UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended October 31, 2004 or |
|
Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 For the transition period from to |
Commission File Number 1- 4311
PALL CORPORATION
(Exact name of registrant as specified in its charter)
New
York
|
11-1541330 |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
2200 Northern Boulevard, East Hills, NY |
11548 |
|
(Address of principal executive offices) |
(Zip Code) |
(516) 484-5400
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No
On December 6, 2004, there were 123,999,373 outstanding shares of the registrant’s common stock, $.10 par value per share.
Table of Contents
Page No.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
Oct. 31, 2004 |
July 31, 2004 |
||||||
ASSETS |
|||||||
Current assets: | |||||||
Cash
and cash equivalents |
$ | 208,388 | $ | 207,277 | |||
Accounts
receivable, net |
440,382 | 468,905 | |||||
Inventories |
338,136 | 302,861 | |||||
Other
current assets |
91,337 | 90,772 | |||||
Total
current assets |
1,078,243 | 1,069,815 | |||||
Property, plant and equipment, net | 604,670 | 600,383 | |||||
Goodwill, net | 241,428 | 239,660 | |||||
Intangible assets, net | 43,768 | 44,129 | |||||
Other non-current assets | 192,646 | 186,396 | |||||
Total
assets |
$ | 2,160,755 | $ | 2,140,383 | |||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
Current liabilities: | |||||||
Accounts
payable and other current liabilities |
$ | 331,666 | $ | 338,392 | |||
Income
taxes |
20,771 | 42,642 | |||||
Current
portion of long-term debt |
31,656 | 30,514 | |||||
Notes
payable to banks |
32,927 | 28,968 | |||||
Total current liabilities | 417,020 | 440,516 | |||||
Long-term debt, net of current portion | 509,673 | 488,686 | |||||
Deferred taxes and other non-current liabilities | 153,851 | 156,742 | |||||
Total
liabilities |
1,080,544 | 1,085,944 | |||||
Stockholders’ equity: | |||||||
Common
stock, par value $.10 per share |
12,796 | 12,796 | |||||
Capital
in excess of par value |
116,427 | 115,489 | |||||
Retained
earnings |
993,196 | 984,117 | |||||
Treasury
stock, at cost |
(111,388 | ) | (92,047 | ) | |||
Stock
option loans |
(1,976 | ) | (2,308 | ) | |||
Accumulated
other comprehensive income (loss): |
|||||||
Foreign
currency translation |
109,116 | 77,585 | |||||
Minimum
pension liability |
(37,559 | ) | (37,559 | ) | |||
Unrealized
investment losses |
(79 | ) | (3,275 | ) | |||
Unrealized
losses on derivatives |
(322 | ) | (359 | ) | |||
71,156 | 36,392 | ||||||
Total stockholders’ equity | 1,080,211 | 1,054,439 | |||||
Total liabilities and stockholders’ equity | $ | 2,160,755 | $ | 2,140,383 | |||
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)
Three Months Ended | ||||||||
Oct. 31, 2004 |
Oct. 31, 2003 |
|||||||
Net sales | $ | 414,732 | $ | 374,286 | ||||
Cost of sales | 214,860 | 194,221 | ||||||
Gross profit | 199,872 | 180,065 | ||||||
Selling, general and administrative expenses | 145,680 | 131,907 | ||||||
Research and development | 13,713 | 13,708 | ||||||
Restructuring and other charges, net | 5,523 | (3,703 | ) | |||||
Interest expense, net | 5,707 | 5,152 | ||||||
Earnings before income taxes | 29,249 | 33,001 | ||||||
Income taxes | 7,550 | 8,333 | ||||||
Net earnings | $ | 21,699 | $ | 24,668 | ||||
Earnings per share: | ||||||||
Basic |
$ | 0.17 | $ | 0.20 | ||||
Diluted |
$ | 0.17 | $ | 0.19 | ||||
Dividends declared per share | $ | 0.09 | $ | 0.09 | ||||
Average shares outstanding: | ||||||||
Basic |
124,172 | 125,436 | ||||||
Diluted |
125,009 | 126,507 | ||||||
See accompanying notes to condensed consolidated financial statements.
4
PALL CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended |
||||||||
Oct. 31, 2004 |
Oct. 31, 2003 |
|||||||
Operating activities: | ||||||||
Net earnings | $ | 21,699 | $ | 24,668 | ||||
Adjustments
to reconcile net earnings to net cash provided by operating activities: |
||||||||
Restructuring
and other charges, net |
5,523 | (3,703 | ) | |||||
Depreciation
and amortization of long lived assets |
22,138 | 21,557 | ||||||
Other |
1,205 | (3,906 | ) | |||||
Changes
in operating assets and liabilities, net of effects of acquisitions and
dispositions |
(27,883 | ) | (5,683 | ) | ||||
Net cash provided by operating activities | 22,682 | 32,933 | ||||||
Investing activities: | ||||||||
Acquisitions of businesses, net of cash acquired | (1,170 | ) | (679 | ) | ||||
Dispositions of businesses | 1,734 | | ||||||
Advances to and investments in strategic alliances | 340 | (745 | ) | |||||
Proceeds from sale of strategic investments | 915 | | ||||||
Capital expenditures | (17,546 | ) | (10,521 | ) | ||||
Disposals of fixed assets | 1,376 | 524 | ||||||
Proceeds from sale of retirement benefit assets | 10,649 | 8,785 | ||||||
Purchases of retirement benefit assets | (10,613 | ) | (8,665 | ) | ||||
Other | (1,087 | ) | (766 | ) | ||||
Net cash used by investing activities | (15,402 | ) | (12,067 | ) | ||||
Financing activities: | ||||||||
Notes payable | 2,669 | (3,941 | ) | |||||
Long-term borrowings | 117,300 | 13,237 | ||||||
Repayments of long-term debt | (104,313 | ) | (22,394 | ) | ||||
Net proceeds from stock plans | 10,429 | 10,073 | ||||||
Purchase of treasury stock | (29,998 | ) | | |||||
Dividends paid | (11,162 | ) | (11,210 | ) | ||||
Net cash used by financing activities | (15,075 | ) | (14,235 | ) | ||||
Cash flow for period | (7,795 | ) | 6,631 | |||||
Cash and cash equivalents at beginning of year | 207,277 | 149,753 | ||||||
Effect of exchange rate changes on cash | 8,906 | 4,697 | ||||||
Cash and cash equivalents at end of period | $ | 208,388 | $ | 161,081 | ||||
Supplemental disclosures: | ||||||||
Interest
paid |
$ | 11,952 | $ | 5,079 | ||||
Income
taxes paid (net of refunds) |
27,757 | 15,779 |
See accompanying notes to condensed consolidated financial statements.
5
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
The condensed consolidated financial information included herein is unaudited. However, such information reflects all adjustments of a normal recurring nature which are, in the opinion of management, necessary to present fairly the Company’s 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 Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2004 (“2004 Form 10-K”).
Certain prior year amounts have been reclassified to conform to the current year presentation.
