiscal year 2008 as compared to 83 days in the second quarter of fiscal year 2008 and 80 days in the third quarter of fiscal year 2007.
Inventory turns for the four quarters ended April 30, 2008 were 2.6 compared to 2.7 in the four
quarters ended April 30, 2007.
The Companys balance sheet is affected by spot exchange rates used to translate local
currency amounts into U.S. dollars. In comparing spot exchange rates at April 30, 2008 to those at
July 31, 2007, the Euro and the Yen have strengthened against the U.S. dollar, while the British
Pound has weakened. The effect of foreign exchange increased non-cash working capital by $37,957,
including net inventory, net accounts receivable and other current assets by $18,230, $38,956 and
$5,468, respectively, as compared to July 31, 2007. Additionally, foreign exchange increased
accounts payable and other current liabilities by $24,455 and income tax payable by $242.
33
Net cash provided by operating activities in the nine months of fiscal year 2008 was $16,455
as compared to net cash provided by operating activities of $213,554 in the same period of fiscal
year 2007, a decrease of $197,099. The decrease in cash flow reflects a tax payment of $135,000 to
the IRS as well as changes in working capital items, particularly accounts receivable, accounts
payable and accrued liabilities, partly offset by the impact of increased net earnings. Net cash provided by operating activities in the three months
ended April 30, 2008 was $91,360 as compared to net cash provided by operating activities of $64,679
in the same period of fiscal year 2007, an increase of $26,681. The increase in cash flow reflects an increase in net earnings as well as changes
in working capital items, particularly accounts receivable, which benefited from the improvement in DSO discussed above.
Free cash flow, which is defined as net cash provided by operating activities less capital
expenditures, was $(60,011) in the nine months of fiscal year 2008, as compared with $159,468 in
the nine months of fiscal year 2007. Company management believes this measure is important because
it is a key element of its planning. The Company utilizes free cash flow, which is a non-GAAP
measure, as one way to measure its current and future financial performance. The following table
reconciles free cash flow to net cash provided by operating activities.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
Apr. 30, 2008 |
|
|
Apr. 30, 2007 |
|
Net cash provided by operating activities |
|
$ |
16,455 |
|
|
$ |
213,554 |
|
Less capital expenditures |
|
|
76,466 |
|
|
|
54,086 |
|
|
|
|
|
|
|
|
Free cash flow |
|
$ |
(60,011 |
) |
|
$ |
159,468 |
|
|
|
|
|
|
|
|
Overall, net debt (debt net of cash and cash equivalents) as a percentage of total
capitalization (net debt plus equity) was 24.4% at April 30, 2008 as compared to 15.2% at July 31,
2007. Net debt increased by approximately $179,900 compared with July 31, 2007 primarily comprised
of a decrease in cash and cash equivalents of $68,500 and an increase in gross debt of $110,200
reflecting the $135,000 deposit with the IRS in September 2007 and the Companys repurchase of stock of $78,211 in the third quarter of fiscal year 2008. The impact of foreign exchange
rates decreased net debt by about $1,200.
As a result of the audit committee inquiry (refer to Note 2, Audit Committee Inquiry and
Restatement, to the accompanying condensed consolidated financial statements), the Company failed
to comply with certain representations, warranties and covenants in its debt agreements, including
its inability to timely file its periodic reports with the SEC. The Company entered into amendments
and/or waivers of those agreements. Under the terms of those amendments and waivers, the Company
was obligated to return to compliance with its reporting obligations under the federal securities
laws by March 31, 2008. As of the date hereof, the Company is in compliance with its covenants
under the foregoing agreements, as amended by such instruments. Such matters did not affect the
Companys compliance with the financial covenants, and the Company is in compliance with such
financial covenants. Those financial covenants are contained in its five-year revolving credit
facility with a syndicate of financial institutions and its Yen 9 billion loan, which provide that
the Company may not have a consolidated net interest coverage ratio based upon trailing four
quarter results that is less than 3.50 to 1.00, nor a consolidated leverage ratio based upon
trailing four quarter results that is greater than 3.50 to 1.00. The Company is in compliance with
these financial covenants.
