Edgar Filing: PALL CORP

Prepared and Filed by St Ives Financial

Click here for Contents

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 April 30, 2006

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
(Address of principal executive offices)

11548
(Zip Code)

(516) 484-5400

(Registrant’s 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 registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.

Yes

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

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

The number of shares of the registrant’s common stock outstanding as of June 5, 2006 was 124,833,255.

Table of Contents

		Page No.

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of April 30, 2006 and July 31, 2005.	3
	Condensed Consolidated Statements of Earnings for the three and nine months ended April 30, 2006 and April 30, 2005.	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2006 and April 30, 2005.	5
	Notes to Condensed Consolidated Financial Statements.	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	31
Item 4.	Controls And Procedures.	31
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings.	32
Item 6.	Exhibits.	33
SIGNATURES		34

Back to Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PALL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

	Apr. 30, 2006			July 31, 2005

ASSETS
Current assets:
Cash and cash equivalents	$	207,359		$	164,928
Accounts receivable		464,731			493,650
Inventories		438,848			365,929
Prepaid expenses		30,120			21,858
Other current assets		117,316			114,027

Total current assets		1,258,374			1,160,392
Property, plant and equipment		619,898			608,758
Goodwill		246,559			252,904
Intangible assets		52,683			50,004
Other non-current assets		209,815			193,243

Total assets	$	2,387,329		$	2,265,301

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other current liabilities	$	387,466		$	372,553
Income taxes		59,045			58,928
Current portion of long-term debt		1,463			1,359
Notes payable		27,636			24,299

Total current liabilities		475,610			457,139
Long-term debt, net of current portion		488,807			510,161
Deferred taxes and other non-current liabilities		182,611			158,024

Total liabilities		1,147,028			1,125,324

Stockholders’ equity:
Common stock, par value $.10 per share		12,796			12,796
Capital in excess of par value		132,759			121,934
Retained earnings		1,102,089			1,066,848
Treasury stock, at cost		(64,292	)		(90,878	)
Stock option loans		(1,502	)		(1,808	)
Accumulated other comprehensive income:
Foreign currency translation		106,011			80,412
Minimum pension liability		(49,353	)		(49,353	)
Unrealized investment gains		2,132			33
Unrealized loss on derivatives		(339	)		(7	)

		58,451			31,085

Total stockholders’ equity		1,240,301			1,139,977

Total liabilities and stockholders’ equity	$	2,387,329		$	2,265,301

See accompanying notes to condensed consolidated financial statements.

Back to Contents

PALL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)

		Three Months Ended						Nine Months Ended

	Apr. 30, 2006			Apr. 30, 2005			Apr. 30, 2006			Apr. 30, 2005

Net sales		$	509,981		$	493,543		$	1,419,579		$	1,377,748
Cost of sales			271,388			248,554			753,491			707,955

Gross profit			238,593			244,989			666,088			669,793
Selling, general and administrative expenses			157,407			161,461			466,250			464,906
Research and development			14,511			15,498			41,975			43,118
Restructuring and other charges, net			7,313			4,292			10,999			15,253
Interest expense, net			5,091			7,084			16,472			18,937

Earnings before income taxes			54,271			56,654			130,392			127,579
Income taxes			29,082			12,976			47,657			30,157

Net earnings		$	25,189		$	43,678		$	82,735		$	97,422

Earnings per share:
Basic		$	0.20		$	0.35		$	0.66		$	0.78
Diluted		$	0.20		$	0.35		$	0.66		$	0.78
Dividends declared per share		$	0.11		$	0.10		$	0.32		$	0.29
Average shares outstanding:
Basic			125,614			124,869			125,243			124,535
Diluted			126,581			125,924			126,121			125,481

See accompanying notes to condensed consolidated financial statements.