STOCK PLANS
On September 17, 2004, the Board of Directors approved the 2005 Stock Compensation Plan (the “2005 Plan”) providing for the issuance of up to 5,000 shares and amended the 2001 Stock Option Plan for Non-Employee Directors to reduce the total number of shares remaining available for grants made under that plan to 150. The 2005 Plan permits the Company to grant to its employees forms of equity compensation other than stock options (that is, restricted shares, restricted units, performance shares and performance units). The Company’s shareholders approved the 2005 Plan at the annual shareholders’ meeting on November 17, 2004. All other Company stock option plans have been terminated effective November 17, 2004, but options outstanding thereunder will remain in effect in accordance with their terms.
The Company has elected to continue to apply Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, to account for its stock plans.
The following table illustrates the effect on net earnings and earnings per share if the Company had accounted for its stock based compensation plans using the Black-Scholes option pricing model to determine the fair value of stock based compensation under Statement of Financial Accounting Standard (“SFAS”) No. 123, as amended by SFAS No. 148:
Three Months Ended | |||||||
Oct. 31, 2004 | Oct. 31 2003 | ||||||
Net earnings, as reported | $ | 21,699 | $ | 24,668 | |||
Pro forma stock compensation expense, net of tax benefit | 2,848 | 2,848 | |||||
Pro forma net earnings | $ | 18,851 | $ | 21,820 | |||
Earnings per share: | |||||||
Basicas reported | $ | .17 | $ | .20 | |||
Basicpro forma | $ | .15 | $ | .17 | |||
Dilutedas reported | $ | .17 | $ | .19 | |||
Dilutedpro forma | $ | .15 | $ | .17 |
NOTE 2 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act provides for a special one-time tax deduction of 85% of certain foreign earnings that are repatriated, as defined in the Act. On November 15, 2004, the FASB issued a proposed FASB staff position, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (“SFAS 109-b”). SFAS 109-b would allow companies additional time to evaluate the effect of the Act as to whether unrepatriated foreign earnings continue to qualify for the SFAS 109 exception regarding non-recognition of deferred tax liabilities and would require explanatory disclosures from those who need the additional time. Through October 31, 2004, the Company has not provided deferred taxes on the undistributed earnings of foreign subsidiaries since substantially all such earnings were expected to be permanently invested in foreign operations. Whether the Company will ultimately take advantage of this provision depends on a number of factors, including reviewing future Congressional or Treasury Department guidance, before a determination can be made. The range of reasonably possible amounts that are being considered for repatriation due to the aforementioned provision is between zero and $500,000. The related potential range of income tax is between zero and $26,250.
6
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
(Unaudited)
NOTE 3 BALANCE SHEET DETAILS
Oct.
31, 2004
|
July
31, 2004
|
||||||
Accounts receivable, net: | |||||||
Accounts
receivable |
$ | 453,256 | $ | 480,967 | |||
Less:
Allowances for doubtful accounts |
12,874 | 12,062 | |||||
$ | 440,382 | $ | 468,905 | ||||
Inventories: | |||||||
Raw
materials and components |
$ | 97,458 | $ | 88,341 | |||
Work-in-process |
49,247 | 45,747 | |||||
Finished
goods |
191,431 | 168,773 | |||||
$ | 338,136 | $ | 302,861 | ||||
Property, plant and equipment, net: | |||||||
Property,
plant and equipment |
$ | 1,244,999 | $ | 1,216,447 | |||
Less:
Accumulated depreciation and
amortization |
640,329 | 616,064 | |||||
$ | 604,670 | $ | 600,383 | ||||
NOTE 4 GOODWILL AND INTANGIBLE ASSETS
Oct.
31, 2004
|
July 31, 2004
|
||||||
Medical | $ | 28,929 | $ | 28,433 | |||
BioPharmaceuticals | 28,632 | 28,602 | |||||
Life Sciences | 57,561 | 57,035 | |||||
General Industrial | 155,755 | 154,753 | |||||
Aerospace | 6,436 | 6,127 | |||||
Microelectronics | 21,676 | 21,745 | |||||
Industrial | 183,867 | 182,625 | |||||
$ | 241,428 | $ | 239,660 | ||||
7
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
(Unaudited)
Oct. 31, 2004 | July 31, 2004 | ||||||||||||
Gross |
Accumulated
Amortization |
Gross |
Accumulated Amortization |
||||||||||
Patents and unpatented technology | $ | 77,592 | $ | 37,445 | $ | 76,724 | $ | 36,108 | |||||
Trademarks | 3,653 | 1,510 | 3,619 | 1,432 | |||||||||
Other | 5,354 | 3,876 | 5,090 | 3,764 | |||||||||
$ | 86,599 | $ | 42,831 | $ | 85,433 | $ | 41,304 | ||||||
NOTE 5 OTHER NON-CURRENT ASSETS
NOTE 6 PRODUCT WARRANTY
NOTE 7 TREASURY STOCK
On October 17, 2003, the Company’s Board of Directors (“the Board”) authorized the expenditure of up to $200,000 to repurchase shares of the Company’s common stock. On October 14, 2004, the Board authorized the additional expenditure of up to another $200,000 for the repurchase of the Company’s common stock. The Company’s shares may be purchased over time, as market and business conditions warrant. There is no time restriction on this authorization. During the first quarter of fiscal 2005, the Company purchased 1,228 shares in open-market transactions at an aggregate cost of $29,998 with an average price per share of $24.43. Therefore, $295,002 remains to be expended under the current stock repurchase programs. Repurchased shares are held in treasury for use in connection with the Company’s stock plans and for general corporate purposes.
8
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
(Unaudited)
NOTE 8 LONG-TERM DEBT
On August 24, 2004, the Company entered into a $300,000 unsecured senior revolving credit facility with a syndicate of banks, which expires on August 24, 2009. Simultaneously, the Company borrowed $125,000 under this facility principally to repay (1) $71,200 ($54,000 outstanding as of July 31, 2004) of borrowings under its existing $200,000 unsecured senior revolving credit facility entered into on August 29, 2000, (2) the $50,000 balance due on its $100,000 bank loan entered into on October 18, 2002, which otherwise was to mature on October 18, 2007 and (3) various fees associated with the new facility. Both the $200,000 revolving credit facility and the $100,000 term loan were terminated upon the execution of the new revolving credit facility.