The Company utilizes cash flow generated from operations and its revolving credit facility to
meet its short-term liquidity needs. Company management considers its existing lines of credit,
along with the cash typically generated from operations, to be sufficient to meet its short-term
liquidity needs.
Capital expenditures were $76,466 in the nine months of fiscal year 2008 ($23,785 expended in
the current quarter). Capital expenditures reflect spending on the expansion of existing plants in
Puerto Rico, the United States and Europe related to the facilities rationalization initiative.
Depreciation expense was $21,435 and $63,134 in the quarter and nine months, respectively.
Amortization expense was $2,041 and $6,297 in the quarter and nine months, respectively. For the
full fiscal year 2008, capital expenditures are expected to be approximately $130,000. Depreciation
and amortization expense are expected to total approximately $93,000 $95,000.
On October 14, 2004, the Companys board of directors authorized the expenditure of up to
$200,000 for the repurchase of shares of the Companys common stock. On November 15, 2006, the
board of directors authorized an additional expenditure of $250,000 to repurchase shares. At July
31, 2007 there was $348,232 available to be expended under these authorizations. The Company
repurchased stock of $51,016 in the nine months of fiscal year 2007 and $61,795 for the full fiscal
year ended July 31, 2007. In the nine months of fiscal year 2008, the Company repurchased stock of
$78,211 and as such there was $270,021 available to be expended at April 30, 2008 under the current
stock repurchase programs. In May 2008, the Company repurchased stock
of $40,000. Net proceeds from stock plans were $15,468 in the nine months.
34
The Company increased its quarterly dividend by 9%, from 11 to 12 cents per share, effective
with the dividend declared on January 11, 2007. In the nine months of fiscal year 2008, the Company
paid dividends of $44,170, an increase of approximately 6% compared to the nine months of fiscal
year 2007. The Company increased its quarterly dividend from 12 to 13 cents per share, effective
with the dividend declared on March 12, 2008.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS No. 157 is effective for the Company beginning
with fiscal year 2009, except as revised by FASB Staff Position (FSP) No. 157-2, issued in February
2008. This FSP delays the effective date of SFAS No. 157 for non-financial assets and
non-financial liabilities, except for items that are reorganized or disclosed at fair value in the
financial statements on a periodic basis (at least annually). The Company is in the process of
assessing the effect SFAS No. 157 may have on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159). SFAS No. 159 permits entities to elect to measure
specified financial instruments and certain other items at fair value with changes in fair value
recognized in earnings each reporting period. SFAS No. 159 is effective for the Company beginning
with fiscal year 2009. The Company is in the process of assessing the effect SFAS No. 159 may have
on its consolidated financial statements.
In June 2007, the FASB ratified Emerging Issues Task Force (EITF) No. 07-3, Accounting for
Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and
Development Activities (EITF No. 07-3). EITF No. 07-3 requires that nonrefundable advance
payments for goods or services that will be used or rendered for future research and development
activities be deferred and capitalized and recognized as an expense as the related goods are
delivered or the related services are performed. If an entity does not expect the goods to be
delivered or services to be rendered, the capitalized advance payment should be charged to expense.
EITF No. 07-3 is effective, on a prospective basis, for the Company beginning with fiscal year
2009. The Company is in the process of assessing the effect EITF No. 07-3 may have on its
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
No. 141(R)). SFAS No. 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree, recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase, and determines
what information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS No. 141(R) is effective for the Company
beginning with fiscal year 2010.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statementsan amendment of Accounting Research Bulletin No. 51 (SFAS No. 160). SFAS No.