Back to Contents

PALL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

		Nine Months Ended

	Apr. 30, 2006				Apr. 30, 2005

Operating activities:
Net earnings		$	82,735			$	97,422
Adjustments to reconcile net earnings to net cash provided by operating activities:
Restructuring and other charges, net			10,999				15,253
Depreciation and amortization of long-lived assets			70,747				67,673
Non-cash stock compensation			8,769				946
Excess tax benefits from stock based compensation arrangements			(723	)			—
Other			1,060				2,580
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions			(21,920	)			(103,760	)

Net cash provided by operating activities			151,667				80,114

Investing activities:
Acquisitions of businesses, net of disposals and cash acquired			(75	)			(30,812	)
Proceeds from sale of strategic investments			7,387				915
Capital expenditures			(72,784	)			(59,361	)
Proceeds from sale of fixed assets			6,564				3,655
Proceeds from sale of retirement benefit assets			26,769				16,290
Purchases of retirement benefit assets			(44,844	)			(16,118	)
Other			(2,140	)			(2,678	)

Net cash used by investing activities			(79,123	)			(88,109	)

Financing activities:
Notes payable			2,247				(767	)
Long-term borrowings			139				130,575
Repayments of long-term debt			(21,331	)			(105,057	)
Net proceeds from stock plans			26,795				42,597
Excess tax benefits from stock based compensation arrangements			723				—
Purchase of treasury stock			(5,750	)			(49,998	)
Payment to terminate interest rate swaps			—				(10,044	)
Dividends paid			(38,611	)			(34,673	)

Net cash used by financing activities			(35,788	)			(27,367	)

Cash flow for period			36,756				(35,362	)
Cash and cash equivalents at beginning of year			164,928				207,277
Effect of exchange rate changes on cash			5,675				10,382

Cash and cash equivalents at end of period		$	207,359			$	182,297

Supplemental disclosures:
Interest paid		$	25,790			$	26,928
Income taxes paid (net of refunds)			45,294				57,518
Non-cash investing and financing activities:
Capital lease entered into for building			—				6,439
Note receivable (Note 4)			2,539				—

See accompanying notes to condensed consolidated financial statements.

Back to Contents

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. Such information reflects all adjustments of a normal recurring nature, which are, in the opinion of Company 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, 2005 (“2005 Form 10-K”).

Certain prior year amounts have been reclassified to conform to the current year presentation.

NOTE 2 – STOCK-BASED PAYMENT

The Company currently has four stock-based employee compensation plans (collectively, the “Stock Plans”), which are described more fully below under the captions Stock Purchase Plans and Stock Option Plans. Prior to August 1, 2005, the Company accounted for stock-based compensation related to those Stock Plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and related Interpretations, as permitted by Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). As such, there was no stock-based employee compensation cost recognized in net earnings relating to any shares under the Employee Stock Purchase Plan (“ESPP”) or stock options granted under any of the existing or terminated stock option plans prior to August 1, 2005 as all stock options were granted with an exercise price equal to the fair market value on the date of grant. There was, however, stock-based employee compensation cost recognized in net earnings for periods prior to August 1, 2005 resulting from the issuance of restricted stock units under the 2005 Stock Compensation Plan (“2005 Plan”) and the Management Stock Purchase Plan (“MSPP”).

Effective August 1, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment (“SFAS No. 123(R)”), using the modified-prospective-transition method. Under that transition method, compensation cost recognized for the three and nine months ended April 30, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of, August 1, 2005, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for the vested portion of share-based payments granted subsequent to August 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated.

The Company adopted the 2005 Plan (described in more detail below) in contemplation of the change in the accounting for share-based payments required by SFAS No. 123(R). Specifically, the 2005 Plan provides the Company with the ability to award stock units with various restrictions and vesting requirements. The detailed components of stock-based compensation expense recorded in the Statements of Earnings for the three and nine months ended April 30, 2006 and April 30, 2005 are illustrated in the table below.

	Three Months Ended				Nine Months Ended

	Apr. 30, 2006		Apr. 30, 2005		Apr. 30, 2006		Apr. 30, 2005

Stock options	$	1,496	$	—	$	4,517	$	—
Restricted stock units		650		390		1,703		390
ESPP		590		—		1,563		—
MSPP		316		199		986		556

Total	$	3,052	$	589	$	8,769	$	946

Stock-based compensation expense related to stock options and the ESPP for the three and nine months ended April 30, 2005 was not recorded in the Statements of Earnings, but had been disclosed in the pro forma disclosures as required by SFAS No. 123 and SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123 (“SFAS No. 148”).