Borrowings under the new facility bear interest at either a variable rate based upon LIBOR or at the prime rate of the Administrative Agent. The new facility contains customary affirmative and negative covenants, financial covenants, representations and warranties and events of defaults. The financial covenants are as follows:
i. | Minimum interest coverage ratio: The Ratio of Earnings Before Net Interest, Taxes, Depreciation, Amortization and the Non-Cash Portion of Non-Recurring Charges and Income (“EBITDA”) to Net Interest Expense shall not be less than 5 to 1 for the last four consecutive fiscal quarters. |
ii. | Maximum funded debt ratio: The Ratio of Consolidated Funded Debt to EBITDA shall not exceed 3 to 1. | |
NOTE 9 CONTINGENCIES AND COMMITMENTS
9
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
(Unaudited)
NOTE 10 RESTRUCTURING AND OTHER CHARGES, NET
Three Months Ended Oct. 31, 2004 |
Restructuring |
Other Charges/ (Income) |
Total |
|||||||
Impairment of investments (a) | $ | | $ | 2,875 | $ | 2,875 | ||||
Severance (b) | 2,665 | | 2,665 | |||||||
Other exit costs (b) | 485 | | 485 | |||||||
Gain on sale of assets (b) | (387 | ) | | (387 | ) | |||||
Other | | (115 | ) | (115 | ) | |||||
$ | 2,763 | $ | 2,760 | $ | 5,523 | |||||
Cash | $ | 2,763 | $ | 95 | $ | 2,858 | ||||
Non-cash | | 2,665 | 2,665 | |||||||
$ | 2,763 | $ | 2,760 | $ | 5,523 | |||||
Three Months Ended Oct. 31, 2003 |
||||||||||
Severance (b) | $ | 1,570 | $ | | $ | 1,570 | ||||
German pension liability (c) | (5,289 | ) | (5,289 | ) | ||||||
Other | | 16 | 16 | |||||||
$ | 1,570 | $ | (5,273 | ) | $ | (3,703 | ) | |||
Cash | $ | 1,570 | $ | | $ | 1,570 | ||||
Non-cash | | (5,273 | ) | (5,273 | ) | |||||
$ | 1,570 | $ | (5,273 | ) | $ | (3,703 | ) | |||
(a) | In the first quarter of fiscal 2005, the Company recorded a charge of $2,875 primarily for the other-than-temporary diminution in value of its strategic investment in VITEX. For further discussion of the Company’s investment in VITEX refer to the Other Non-Current Assets note. |
(b) | In the first quarter of fiscal 2005, the Company began to implement its plan for an integrated business approach within the Company that will be organized around three operating segments: Life Sciences, comprising Medical and BioPharmaceuticals; Aeropower, comprising Aerospace and the Machinery & Equipment portion of the current General Industrial segment; and Process Technologies, comprising General Industrial’s Food & Beverage, Fuels & Chemicals, Power Generation, Municipal Water divisions and Microelectronics. In addition, the Company continued its cost reduction initiatives. As a result, the Company recorded severance liabilities of $2,665 for the termination of certain employees worldwide as well as other exit costs of $485. |
In addition, in the first quarter of fiscal 2005, the Company recorded a gain of $387 on the sale of a certain non-core machine and tool business in Germany. |
In the first quarter of fiscal 2004, the Company implemented a plan to reorganize and streamline its operations in Japan. The plan, which affected both sales and support personnel, is expected to increase productivity and result in a more efficient sales focused operation. In connection with this plan, the Company recorded severance liabilities for the termination of employees. |
(c) | Reflects an adjustment to pension liabilities in Germany due to an overaccrual of pension expense that occurred during the preceding five-year period, the effect of which was not significant in any period. |
10
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
(Unaudited)
Severance |
Lease
Termination Liabilities & Other |
Total |
||||||||
Fiscal
2005
|
||||||||||
Balance at July 31, 2004 | $ | | $ | | $ | | ||||
Additions | 2,665 | 485 | 3,150 | |||||||
Utilized | (641 | ) | (85 | ) | (726 | ) | ||||
Balance at Oct. 31, 2004 | $ | 2,024 | $ | 400 | $ | 2,424 | ||||
Fiscal 2004 | ||||||||||
Balance at July 31, 2004 | $ | 1,352 | $ | | $ | 1,352 | ||||
Utilized | (1,138 | ) | | (1,138 | ) | |||||
Balance at Oct. 31, 2004 | $ | 214 | $ | | $ | 214 | ||||
Fiscal 2003 | ||||||||||
Balance at July 31, 2004 | $ | 1,062 | $ | 250 | $ | 1,312 | ||||
Utilized | (191 | ) | (11 | ) | (202 | ) | ||||
Balance at Oct. 31, 2004 | $ | 871 | $ | 239 | $ | 1,110 | ||||
Fiscal 2002 | ||||||||||
Balance at July 31, 2004 | $ | 633 | $ | 4 | $ | 637 | ||||
Utilized | (82 | ) | (2 | ) | (84 | ) | ||||
Balance at Oct. 31, 2004 | $ | 551 | $ | 2 | $ | 553 | ||||
NOTE 11 COMPONENTS OF NET PERIODIC PENSION COST
Three Months Ended | |||||||||||||
U.S. Plans | Foreign Plans | ||||||||||||
Oct. 31, 2004 |
Oct. 31, 2003 |
Oct. 31, 2004 |
Oct. 31, 2003 |
||||||||||
Service cost | $ | 1,658 | $ | 1,635 | $ | 1,834 | $ | 1,753 | |||||
Interest cost | 2,307 | 2,104 | 3,147 | 2,666 | |||||||||
Expected return on plan assets | (1,299 | ) | (1,364 | ) | (2,284 | ) | (2,140 | ) | |||||
Amortization of prior service cost | 221 | 187 | 126 | 120 | |||||||||
Amortization of net transition asset | (11 | ) | (20 | ) | 8 | 8 | |||||||
Recognized actuarial loss | 375 | 299 | 1,288 | 956 | |||||||||
Gain due to curtailments and settlements | | | | (156 | ) | ||||||||
Net periodic benefit cost | $ | 3,251 | $ | 2,841 | $ | 4,119 | $ | 3,207 | |||||
11
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
(Unaudited)
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, such as those issuable upon exercise of stock options that meet certain criteria, 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 of 166 and 180 shares were not included in the computation of diluted shares for the three months ended October 31, 2004 and October 31, 2003, respectively, because their effect would have been antidilutive.
The following is a reconciliation between basic shares outstanding and diluted shares outstanding:
Three
Months Ended
|
|||||||
Oct.
31, 2004
|
Oct.