160 establishes accounting and reporting standards for ownership interests in subsidiaries held by
parties other than the parent, the amount of consolidated net income attributable to the parent and
to the noncontrolling interest, changes in a parents ownership interest, and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also
establishes disclosure requirements that clearly identify and distinguish between the interests of
the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for the
Company beginning with fiscal year 2010.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activitiesan amendment of FASB Statement No. 133 (SFAS No. 161). SFAS No. 161 requires
entities to provide enhanced disclosures about how and why an entity uses derivative instruments,
how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its
related interpretations, and how derivative instruments and related hedged items affect an entitys
financial position, financial performance, and cash flows. SFAS No. 161 is effective for the
Company beginning with its third quarter of fiscal year 2009.
In April 2008, the FASB issued FASB Staff Position (FSP) No. FAS 142-3, Determination of the
Useful Life of Intangible Assets (FSP No. 142-3). FAS No. 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3
is effective for the Company beginning with fiscal year 2010. The Company is in the process of
assessing the effect FSP No. 142-3 may have on its consolidated financial statements.
35
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally accepted accounting
principles in the United States. SFAS No. 162 is effective 60 days following the SECs approval of
the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There is no material change in the market risk information reported in Item 7A of the 2007
Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES.
There was no change in the Companys internal control over financial reporting during the
third quarter of fiscal year 2008 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
As reported in the 2007 Form 10-K, the Companys management identified a material weakness in
its internal control over financial reporting related to its accounting for income taxes.
Specifically, the Company lacked a periodic review to ensure that the income tax impact of certain
intercompany transactions were properly considered in the Companys provision for income taxes. As
a result of that material weakness, management concluded that the Companys disclosure controls and
procedures were not effective as of July 31, 2007.
As discussed in its Form 10-Q for the quarter ended October 31, 2007, the Company implemented
the additional controls and procedures listed below during the quarter ended October 31, 2007:
|
|
|
Changes in the resources and technical expertise of the Tax and Treasury
functions, including the termination of the employment of four employees. |
|
|
|
|
Additional processes requiring the monthly review of intercompany transactions to
determine if balances are being settled in accordance with applicable intercompany
settlement policies and to ensure that exceptions are given appropriate income tax
consideration. In addition, a quarterly review of income in foreign subsidiaries that
may be subject to U.S. income tax for inclusion in the Companys forecasted effective
tax rate to be applied in its interim periods was implemented. |
The Company has conducted and is planning further training initiatives for all employees affected by revisions to its
policies and procedures, as well as specialized training with respect to tax considerations for
relevant employees.
As of the end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Companys management, including the
Companys chief executive officer and chief financial officer, of the effectiveness of the
Companys disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended. Based on this evaluation, the chief executive officer
and chief financial officer concluded that the Companys disclosure controls and procedures are
effective. The Company believes that the actions it has taken to date, including the implementation
and testing of the additional controls and procedures outlined above, have remediated its material weakness in internal control over financial reporting.
It should be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the system are met. In
addition, the design of any control system is based in part upon certain assumptions about the
likelihood of future events. Because of these and other inherent limitations of control systems,
there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
36
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
(In thousands)
As previously disclosed in the 2007 Form 10-K, the Company is subject to various regulatory
proceedings and litigation relating to various environmental matters and to the tax matters
described in Note 2, Audit Committee Inquiry and Restatement, to the accompanying condensed
consolidated financial statements. The information provided below updates and should be read in
conjunction with the discussion of these proceedings in Part I Item 3 Legal Proceedings in the
2007 Form 10-K. Reference is also made to Note 7, Contingencies and Commitments, to the
accompanying condensed consolidated financial statements.