Back to Contents

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

The following table illustrates the impact of adopting SFAS No. 123(R) on August 1, 2005 on the Company’s earnings before income taxes, net earnings and earnings per share (which excludes the effect of certain changes to the Company’s stock plans under the 2005 Plan such as restricted stock units granted in contemplation of the change in accounting):

	Three Months Ended Apr. 30, 2006			Nine Months Ended Apr. 30, 2006

Impact on earnings before income taxes		$	2,086		$	6,080
Impact on net earnings			1,855			5,395
Impact on basic earnings per share		$	0.01		$	0.04
Impact on diluted earnings per share		$	0.01		$	0.04

SFAS No. 123(R) also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows. For the nine months ended April 30, 2006, this treatment resulted in cash flows from financing activities of $723. The tax benefit recognized related to the total compensation cost for stock-based payment arrangements totaled $556 and $1,576 for the three and nine months ended April 30, 2006, respectively, and totaled $141 and $227 for the three and nine months ended April 30, 2005, respectively. The actual tax benefit realized for the tax deductions from option exercise of the stock-based payment arrangements totaled $1,669 and $3,462 for the three and nine months ended April 30, 2006, respectively.

The following table illustrates the effect on net earnings and earnings per share for the three and nine months ended April 30, 2005 as if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted under the Company’s stock plans prior to adoption of SFAS No. 123(R) on August 1, 2005. No pro forma disclosure has been made for periods subsequent to August 1, 2005 as all stock-based compensation has been recognized in net earnings. For purposes of this pro forma disclosure and compensation cost recorded in the Company’s condensed consolidated financial statements, the value of the options is estimated using a Black-Scholes-Merton option-pricing formula and amortized to expense over the options’ service periods.

	Three Months Ended Apr. 30, 2005			Nine Months Ended Apr. 30, 2005

Net earnings, as reported		$	43,678		$	97,422
Pro forma stock compensation expense, net of tax benefit			2,934			8,668

Pro forma net earnings		$	40,744		$	88,754

Earnings per share:
Basic–as reported		$	0.35		$	0.78
Basic–pro forma		$	0.33		$	0.71
Diluted–as reported		$	0.35		$	0.78
Diluted–pro forma		$	0.32		$	0.71

Back to Contents

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 granted during the three and nine months ended April 30, 2006 and April 30, 2005 (there were no stock options granted during the three months ended April 30, 2006):

	Three Months Ended							Nine Months Ended

	Apr. 30, 2006			Apr. 30, 2005				Apr. 30, 2006				Apr. 30, 2005

Average fair value of stock-based compensation awards granted		$	—		$	7.47			$	7.43			$	7.67
Valuation assumptions:
Expected dividend yield			—			1.8	%			1.9	%			1.8	%
Expected volatility			—			31.0	%			27.0	%			31.1	%
Expected life (years)			—			5.0				5.0				5.0
Risk-free interest rate			—			3.8	%			4.3	%			3.7	%

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 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 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.

As noted above, the following paragraphs describe each of the aforementioned stock-based compensation plans in detail:

Stock Purchase Plans

During fiscal year 2000, the Company’s shareholders approved two stock purchase plans, the MSPP and the ESPP. Participation in the MSPP is limited to certain executives as designated by the Compensation Committee of the Board of Directors, which also established common stock ownership targets for participants. Participation in the ESPP is available to all employees except those that are included in the MSPP.

The purpose of the MSPP is to encourage key employees of the Company to increase their ownership of shares of the Company’s 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 four years for matches made thereafter. Such restricted units aggregated 715 and 622 as of April 30, 2006 and April 30, 2005, respectively. No vested restricted units were distributed during the three months ended April 30, 2006 and April 30, 2005. During the nine months ended April 30, 2006 and April 30, 2005, approximately 58 and 65 vested restricted units, respectively, were distributed. There was no participants’ deferred compensation and cash payments for the three months ended April 30, 2006 and April 30, 2005. For the nine months ended April 30, 2006 and April 30, 2005, participants’ deferred compensation and cash payments amounted to $3,165 and $2,260, respectively. Dividends are paid on unvested restricted units (in the form of additional restricted units) and vest over the remaining service period of the restricted units for which the dividends were recorded. Dividends are paid on vested restricted units (in the form of additional restricted units) and are vested upon grant. As of April 30, 2006, there was $3,619 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 3.1 years. A total of 25 restricted stock units vested during the nine months ended April 30, 2006.