31, 2003
|
||||||
Basic shares outstanding | 124,172 | 125,436 | |||||
Effect of dilutive securities: | |||||||
Stock
options |
833 | 1,067 | |||||
Other |
4 | 4 | |||||
Diluted shares outstanding | 125,009 | 126,507 | |||||
NOTE 13 COMPREHENSIVE INCOME
Three
Months Ended
|
|||||||
Oct. 31, 2004
|
Oct. 31, 2003
|
||||||
Net earnings | $ | 21,699 | $ | 24,668 | |||
Unrealized translation adjustment | 30,333 | 23,683 | |||||
Income taxes | 1,198 | 2,566 | |||||
Unrealized translation adjustment, net | 31,531 | 26,249 | |||||
Change in unrealized investment gains | 3,384 | 698 | |||||
Income taxes | (188 | ) | (79 | ) | |||
Change in unrealized investment gains | 3,196 | 619 | |||||
Unrealized gains (losses) on derivatives | 56 | (2 | ) | ||||
Income taxes | (19 | ) | 1 | ||||
Unrealized gains (losses) on derivatives, net | 37 | (1 | ) | ||||
Total comprehensive income | $ | 56,463 | $ | 51,535 | |||
Three
Months Ended
|
|||||||
Oct. 31, 2004
|
Oct. 31, 2003
|
||||||
Unrealized gains arising during the period | $ | 510 | $ | 698 | |||
Income taxes | (189 | ) | (79 | ) | |||
Net unrealized gains arising during the period | 321 | 619 | |||||
Reclassification adjustment for unrealized loss included in net earnings | 2,875 | | |||||
Change in unrealized accumulated investment gains, net | $ | 3,196 | $ | 619 | |||
12
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
(Unaudited)
NOTE 14 SEGMENT INFORMATION AND GEOGRAPHIES
MARKET SEGMENT INFORMATION |
Three Months Ended | ||||||
Oct. 31, 2004 | Oct. 31, 2003 | ||||||
SALES TO UNAFFILIATED CUSTOMERS: | |||||||
Medical | $ | 95,465 | $ | 92,281 | |||
BioPharmaceuticals | 70,789 | 60,013 | |||||
Total Life Sciences | 166,254 | 152,294 | |||||
General Industrial | 158,221 | 138,623 | |||||
Aerospace | 38,837 | 43,543 | |||||
Microelectronics | 51,420 | 39,826 | |||||
Total Industrial | 248,478 | 221,992 | |||||
Total | $ | 414,732 | $ | 374,286 | |||
OPERATING PROFIT: | |||||||
Medical | $ | 13,795 | $ | 9,726 | |||
BioPharmaceuticals | 16,941 | 15,227 | |||||
Life Sciences | 30,736 | 24,953 | |||||
General Industrial | 13,192 | 12,824 | |||||
Aerospace | 5,089 | 11,372 | |||||
Microelectronics | 8,514 | 4,747 | |||||
Industrial | 26,795 | 28,943 | |||||
Subtotal
|
57,531 | 53,896 | |||||
Restructuring and other charges | (5,523 | ) | 3,703 | ||||
General corporate expenses | (17,052 | ) | (19,446 | ) | |||
Interest expense, net | (5,707 | ) | (5,152 | ) | |||
Earnings before income taxes | $ | 29,249 | $ | 33,001 | |||
GEOGRAPHIES: | |||||||
SALES TO UNAFFILIATED CUSTOMERS: | |||||||
Western Hemisphere | $ | 152,278 | $ | 141,987 | |||
Europe | 169,758 | 159,723 | |||||
Asia | 92,696 | 72,576 | |||||
Total | $ | 414,732 | $ | 374,286 | |||
INTERCOMPANY SALES BETWEEN GEOGRAPHIC AREAS: | |||||||
Western Hemisphere | $ | 49,601 | $ | 40,028 | |||
Europe | 26,159 | 23,080 | |||||
Asia | 1,259 | 999 | |||||
Total | $ | 77,019 | $ | 64,107 | |||
TOTAL SALES: | |||||||
Western Hemisphere | $ | 201,879 | $ | 182,015 | |||
Europe | 195,917 | 182,803 | |||||
Asia | 93,955 | 73,575 | |||||
Eliminations | (77,019 | ) | (64,107 | ) | |||
Total | $ | 414,732 | $ | 374,286 | |||
13
Three Months
Ended |
|||||||
Oct. 31, 2004
|
Oct. 31, 2003 |
||||||
OPERATING PROFIT: | |||||||
Western Hemisphere | $ | 27,063 | $ | 20,742 | |||
Europe | 21,014 | 22,773 | |||||
Asia | 13,311 | 10,508 | |||||
Eliminations | (3,857 | ) | (127 | ) | |||
Subtotal |
57,531 | 53,896 | |||||
Restructuring and other charges | (5,523 | ) | 3,703 | ||||
General corporate expenses | (17,052 | ) | (19,446 | ) | |||
Interest expense, net | (5,707 | ) | (5,152 | ) | |||
Earnings before income taxes | $ | 29,249 | $ | 33,001 | |||
MARKET SEGMENT INFORMATION: |
Three
Months Ended
|
Year
Ended
|
||||||||||||||
Oct.
31, 2003 |
Jan.
31, 2004 |
Apr.
30, 2004 |
July
31, 2004 |
July
31, 2004 |
||||||||||||
SALES TO UNAFFILIATED CUSTOMERS: | ||||||||||||||||
Medical | $ | 92,281 | $ | 106,587 | $ | 119,662 | $ | 125,485 | $ | 444,015 | ||||||
BioPharmaceuticals | 60,013 | 68,023 | 72,118 | 77,022 | 277,176 | |||||||||||
Life Sciences | $ | 152,294 | $ | 174,610 | $ | 191,780 | $ | 202,507 | $ | 721,191 | ||||||
OPERATING PROFIT: | ||||||||||||||||
Medical | $ | 9,726 | $ | 13,588 | $ | 23,783 | $ | 32,625 | $ | 79,722 | ||||||
BioPharmaceuticals | 15,227 | 17,149 | 17,614 | 19,110 | 69,100 | |||||||||||
Life Sciences | $ | 24,953 | $ | 30,737 | $ | 41,397 | $ | 51,735 | $ | 148,822 | ||||||
NOTE 15 SUBSEQUENT EVENT
14
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements and Risk Factors
You should read the following discussion together with Pall’s condensed consolidated financial statements and notes thereto and other financial information in this Form 10-Q and in Pall’s Annual Report on Form 10-K for the fiscal year ended July 31, 2004. The discussions under the subheadings “Review of Market Segments and Geographies” below are in local currency unless indicated otherwise. Management considers local currency growth an important measure because by excluding the volatility of exchange rates, underlying volume growth is clearer. As used below, “½%” indicates that we have rounded the relevant data up or down to the nearest one-half percentage point. 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. These statements are based on current Company management expectations and are subject to risks and uncertainties which could cause actual results to differ materially. Such risks and uncertainties include, but are not limited to: fluctuations in foreign currency exchange rates; regulatory approval and market acceptance of new technologies; changes in product mix and product pricing and in interest rates and cost of raw materials; the Companys success in enforcing its patents and protecting its proprietary products and manufacturing techniques and its ability to achieve the savings anticipated from its cost reduction initiatives; global and regional economic conditions and legislative, regulatory and political developments; and domestic and international competition in the Company’s global markets.