Federal Securities Class Actions:
Four putative class action lawsuits have been filed against the Company and certain members of
its management team alleging violations of the federal securities laws relating to the Companys
understatement of certain of its U.S. income tax payments and of its provision for income taxes in
certain prior periods described in Note 2, Audit Committee Inquiry and Restatement, to the
accompanying condensed consolidated financial statements. These lawsuits were filed between August
14, 2007 and October 11, 2007 in the United States District Court for the Eastern District of New
York. The plaintiffs principally allege that the defendants violated the federal securities laws
by issuing materially false and misleading public statements about the Companys financial results,
financial statements, income tax liability, effective tax rate and internal controls. The
plaintiffs seek unspecified compensatory damages, costs and expenses. By Order dated May 28, 2008,
the Court consolidated the cases under the caption In re Pall Corp, No. 07-CV-3359 (E.D.N.Y.)
(JS) (ARL), appointed a lead plaintiff and ordered that the lead plaintiff file a consolidated
amended complaint within 45 days of the entry of the Order.
Shareholder Derivative Lawsuits:
On October 5, 2007, two plaintiffs filed identical derivative lawsuits in New York Supreme
Court, Nassau County relating to the tax matter described above. These actions purport to bring
claims on behalf of the Company based on allegations that certain current and former directors and
officers of the Company breached their fiduciary duties by failing to evaluate and otherwise inform
themselves about the Companys internal controls and financial reporting systems and procedures.
In addition, plaintiffs allege that certain officers of the Company were unjustly enriched as a
result of the Companys inaccurate financial results over fiscal years 1999-2006. The complaints
seek unspecified compensatory damages on behalf of Pall Corporation, disgorgement of defendants
salaries, bonuses, stock grants and stock options, equitable relief and costs and expenses. The
Company, acting in its capacity as nominal defendant, moved to dismiss the complaints for failure
to make a demand upon the Companys board of directors, which motions were granted.
Another shareholder derivative lawsuit relating to the tax matter described above was filed in
the United States District Court for the Eastern District of New York on January 10, 2008. This
action purports to bring claims on behalf of the Company based on allegations that certain of the
current directors of the Company breached their fiduciary duties and were unjustly enriched in
connection with the tax matter described above. The complaint seeks unspecified compensatory damages on behalf of
Pall Corporation, disgorgement of defendants profits, benefits and other compensation, equitable
and non-monetary relief, and costs and expenses. The Company, acting in its capacity as nominal
defendant, moved to dismiss the complaint for lack of subject matter jurisdiction over the
complaint. On May 23, 2008, the plaintiff filed a notice of voluntary dismissal without prejudice,
which was subsequently granted by the Court.
Other Proceedings:
The SEC and U.S. Attorneys Office for the Eastern District of New York are conducting
investigations in connection with the tax matter described above. The Company is cooperating with
these investigations.
37
Environmental Matters
The Companys condensed consolidated balance sheet at April 30, 2008 contains a reserve for
environmental liabilities of approximately $15,566, which relate primarily to the previously
reported environmental proceedings involving a Company subsidiary, Gelman Sciences Inc., pertaining
to groundwater contamination. In the opinion of management, the Company is in substantial
compliance with applicable environmental laws and its accruals for environmental remediation are
adequate at this time.
Pinellas Park, Florida
Pursuant to the Florida Department of Environmental Protections (FDEP) requirements and
requests in January 2007, the Company installed one on-site monitoring well. Groundwater sampling
and analysis in accordance with FDEP Underground Injection Control requirements will continue for
one year. Upon completion of the monitoring activities, the Company will prepare a Site Assessment
Report Addendum, delineating the soil and groundwater contamination for FDEP review. The report
will also present the scope of all remediation tasks.
Hauppauge, New York
While the motions related to the legal proceedings surrounding this matter were pending, the
parties enlisted the aid of a mediator to negotiate a settlement of the case. The parties met with
the mediator on July 30 through August 1, 2007, which resulted in a tentative settlement agreement,
subject to drafting of definitive settlement documents. During the process of negotiating the
settlement documents, a disagreement developed between the plaintiff and the primary defendants as
to the terms of establishment of the settlement fund that had been agreed upon at the mediation.
This dispute has not been resolved and the proposed settlement has not yet been achieved.