The ESPP enables participants to purchase shares of the Company’s 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 265 and 207 shares were purchased under the ESPP during the semi-annual stock purchase periods ended April 30, 2006 and October 31, 2005, respectively.

Both plans provide for accelerated vesting if there is a change in control (as defined in the plans). All of the above shares were issued from treasury stock.

Back to Contents

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

Stock Option Plans

The Company has adopted several plans that provide for the granting of stock options to employees and non-employee directors at option prices equal to the market price of the common stock at the date of grant. On November 17, 2004, the Company’s shareholders approved the 2005 Plan, which had been developed in contemplation of adopting the provisions of SFAS No. 123(R). As a result of such approval, the Compensation Committee of the Board of Directors (a) amended the 2001 Stock Option Plan for non-employee directors to reduce the total number of shares remaining available for grants from 261 to 150, and (b) terminated all other stock plans, except that options then outstanding thereunder remained in effect in accordance with their terms. Up to 5,000 shares are issuable under the 2005 Plan. Both plans provide for accelerated vesting if there is a change in control (as defined in the plans). The 2005 Plan permits the Company to grant to its employees and non-employee directors other forms of equity compensation in addition to stock options (that is, restricted shares, restricted units, performance shares and performance units).

The fair value of the restricted unit awards are determined by reference to the closing price of the stock on the date of the award, and are charged to earnings over the service periods during which the awards are deemed to be earned; one year, in the case of the annual award units to non-employee directors, and four years, in the case of units awarded to employees. The annual award units granted to non-employee directors of the Company (and any related dividends paid in the form of additional units) are converted to shares once the director ceases to be a member of the Board. A total of 14 annual award units were granted during the nine months ended April 30, 2006, with a weighted-average fair market value of $27.89 per share. Restricted stock units granted to employees cliff-vest after the fourth anniversary of the date of grant. Dividends paid on unvested restricted stock units vest at the same time as the restricted units for which the dividends were recorded.

A summary of restricted stock unit activity, excluding annual award units, for the 2005 Stock Plan during the nine months ended April 30, 2006, is presented below:

	Shares			Weighted- Average Grant-Date Fair Value

Nonvested at August 1, 2005		261		$	30.07
Granted		4			28.71
Exercised		—			—
Forfeited		(4	)		30.83

Nonvested at October 31, 2005		261			30.04
Granted		55			28.66
Exercised		—			—
Forfeited		(3	)		30.83

Nonvested at January 31, 2006		313			29.79
Granted		—			—
Exercised		—			—
Forfeited		(10	)		29.12

Nonvested at April 30, 2006		303		$	29.81

As of April 30, 2006, there was $7,313 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 3.3 years. None of the restricted stock units vested during the nine months ended April 30, 2006.

The forms of options adopted provide that the options may not be exercised within one year from the date of grant, and expire if not completely exercised within 7 years from the date of grant. Generally, in any year after the first year, the options can be exercised with respect to only up to 25% of the shares subject to the option, computed cumulatively. The Company’s shareholders have approved all of the Company’s stock option plans.

Back to Contents

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

A summary of option activity for all stock option plans during the nine months ended April 30, 2006 is presented below:

Options	Shares			Weighted -Average Exercise Price			Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value

Outstanding at August 1, 2005		4,302			$	20.27
Granted		16				28.41
Exercised		(120	)			18.86
Forfeited or Expired		(26	)			19.76

Outstanding at October 31, 2005		4,172				20.34
Granted		225				28.53
Exercised		(252	)			18.40
Forfeited or Expired		(56	)			20.77

Outstanding at January 31, 2006		4,089				20.91
Granted		—				—
Exercised		(350	)			18.95
Forfeited or Expired		(33	)			20.49

Outstanding at April 30, 2006		3,706			$	21.10		5.9		$	32,042

Vested or Expected to Vest at April 30, 2006		3,587			$	21.05		5.9		$	31,168

Exercisable at April 30, 2006		2,220			$	20.17		5.6		$	21,125

As of April 30, 2006, there was $6,362 of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted-average period of 2.2 years. The total intrinsic value of options exercised during the three and nine months ended April 30, 2006 was $3,758 and $6,952, respectively. The total intrinsic value of options exercised during the three and nine months ended April 30, 2005 was $1,083 and $9,569, respectively.