Results of Operations
Review of Consolidated Results
Sales in the quarter increased 11% to $414,732 from $374,286 in the first quarter of last year. Exchange rates increased reported sales in the quarter by $17,468, or 5%, primarily due to the strengthening of the Euro and to a lesser extent the British Pound and Japanese Yen. In local currency (i.e., had exchange rates not changed year over year), sales increased 6%. Overall, a decrease in pricing reduced sales by about 1%, which was offset by an increase in volume of 7%. Sales growth was particularly strong in our Microelectronics segment, where sales increased 25%, as the semiconductor industry continued to recover. Our BioPharmaceuticals and General Industrial segments posted double-digit and high single-digit growth, respectively. Sales in our Medical segment were flat as growth in our core blood business was offset by a weakness in our BioSciences OEM business (please see the section titled “Review of Market Segments and Geographies” for a discussion of the integration of our Medical and BioSciences business). Growth in the quarter was partly offset by a decline in Aerospace sales attributable to a shortfall in military sales. By geography, Asia reported double-digit sales growth, while the Western Hemisphere achieved solid mid single-digit growth. The growth in Asia and the Western Hemisphere was partly offset by a decline in sales in Europe, primarily attributable to lower Aerospace sales and the sale of our machine and tool business in Germany. We expect overall sales in local currency to grow in the mid-single digit range for the full fiscal year 2005. For a detailed discussion of sales, refer to “Review of Market Segments and Geographies.”
Cost of sales in the quarter, as a percentage of sales, decreased to 51.8% from 51.9% last year. The improvement in cost of sales, as a percentage of sales reflects the impact of our cost reduction initiatives partly offset by a decline in pricing (primarily Medical) and a change in product mix. We are expecting a modest improvement in cost of sales, as a percentage of sales, for the full fiscal year 2005 as the impact of our cost reduction initiatives continues to increase (see below for a discussion of our cost reduction programs).
Selling, general and administrative expenses in the quarter, as a percentage of sales, decreased to 35.1% as compared to 35.2% last year. The improvement in selling, general and administrative expenses reflects the effects of our cost reduction programs, partly offset by the impact of foreign exchange. Foreign currency translation is estimated to have increased selling, general and administrative expenses by approximately $7,252 in the quarter.
We continue to move forward with our cost reduction initiatives. We expect to attain $2,500 in savings per quarter in fiscal 2005 related to our Indirect Expenditure cost reduction initiatives for items such as freight, office supplies, parcel delivery and travel. The program was implemented in the Western Hemisphere in fiscal 2004 and will expand to Europe and Asia this fiscal year. Other cost reduction initiatives focus on our cost of manufacturing. We expect to achieve $10,000 in savings in fiscal 2005 and continuing savings in fiscal 2006 as a result of these efforts. We are also in the process of creating an integrated business approach within the Company that will be organized around three operating segments: Life Sciences, comprising Medical and BioPharmaceuticals; Aeropower, comprising Aerospace and the Machinery & Equipment portion of the current General Industrial segment; and Process Technologies, comprising General Industrial’s Food & Beverage, Fuels & Chemicals, Power Generation, Municipal Water divisions and Microelectronics. This new structure will enable us to better meet our customers’ needs while achieving greater efficiencies and profit growth with this leaner structure. We are expecting to achieve a modest improvement in selling, general and administrative expenses, as a percentage of sales, for the full fiscal year 2005.
15
R&D expenses were on par with last year in dollars and decreased to 3.3% of sales in the quarter as compared with 3.7% last year. We expect R&D as a percentage of sales to increase slightly for the full fiscal year 2005.
In the first quarter of fiscal 2005, we recorded restructuring and other charges, net, of $5,523. The restructuring and other charges, net, reflect restructuring charges of $2,763 related to our cost reduction initiatives including our plans to create an integrated business approach centered around three businesses as discussed above. In addition, the charges in the current quarter include the write-down of a strategic investment in V.I. Technologies, Inc. (VITEX), that was deemed other-than-temporarily impaired. In the first quarter of fiscal 2004, we recorded non-recurring income, net, of $3,703 reflecting non-recurring income related to a decrease of pension liabilities in Germany due to an overstatement of pension expense that occurred during a five-year period, the effect of which was not significant in any period, partly offset by severance charges of $1,570 related to the reorganization of our Japanese operations. The details of the charges for the quarters ended October 31, 2004 and October 31, 2003 can be found in the Restructuring and Other Charges note accompanying the condensed consolidated financial statements. We expect to recover the costs of the restructuring-related charges within two years from the date of the charge.
The following table summarizes the activity for the first quarter of fiscal 2005 related to restructuring liabilities that were recorded in fiscal 2005, 2004, 2003 and 2002:
Severance |
Lease
Termination Liabilities & Other
|
Total |
||||||||
Fiscal 2005 | ||||||||||
Balance at July 31, 2004 | $ | | $ | | $ | | ||||
Additions | 2,665 | 485 | 3,150 | |||||||
Utilized | (641 | ) | (85 | ) | (726 | ) | ||||
Balance at Oct. 31, 2004 | $ | 2,024 | $ | 400 | $ | 2,424 | ||||
Fiscal 2004 | ||||||||||
Balance at July 31, 2004 | $ | 1,352 | $ | | $ | 1,352 | ||||
Utilized | (1,138 | ) | | (1,138 | ) | |||||
Balance at Oct. 31, 2004 | $ | 214 | $ | | $ | 214 | ||||
Fiscal 2003 | ||||||||||
Balance at July 31, 2004 | $ | 1,062 | $ | 250 | $ | 1,312 | ||||
Utilized | (191 | ) | (11 | ) | (202 | ) | ||||
Balance at Oct. 31, 2004 | $ | 871 | $ | 239 | $ | 1,110 | ||||
16
Severance
|
Lease
Termination Liabilities & Other
|
Total
|
||||||||
Fiscal 2002 | ||||||||||
Balance at July 31, 2004 | $ | 633 | $ | 4 | $ | 637 | ||||
Utilized | (82 | ) | (2 | ) | (84 | ) | ||||
Balance at Oct. 31, 2004 | $ | 551 | $ | 2 | $ | 553 | ||||
Net interest expense was $5,707 as compared with $5,152 in the first quarter of last year reflecting increased interest rates on our variable rate debt. Refer to the Liquidity and Capital Resources section of this Management’s Discussion and Analysis for a discussion of net and gross debt. In fiscal 2005, we expect interest expense to be flat compared with fiscal 2004.
The underlying tax rate was 24% in the quarter, unchanged from the first quarter of last year. We expect to sustain an underlying tax rate of 24% in fiscal 2005.
Net earnings in the quarter were $21,699, or 17 cents per share, compared with net earnings of $24,668, or 19 cents per share last year. In summary, net earnings benefited from organic sales growth, an improvement in gross profit margin and the controlling of operating expenses, offset by the impact of restructuring and other charges, net. The first quarter of fiscal 2005 included restructuring and other charges, net, of $5,523 (related to our plans to create three integrated businesses and the impairment of a strategic investment), whereas the first quarter of fiscal 2004 included non-recurring income, net, of $3,703 (related to the adjustment of pension liabilities in Germany partly offset by severance charges related to the reorganization of our Japan operations). We estimate that foreign currency translation added approximately 1 cent to earnings per share in the quarter. We continue to expect earnings per share for fiscal year 2005 to be in the range of $1.38 to $1.52 per share. In light of the cost reduction initiatives, we expect to incur severance and other restructuring costs over the next three quarters; however, because these costs are not estimable at this time, this range does not contemplate such charges.