The summary judgment motions remains pending without a decision. On September 27, 2007, the
Court issued a decision on Palls motions in limine to preclude testimony by the experts for
plaintiff and third-party plaintiff Barbara Gross, granting the motions in part and denying them in
part.
If the settlement is completed as contemplated, Palls responsibility will be fixed and it
will be released from further liability to the plaintiff or third-party plaintiffs. If it is not
completed and Palls motion for summary judgment is denied, the case will continue. If that
happens, Pall will remain subject to potential liability and an allocation of some portion of the
response costs paid by plaintiff to the State of New York.
ITEM 1A. RISK FACTORS.
There is no material change in the risk factors reported in Item 1A of the 2007 Form 10-K.
This report contains certain forward-looking statements which reflect managements expectations
regarding future events and operating performance and speak only as of the date hereof. These
statements are subject to risks and uncertainties, which could cause actual results to differ
materially. For a description of these risks see Managements Discussion and Analysis of Financial
Condition and Results of Operations Forward-Looking Statements and Risk Factors.
38
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|
(a) |
|
During the period covered by this report, the Company did not sell any of its equity
securities that were not registered under the Securities Act of 1933. |
|
|
(b) |
|
Not applicable. |
|
|
(c) |
|
The following table provides information with respect to purchases made by or on behalf
of the Company or any affiliated purchaser of shares of the Companys common stock. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
Value of Shares that |
|
|
|
Total Number |
|
|
|
|
|
|
Part of Publicly |
|
|
May Yet Be Purchased |
|
|
|
of Shares |
|
|
Average Price |
|
|
Announced Plans or |
|
|
Under the Plans or |
|
Period |
|
Purchased |
|
|
Paid Per Share |
|
|
Programs (1) |
|
|
Programs (1) |
|
February 1, 2008 to
February 29, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
348,232 |
|
March 1, 2008 to
March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
348,232 |
|
April 1, 2008 to
April 30, 2008 |
|
|
2,138 |
|
|
$ |
36.58 |
|
|
|
2,138 |
|
|
$ |
270,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,138 |
|
|
$ |
36.58 |
|
|
|
2,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On October 14, 2004, the Companys board of directors authorized the expenditure of up
to $200,000 for the repurchase of the Companys common stock. On November 15, 2006, the
board authorized an additional expenditure of $250,000 to repurchase shares. The Companys
shares may be purchased over time, as market and business conditions warrant. There is no
time restriction on this authorization. During the three and nine months ended April 30,
2008, the Company purchased 2,138 shares in open-market transactions at an aggregate cost
of $78,211 with an average price per share of $36.58. At April 30, 2008, approximately
$270,021 remained available to be expended under the current stock repurchase programs.
Repurchased shares are held in treasury for use in connection with the Companys
stock-based compensation plans and for general corporate purposes. |
ITEM 6. EXHIBITS.
See the Exhibit Index for a list of exhibits filed herewith or incorporated by reference
herein.
39
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.
|
|
|
|
|
|
Pall Corporation
|
|
June 9, 2008 |
/s/ LISA MCDERMOTT
|
|
|
Lisa McDermott |
|
|
Chief Financial Officer
and Treasurer |
|
|
|
|
|
|
/s/ FRANCIS MOSCHELLA
|
|
|
Francis Moschella |
|
|
Vice President - Corporate Controller
Chief Accounting Officer |
|
40
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
3(i)*
|
|
Restated Certificate of Incorporation of the Registrant as amended through November 23,
1993, filed as Exhibit 3(i) to the Registrants Annual Report on Form 10-K for the fiscal year
ended July 30, 1994. |
|
|
|
3(ii)*
|
|
By-Laws of the Registrant as amended effective January 17, 2008, filed as Exhibit 3(ii) to
the Registrants Current Report on Form 8-K filed on January 18, 2008. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C. Section 1350. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C. Section 1350. |
|
|
|
* |
|
Incorporated herein by reference. |
|
|
|
Exhibit filed herewith. |
41