The Company currently uses treasury shares that have been repurchased through the Company’s stock repurchase program to satisfy share award exercises (see Note 7).

NOTE 3 – ACQUISITIONS

On November 30, 2004, the Company acquired the BioSepra Process Division (“Biosepra”) from Ciphergen Biosystems, Inc. The purchase price was approximately $32,000, net of cash and debt assumed, subject to a post closing adjustment of the purchase price based upon certain quantitative thresholds as defined in the purchase agreement. The adjustment to the purchase price was finalized on April 11, 2005, resulting in a reduction in the purchase price of approximately $1,100. Biosepra develops, manufactures and markets chromatography sorbents for use in the purification of protein in drug development and production.

On January 21, 2005, the Company acquired the remaining interest in Euroflow (UK) of Stroud, England (“Euroflow”) which it did not already own. The purchase price was $1,466, net of cash. Euroflow manufactures pilot and production scale chromatography columns for the biotechnology industry. The Company has held exclusive global marketing and distribution rights to Euroflow chromatography columns and associated technologies since 2002. In addition, the Company had loans and advances totaling $9,255 outstanding from Euroflow at the date of acquisition.

The acquisitions were accounted for using the purchase method of accounting in accordance with SFAS No. 141, Business Combinations (“SFAS No. 141”). SFAS No. 141 requires that the total cost of the acquisition be allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the date of acquisition. The April 30, 2006 condensed consolidated balance sheet reflects the final allocation of the purchase prices and non-deductible goodwill of $9,900 related to these acquisitions.

Back to Contents

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

The following table summarizes the final allocation of the purchase prices to the assets acquired and liabilities assumed at the dates of the acquisitions:

Purchase price	$	38,349
Transaction costs		638

Total purchase price		38,987
Cash acquired		7,470

Total purchase price, net of cash acquired		31,517

Accounts receivable, net		1,710
Inventories		9,886
Other current assets		1,658
Property plant and equipment, net		6,771
Intangible assets		18,393
Other non-current assets		211

Total assets acquired		38,629

Accounts payable and other current liabilities		4,564
Long-term debt		2,563
Due to the Company (from Euroflow)		9,255
Other non-current liabilities		630

Total liabilities assumed		17,012

Goodwill	$	9,900

Based upon the markets Biosepra and Euroflow serve, the goodwill was assigned to the Company’s BioPharmaceutical segment. Pro forma financial information related to the acquisitions has not been provided, as it is not material to the Company’s results of operations and cash flows.

NOTE 4 – DISTRIBUTION AGREEMENT

On December 16, 2005, the Company and Satair A/S (“Satair”) signed an agreement whereby Satair acquired the exclusive rights to the Western Hemisphere commercial aerospace aftermarket distribution channel for the Company’s products for a ten-year period. The transaction was valued at $22,000, of which $19,000 was paid to the Company in cash on the closing date, and $3,000 in a five-year non-interest bearing note receivable, payable in equal installments. In addition, the agreement required Satair to purchase certain finished goods inventory from the Company valued at $5,683. The $22,000 in cash and note receivable received for the distribution rights were recorded as deferred revenue and are being amortized as an increase to sales over the life of the distribution agreement.

Back to Contents

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

NOTE 5 – BALANCE SHEET DETAILS

The following tables provide details of selected balance sheet items:

	Apr. 30, 2006			July 31, 2005

Accounts receivable:
Billed	$	439,395		$	463,959
Unbilled		38,452			43,206

Total		477,847			507,165
Less: Allowances for doubtful accounts		(13,116	)		(13,515	)

	$	464,731		$	493,650

Unbilled receivables principally relate to long-term contracts recorded under the percentage-of-completion method of accounting.