Review of Market Segments and Geographies
Market Segments:
Three
Months Ended
|
Oct.
31, 2004
|
Oct.
31, 2003
|
%
Change |
Exchange
Rate Difference |
%
Change in Local Currency |
|||||||||||
Medical | $ | 95,465 | $ | 92,281 | 3 | ½ | $ | 3,100 | | |||||||
BioPharmaceuticals | 70,789 | 60,013 | 18 | 3,555 | 12 | |||||||||||
Total Life Sciences | 166,254 | 152,294 | 9 | 6,655 | 5 | |||||||||||
General Industrial | 158,221 | 138,623 | 14 | 8,110 | 8 | ½ | ||||||||||
Aerospace | 38,837 | 43,543 | (11 | ) | 1,113 | (13 | ½) | |||||||||
Microelectronics | 51,420 | 39,826 | 29 | 1,590 | 25 | |||||||||||
Total Industrial | 248,478 | 221,992 | 12 | 10,813 | 7 | |||||||||||
Total | $ | 414,732 | $ | 374,286 | 11 | $ | 17,468 | 6 | ||||||||
Life Sciences sales increased 5% in the current quarter compared with the first quarter last year. Life Sciences represented approximately 40% of our total sales in the quarter compared with 41% last year.
Within Life Sciences, Medical segment sales were flat as growth in the Blood portion of the business was offset by a shortfall in BioSciences. Sales in Asia, which comprises the smallest portion of our Medical business, grew 7½%. Sales in Europe were up slightly, while sales in the Western Hemisphere were down slightly. Within Medical, sales in our Blood Filtration and Hospital submarkets grew 3½% (attributable to the Western Hemisphere) and 12½% (driven by Europe and Asia), respectively. There continues to be increasing core market demand for our blood filtration products. New water filtration products for medical applications such as the Aquasafe filter are growing and we have introduced our enhanced Bacterial Detection System to blood centers and it has begun contributing to sales. In BioSciences, the other Medical submarket, sales were down 10% reflecting a shortfall in our OEM business in the quarter. The decline in OEM business resulted from the termination of IV filter usage by a major OEM customer. Sales in the laboratory portion of this business were up 3%. By geography, the decline in BioSciences sales reflects shortfalls in the Western Hemisphere and Europe. Sales in Asia were flat. Overall, we continue to expect sales in our Medical segment to grow in the mid-single digit range for the full fiscal year 2005.
17
BioPharmaceuticals segment sales increased 12% in the quarter as compared with last year driven by strong system sales. By geography, the growth was driven by double-digit gains in the Western Hemisphere (16½%) and Asia (30½%). Sales in Europe were up 4½%. Industry reports suggest that the plasma industry is projected to recover later this fiscal 2005. Overall, for the full fiscal year 2005, we continue to expect sales in our BioPharmaceuticals segment to grow in the high single digits.
Our Industrial business accounted for approximately 60% of total sales in the quarter as compared with 59% last year. Industrial sales grew 7% as compared to the first quarter of last year. Sales in our Microelectronics segment increased 25%, while General Industrial segment sales, which accounted for about 64% of our Industrial business, were up 8½%. Aerospace sales were down 13½%.
The increase in sales in our General Industrial segment was driven by double-digit growth in our Power Generation, Fuels & Chemicals and Water Processing submarkets. Sales in our Power Generation submarket increased 26½% with all geographies contributing to this gain. In Asia, Power Generation sales increased 65½% reflecting strong sales in Japan and China. Sales in our Fuels & Chemicals submarket grew 19% reflecting double-digit growth in all geographies. Water Processing sales grew 27% in the quarter. We are continuing to see very strong growth in the Western Hemisphere (up 72%), driven by tighter EPA regulations, as well as in Asia (up 72½%), as water shortages and population pressures, particularly in China, create new opportunities for our products. Sales in our Machinery & Equipment submarket decreased 1½%, as strong growth in the Western Hemisphere and Asia were offset by a decline in Europe. Sales in Europe were reduced due to the sale of our German machine and tool business, in the current quarter and in the second quarter of fiscal 2004. Excluding prior year first quarter sales of $3,697 related to the machine and tool business in Germany, overall Machinery & Equipment sales were up 8% on a pro forma basis. Overall, we continue to expect sales in our General Industrial segment to grow in the high single digits in fiscal 2005.
Aerospace sales decreased 13½%, reflecting a decline in Military sales of 26% (all geographies). The commercial portion of our Aerospace business was flat in the quarter. The shortfall in Military sales reflects timing of large projects. Military sales comprised approximately 43% of total Aerospace sales compared with 50% last year. We continue to expect low single digit growth in Aerospace sales in fiscal 2005.
Microelectronics sales grew 25% compared with last year, marking the fourth consecutive quarter of double-digit growth. Growth in the quarter was driven by the Western Hemisphere and Asia where sales increased 39½% and 27½%, respectively. Sales in Europe, the smallest of our Microelectronics’ markets, was up 2%. We are well positioned to take advantage of the semiconductor industry recovery. One of our strategies is to reduce dependence on the cyclical semiconductor industry and we are working on several new initiatives which we hope will generate sales by the next downturn. These “macroelectronic” market applications include display screens, printing technologies and data storage. Industry indicators support our current projection of low double-digit sales growth in this segment in fiscal 2005.
The consolidated operating profit as a percentage of sales was 13.9% as compared to 14.4% last year.
In Life Sciences, overall operating profit as a percentage of sales increased to 18.5% from 16.4% last year, reflecting an increase in Medical operating profit margin, partly offset by a decline in BioPharmaceuticals. Operating profit dollars increased $5,783 or 23%.
Within Life Sciences, Medical operating profit improved to 14.5% from 10.5% last year. Operating profit dollars increased by $4,069 or 42%. The improvement in operating profit reflects the impact of our cost reduction programs, particularly with manufacturing efficiencies. Operating profit in BioPharmaceuticals was 23.9% of sales as compared to 25.4% last year. The decline in operating profit margin reflects increased system sales which carry a lower margin. Operating profit dollars increased $1,714 or 11½%, generated by the strong growth in sales.
Overall operating profit margins in Industrial were 10.8% as compared with 13% last year. General Industrial operating profit was 8.3% as compared to 9.3% last year, attributable to a shift in product mix. Operating profit dollars increased 3% to $13,192 reflecting the sales growth as discussed previously. Aerospace operating profit was 13.1% as compared to 26.1% last year, while operating profit dollars declined by $6,283, or 55%. The shortfall in operating profit margin and dollars reflects lower military sales as discussed above. Microelectronics operating profit increased to 16.6% from 11.9% last year, while operating profit dollars increased $3,767 or 79½%. The increase in Microelectronics operating profit margin and dollars reflects the strong growth in sales as discussed above.
18
Geographies:
The table below presents sales for the quarters ended October 31, 2004 and October 31, 2003 to unaffiliated customers by geography, including the effect of exchange rates for comparative purposes.