	Apr. 30, 2006			July 31, 2005

Inventories:
Raw materials and components	$	129,871		$	113,202
Work-in-process		82,708			44,837
Finished goods		226,269			207,890

	$	438,848		$	365,929


Property, plant and equipment:
Property, plant and equipment	$	1,345,720		$	1,278,517

Less: Accumulated depreciation and amortization		(725,822	)		(669,759	)
	$	619,898		$	608,758

NOTE 6 – GOODWILL AND INTANGIBLE ASSETS

The following table presents goodwill, net of accumulated amortization, allocated by reportable segment in accordance with SFAS No. 142:

	Apr. 30, 2006		July 31, 2005

Medical	$	29,117	$	28,578
BioPharmaceuticals		38,406		45,538

Life Sciences		67,523		74,116

General Industrial		152,124		151,878
Aerospace		5,705		5,704
Microelectronics		21,207		21,206

Industrial		179,036		178,788

	$	246,559	$	252,904

The change in the carrying amount of goodwill is primarily attributable to the changes in the final allocation of goodwill from the acquisition of Euroflow as discussed in Note 3 and to the 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.

Back to Contents

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

Intangible assets, net, consist of the following:

	Apr. 30, 2006

	Gross		Accumulated Amortization		Net

Patents and unpatented technology	$	96,634	$	47,274	$	49,360
Trademarks		4,617		2,147		2,470
Other		5,330		4,477		853

	$	106,581	$	53,898	$	52,683

	July 31, 2005

	Gross		Accumulated Amortization		Net

Patents and unpatented technology	$	88,098	$	41,858	$	46,240
Trademarks		4,545		1,849		2,696
Other		5,301		4,233		1,068

	$	97,944	$	47,940	$	50,004

The increase in patents and unpatented technology is primarily due to the finalization of the valuation of intangible assets purchased in the Euroflow acquisition, as discussed in Note 3. The fair value of these intangibles had not been determined as of July 31, 2005. As such, their cost had been preliminarily allocated based upon their book values.

Amortization expense for intangible assets for the three and nine months ended April 30, 2006 was $1,935 and $6,337, respectively. Amortization expense for intangible assets for the three and nine months ended April 30, 2005 was $1,498 and $4,457, respectively. Amortization expense is estimated to be approximately $2,120 for the remainder of fiscal 2006, $8,148 in 2007, $7,201 in 2008, $6,765 in 2009, $6,725 in 2010 and $6,769 in 2011.

NOTE 7 – FINANCING ACTIVITIES

On October 17, 2003, 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 these authorizations. During the nine months ended April 30, 2006, the Company purchased 187 shares in open-market transactions at an aggregate cost of $5,750 with an average price per share of $30.81. As of April 30, 2006, $255,004 remains available to be expended under the current stock repurchase programs. Repurchased shares are held in treasury for use in connection with the Company’s stock-based compensation plans and for general corporate purposes.

During the nine months ended April 30, 2006, 1,277 shares were issued under the Company’s stock-based compensation plans. At April 30, 2006, the Company held 2,527 treasury shares.

Subsequent to the quarter ended April 30, 2006, Medsep Corporation, a subsidiary of the Company, entered into a 90-day term loan with a financial institution in the principal amount of $200,000 bearing interest at a rate equal to LIBOR.

NOTE 8 – CONTINGENCIES AND COMMITMENTS

The Company’s condensed consolidated balance sheet at April 30, 2006 includes liabilities for environmental matters of approximately $20,893, which relates 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, because 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.

Back to Contents

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

NOTE 9 - RESTRUCTURING AND OTHER CHARGES, NET

The following tables summarize the restructuring related items and other charges/(gains) recorded for the three and nine months ended April 30, 2006 and April 30, 2005:

	Three Months Ended Apr. 30, 2006									Nine Months Ended Apr. 30, 2006

	Restructuring (1)			Other Charges/ (Gains) (2)			Total			Restructuring (1)			Other Charges/ (Gains) (2)			Total

Severance	$	6,580		$	—		$	6,580		$	11,181		$	—		$	11,181
Other exit costs		164			—			164			2,528			—			2,528
Gain on sale of investments (a)		—			—			—			—			(2,200	)		(2,200	)
Loss on sale of assets		6			—			6			57			—			57
Environmental (b)		—			793			793			—			793			793
Other		—			60			60			—			(59	)		(59	)

	$	6,750		$	853		$	7,603		$	13,766		$	(1,466	)	$	12,300
Reversal of excess reserves		(290	)		—			(290	)		(1,301	)		—			(1,301	)

	$	6,460		$	853		$	7,313		$	12,465		$	(1,466	)	$	10,999

Cash	$	6,454		$	853		$	7,307		$	12,181		$	(1,342	)	$	10,839
Non-cash		6			—			6			284			(124	)		160

	$	6,460		$	853		$	7,313		$	12,465		$	(1,466	)	$	10,999


	Three Months Ended Apr. 30, 2005									Nine Months Ended Apr. 30, 2005

	Restructuring (1)			Other Charges/ (Gains) (2)			Total			Restructuring (1)			Other Charges/ (Gains) (2)			Total

Severance	$	2,794		$	—		$	2,794		$	9,024		$	—		$	9,024
Other exit costs		620			—			620			2,690			—			2,690
Impairment of investments (a)		—			740			740			—			3,615			3,615
Loss (gain) on sale of assets		54			—			54			(322	)		—			(322	)
Environmental (b)		—			—			—			—			502			502
Other		—			216			216			—			101			101

	$	3,468		$	956		$	4,424		$	11,392		$	4,218		$	15,610
Reversal of excess reserves		(132	)		—			(132	)		(357	)		—			(357	)

	$	3,336		$	956		$	4,292		$	11,035		$	4,218		$	15,253

Cash	$	3,282		$	(171	)	$	3,111		$	10,971		$	426		$	11,397
Non-cash		54			1,127			1,181			64			3,792			3,856

	$	3,336		$	956		$	4,292		$	11,035		$	4,218		$	15,253

Back to Contents

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

(1)	Restructuring:

•

During the nine months ended April 30, 2005, the Company began to implement its plan to reorganize its business structure. As a result, the Company recorded severance liabilities for the termination of certain employees worldwide as well as other costs related to the reorganization.

Furthermore, the Company completed the sale begun in the fourth quarter of fiscal year 2004 of certain manufacturing plants in Germany acquired as part of its acquisition of the Filtration and Separations Group (“FSG”), which resulted in the recognition of a gain of $387.

•

During the nine months ended April 30, 2006, the Company continued its realignment plan and cost reduction initiatives, including its facilities rationalization initiative and its initiative to optimize European operations (“EuroPall”). As a result, the Company recorded severance liabilities for the termination of certain employees worldwide as well as other costs related to these initiatives.

(2)	Other Charges/(Gains):

(a)

The Company recorded a charge of $2,875 in the three months ended October 31, 2004 for the other-than-temporary diminution in value of its investment in Panacos Pharmaceuticals, Inc., formerly known as V.I. Technologies, Inc. (“VITEX”). In addition, the Company recorded a charge of $740 in the three months ended April 30, 2005 for the other-than-temporary diminution in value of an investment in equity securities held by its benefits protection trust.

In August 2005, the Company sold all of the 617.5 shares it held of VITEX for total proceeds aggregating $6,783. The cost basis at the time of the sale, as adjusted by previous impairment charges, was $4,940. As a result, the Company recorded a gain of $1,806, net of fees and commissions in the three months ended October 31, 2005.

On January 13, 2006 the Company sold its stock rights in Satair for total proceeds aggregating $641. The cost basis of the rights at the time of the sale was $247. As a result, the Company recorded a gain of $394 in the three months ended January 31, 2006.

(b)

In the three months ended January 31, 2005, the Company increased a previously established environmental reserve by $502 related to the environmental matter in Pinellas Park, Florida.

In the three months ended April 30, 2006, the Company increased its previously established environmental reserves by $793 primarily related to environmental matters in Ann Arbor, Michigan and Pinellas Park, Florida.