Three
Months Ended
|
Oct.
31, 2004 |
Oct.
31, 2003 |
% Change |
Exchange Rate Difference |
% Change in Local Currency |
|||||||||||
Western Hemisphere | $ | 152,278 | $ | 141,987 | 7½ | $ | 453 | 7 | ||||||||
Europe | 169,758 | 159,723 | 6½ | 14,160 | (2 | ½) | ||||||||||
Asia | 92,696 | 72,576 | 27½ | 2,855 | 24 | |||||||||||
Total | $ | 414,732 | $ | 374,286 | 11 | $ | 17,468 | 6 | ||||||||
By geography, sales in the Western Hemisphere increased 7% compared with last year, driven by strong growth in BioPharmaceuticals, General Industrial and Microelectronics. Exchange rates increased sales by $453, primarily related to the strengthening of the Canadian Dollar, resulting in reported sales growth of 7½%. Operating profit increased to 13.4% of sales as compared with 11.4% last year. Operating profit dollars increased $6,321, or 30½% reflecting the improvement in margin as well as the growth in sales.
In Europe, sales declined 2½% compared with last year primarily due to a shortfall in Aerospace and the sale of the machine and tool business discussed above. The strengthening of European currencies added $14,160 in sales resulting in reported sales growth of 6½%. Operating profit was 10.7% of sales as compared to 12.5% last year, while operating profit dollars were $21,014, a decrease of 7½%.
Sales in Asia increased 24% as compared to last year. The strengthening of Asian currencies added $2,855 in sales, resulting in reported sales growth of 27½%. The increase in sales resulted from strong growth in BioPharmaceuticals, General Industrial and Microelectronics sales as cited above. Operating profit margin was 14.2%, on par with last year. Operating profit dollars increased $2,803, or 26½% reflecting the revenue growth discussed above.
General corporate expenses decreased $2,394 compared with last year, reflecting the impact of our cost reduction initiatives as well as a decline in consulting expenses related to such initiatives.
Liquidity and Capital Resources
On August 24, 2004, we entered into a $300,000 unsecured senior revolving credit facility with a syndicate of banks, which expires on August 24, 2009. Simultaneously, we borrowed $125,000 under this facility and used the proceeds principally to repay (1) $71,200 ($54,000 outstanding as of July 31, 2004) of borrowings under our existing $200,000 unsecured senior revolving credit facility entered into on August 29, 2000, (2) the $50,000 balance due on a $100,000 bank loan which otherwise was to mature on October 18, 2007 and (3) various fees associated with the new facility. Both the $200,000 revolving credit facility and the $100,000 term loan were terminated upon the execution of the new revolving credit facility. As a result of the new revolving credit facility, our borrowing capacity has increased by $50,000.
Net cash provided by operating activities in the first quarter of fiscal 2005 was $22,682, a decrease of $10,251 as compared with the first quarter of fiscal 2004. The decrease in cash flow reflects changes in working capital items, particularly, inventory, accounts receivable and income tax payable.
Free cash flow, which is defined as net cash provided by operating activities less capital expenditures, was $5,136 in the first quarter of fiscal 2005, as compared with $22,412 in the first quarter of fiscal 2004. The decrease in free cash flow reflects the factors mentioned above as well as a higher level of capital expenditures. For the full fiscal year 2005, we expect free cash flow to approximate $200,000 based upon the mid-point of the earnings guidance above and assuming no changes in working capital. We believe this measure is important because it is a key element of our planning. We utilize free cash flow, which is a non-GAAP measure, as one way to measure our current and future financial performance. The following table reconciles free cash flow to net cash provided by operating activities:
19
Three
Months Ended Oct. 31, 2004 |
Three
Months Ended Oct. 31, 2003 |
Fiscal
Year 2004 |
||||||||
Net cash provided by operating activities | $ | 22,682 | $ | 32,933 | $ | 191,946 | ||||
Less capital expenditures | 17,546 | 10,521 | 61,262 | |||||||
Free cash flow | $ | 5,136 | $ | 22,412 | $ | 130,684 | ||||
The Company’s balance sheet is affected by spot exchange rates used to translate local currency amounts into U.S. dollars. In comparing spot exchange rates at October 31, 2004 to those at July 31, 2004, the European currencies and the Yen have strengthened against the U.S. dollar.
Working capital was approximately $661,200, a ratio of 2.6 at October 31, 2004 as compared with $651,000, a ratio of 2.6 at year-end fiscal 2004. Accounts receivable days sales outstanding were 95 days, as compared with 93 days in last year’s first quarter. Inventory turns, for the four quarters ended October 31, 2004, were 3.0 as compared to 3.1 at July 31, 2004. The effect of foreign exchange increased inventory, accounts receivable and other current assets by $7,073, $15,005 and $1,383, respectively, as compared with year-end fiscal 2004. Additionally, foreign exchange increased accounts payable and other current liabilities by $8,224 and income taxes payable by $296. Overall, net debt (debt net of cash, cash equivalents and short-term investments), as a percentage of total capitalization (net debt plus equity), was 25.3%, which is on the low end of our targeted range. Net debt increased by approximately $25,000 compared with year-end fiscal 2004. The impact of foreign exchange rates (primarily on cash) reduced net debt by $7,700, while the fair value adjustment on our fixed to variable interest rate swaps carried as part of debt increased net debt by approximately $7,500. As such, the actual cash increase in our net debt was approximately $25,200 in the quarter. Total gross debt increased approximately $26,100 as compared with year-end fiscal 2004. Foreign exchange rates increased gross debt by $1,500, while the fair value adjustment on our fixed to variable interest rate swaps carried as part of debt increased gross debt by approximately $7,500. As such, the actual cash increase in our gross debt was approximately $17,100 in the first quarter of fiscal 2005.
Proceeds from stock plans were $10,429 in the first quarter of fiscal 2005. Capital expenditures were $17,546. Depreciation and amortization expense in the quarter were $20,620 and $1,518, respectively. Capital expenditures are expected to be in the range of $70,000 in fiscal 2005, while depreciation and amortization expense are expected to total approximately $90,000.
On October 17, 2003, our Board of Directors authorized the expenditure of up to $200,000 to repurchase shares of our common stock. Furthermore, on October 14, 2004, our Board of Directors authorized an additional expenditure of another $200,000 to repurchase shares. During fiscal 2004 and in the first quarter of fiscal 2005, we repurchased stock of $75,000 and $29,998, respectively. This leaves $295,002 remaining of the $400,000 the Board of Directors authorized for share repurchases. For the full fiscal year 2005, we expect to repurchase stock of $80,000. In the first quarter, we paid dividends of $11,162 and we expect to pay dividends of about $44,000 for the full fiscal year 2005.
At October 31, 2004, we owned 6,175 shares of the common stock of VITEX. During the quarter, we recorded an impairment charge of $2,875 related to our investment in VITEX as its decline in fair market value was deemed to be other-than-temporary. As such, our investment in VITEX has been recorded at the October 31, 2004 fair market value of $0.80 per share, or $4,940 in the accompanying condensed consolidated balance sheet. For more detail regarding our investment in VITEX, refer to the Other Non-Current Assets note accompanying the condensed consolidated financial statements.
We consider our existing lines of credit, along with the cash generated from operations, to be sufficient for both short-term and long-term growth.
Recently Issued Accounting Pronouncements
20
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
ITEM 4. CONTROLS AND PROCEDURES.
As of October 31, 2004, the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13a15(e) under the Securities Exchange Act of 1934. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in Securities and Exchange Commission’s rules and forms.
There were no changes in the Company’s internal control over financial reporting during the Company’s first quarter ended October 31, 2004, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting as defined in Rule 13a15(f) under the Securities Exchange Act of 1934.
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.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In February 1988, an action was filed in the Circuit Court for Washtenaw County, Michigan (“Court”) by the State of Michigan (“State”) against Gelman Sciences Inc. (“Gelman”), a subsidiary acquired by the Company in February 1997. The action sought to compel Gelman to investigate and remediate 1,4-dioxane groundwater contamination near Gelman’s Ann Arbor facility and requested reimbursement of costs the State had expended in investigating the contamination, which the State alleged was caused by Gelman’s disposal of waste water from its manufacturing process. Pursuant to a consent judgment entered into by Gelman and the State in October 1992 (amended September 1996 and October 1999), which resolved that litigation, Gelman is remediating the contamination without admitting wrongdoing. In February 2000, the State Assistant Attorney General filed a Motion to Enforce Consent Judgment in the Court seeking approximately $4,900,000 in stipulated penalties for the alleged violations of the consent judgment and additional injunctive relief. Gelman disputed these assertions. Following an evidentiary hearing in July 2000, the Court took the matter of penalties “under advisement.” The Court issued a Remediation Enforcement Order (“REO”) requiring Gelman to submit and implement a detailed plan that will reduce the contamination to acceptable levels within five years. Gelman’s plan has been submitted to, and approved by, both the Court and the State. In correspondence dated June 5, 2001, the State asserted that additional stipulated penalties in the amount of $141,500 were owed for a separate alleged violation of the consent judgment. The Court found that a “substantial basis” for Gelman’s position existed and again took the State’s request “under advisement”, pending the results of certain groundwater monitoring data. Those data have been submitted to the Court, but no ruling has been issued. On August 9, 2001, the State made a written demand for reimbursement of $227,462 it has allegedly incurred for groundwater monitoring. Gelman considers this claim barred by the consent judgment.
In February 2004, the Court instructed Gelman to submit its Final Feasibility Study describing how it intends to address an area of groundwater contamination not addressed by the previously approved plan. Gelman has submitted its Feasibility Study as instructed. The State also submitted its plan for remediating this area of contamination to the Court. Management believes that the State’s plan exceeds requirements under state law and that it is not an efficient and expeditious manner to conduct the remediation. On September 8, 2004, the Court advised the parties that it would issue an order modifying its previous REO by November 8, 2004 to address the recently discovered contamination. Although the Court indicated that the modified order would be issued by November 8, 2004, the matter remains under the Court’s consideration as of December 10, 2004, the date of this report.
On May 12, 2004, the City of Ann Arbor, Michigan filed a lawsuit against Gelman Sciences Inc. d/b/a Pall Life Sciences in Washtenaw County Circuit Court. The City’s suit seeks damages, including the cost of replacing a municipal water supply well allegedly affected by the groundwater contamination, as well as injunctive relief in the form of an order requiring Pall Life Sciences to remediate the soil and groundwater beneath the City. The contaminant levels allegedly detected in the municipal well at issue, however, are well below applicable cleanup standards and the Company will vigorously defend against the claim.
On June 25, 2004, a private plaintiff sued the Company in the United States District Court for the Eastern District of Michigan in connection with the groundwater contamination. The complaint seeks both money damages and injunctive relief requiring remediation of the contamination. The single named plaintiff also seeks to represent a larger class of property owners and residents within the area who plaintiff claims are affected by the groundwater contamination. On August 25, 2004, the Company filed a motion for summary judgment seeking to dismiss the plaintiff’s claims. In response, plaintiff’s counsel sought and was granted permission to amend the complaint. An amended complaint was filed on November 17, 2004, which added seven plaintiffs. Management does not believe that there is substantive merit to the named plaintiffs’ claims or a basis for class certification. The Company will vigorously defend the lawsuit.
The Company’s condensed consolidated balance sheet at October 31, 2004 contains environmental liabilities of $28,223,000 which relates mainly to the aforementioned remediation. 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.
Reference is also made to the Contingencies and Commitments note in the notes accompanying the condensed consolidated financial statements.
23
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 Company’s common stock. |
(In thousands, except per share data) |
|||||||||||||
Period |
Total Number of Shares Purchased |
Average
Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
|||||||||
August 1, 2004 to August 31, 2004 | | | | $ 125,000 | |||||||||
September 1, 2004 to September 30, 2004 | 877 | $ 24.20 | 877 | $ 103,780 | |||||||||
October 1, 2004 to October 31, 2004 | 351 | $ 25.01 | 351 | $ 295,002 | |||||||||
Total | 1,228 | $ 24.43 | 1,228 | ||||||||||
(1) | On October 17, 2003, the Company’s Board of Directors (“the Board”) authorized and announced the expenditure of up to $200,000 to repurchase shares of the Company’s common stock. On October 14, 2004 the Board authorized the additional expenditure of up to another $200,000 for the repurchase of the Company’s common stock. The Company’s shares may be purchased over time, as market and business conditions warrant. There is no time restriction on this authorization. During the first quarter of fiscal 2005, the Company purchased 1,228 shares in open-market transactions at an aggregate cost of $29,998 with an average price per share of $24.43. Therefore, $295,002 remains to be expended under the current stock repurchase programs. Repurchased shares are held in treasury for use in connection with the Company’s stock compensation plans and for general corporate purposes. |
During the three month period ended October 31, 2004, 453 shares were issued for the Company’s stock compensation plans. At October 31, 2004, the Company held 4,712 treasury shares. |
ITEM 6. EXHIBITS.
See the exhibit index for a list of exhibits filed herewith or incorporated by reference herein.
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
|
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December 10, 2004 | By: | /s/
MARCUS WILSON
|
Marcus Wilson | ||
President Chief Financial Officer |
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December 10, 2004 | By:
|
/s/ LISA
MCDERMOTT
|
Lisa McDermott | ||
Vice President Finance |
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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 Registrant's Annual Report on Form 10-K for the fiscal year ended July 30, 1994. |
3(ii)* | By-Laws of the Registrant as amended through July 15, 2003, filed as Exhibit 3(ii) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended August 2, 2003. |
31.1 | Certification of Chief Executive Officer furnished pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Chief Financial Officer furnished pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
32.2 | Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
* Incorporated herein by reference.
Exhibits filed herewith.
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