Back to Contents

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

The following table summarizes the activity related to restructuring liabilities that were recorded in fiscal years 2006 and 2005:

	Severance			Lease Termination Liabilities & Other			Total

2006
Original Charge	$	10,954		$	2,528		$	13,482
Utilized		(3,725	)		(2,404	)		(6,129	)
Other changes (a)		186			6			192

Balance at April 30, 2006	$	7,415		$	130		$	7,545

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		(2,875	)		(87	)		(2,962	)
Reversal of excess reserves (b)		(1,230	)		(71	)		(1,301	)
Other changes (a)		43			3			46

Balance at April 30, 2006	$	4,944		$	38		$	4,982

Amounts reflected as severance liabilities for fiscal year 2006 exclude $227 related to non-cash stock compensation.

Other changes reflect translation impact.

Reflects the reversal of excess restructuring reserves originally recorded in the consolidated statement of earnings in fiscal year 2005.

NOTE 10 – REPATRIATION UNDER THE AMERICAN JOBS CREATION ACT OF 2004

Company management and its Board of Directors have elected to repatriate $400,000 of previously undistributed earnings of foreign subsidiaries, in accordance with the provisions of the American Jobs Creation Act of 2004. As of April 30, 2006, the Company has recorded $17,000, net of certain foreign tax credits to provide for amounts that will be due to the U.S. government resulting from the repatriation. The Company is required to complete the repatriation prior to July 31, 2006.

Back to Contents

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

NOTE 11 – 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 Company’s defined benefit pension plans includes the following components:

	Three Months Ended

	U.S. Plans						Foreign Plans						Total

	Apr. 30, 2006			Apr. 30, 2005			Apr. 30, 2006			Apr. 30, 2005			Apr. 30, 2006			Apr. 30, 2005

Service cost	$	1,877		$	1,658		$	1,667		$	1,919		$	3,544		$	3,577
Interest cost		2,367			2,306			3,345			3,308			5,712			5,614
Expected return on plan assets		(1,572	)		(1,299	)		(2,642	)		(2,399	)		(4,214	)		(3,698	)
Amortization of prior service cost		238			221			109			131			347			352
Amortization of net transition asset		(10	)		(11	)		—			9			(10	)		(2	)
Recognized actuarial loss		715			375			1,955			1,354			2,670			1,729
Loss due to curtailments and settlements		—			—			317			—			317			—

Net periodic benefit cost	$	3,615		$	3,250		$	4,751		$	4,322		$	8,366		$	7,572

	Nine Months Ended

	U.S. Plans						Foreign Plans						Total

	Apr. 30, 2006			Apr. 30, 2005			Apr. 30, 2006			Apr. 30, 2005			Apr. 30, 2006			Apr. 30, 2005

Service cost	$	5,633		$	4,975		$	5,883		$	5,688		$	11,516		$	10,663
Interest cost		7,103			6,920			9,843			9,765			16,946			16,685
Expected return on plan assets		(4,716	)		(3,897	)		(7,648	)		(7,074	)		(12,364	)		(10,971	)
Amortization of prior service cost		714			664			339			390			1,053			1,054
Amortization of net transition asset		(32	)		(32	)		—			26			(32	)		(6	)
Recognized actuarial loss		2,143			1,125			5,937			3,990			8,080			5,115
Loss due to curtailments and settlements		—			—			317			—			317			—

Net periodic benefit cost	$	10,845		$	9,755		$	14,671		$	12,785		$	25,516		$	22,540

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 of 725 and 283 shares were not included in the computation of diluted shares for the three months ended April 30, 2006 and April 30, 2005, respectively, because their effect would have been antidilutive. For the nine months ended April 30, 2006 and April 30, 2005, 845 and 476 shares were excluded, respectively, because their effect would have been antidilutive.

Back to Contents

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

The following is a reconciliation between basic shares outstanding and diluted shares outstanding:

	Three Months Ended		Nine Months Ended

	Apr. 30, 2006	Apr. 30, 2005	Apr. 30, 2006	Apr. 30, 2005

Basic shares outstanding	125,614	124,869	125,243	124,535
Effect of stock plans	967	1,055	878	946

Diluted shares outstanding	126,581	125,924	126,121	125,481

NOTE 13 – COMPREHENSIVE INCOME

Comprehensive income is comprised of the following:

	Three Months Ended						Nine Months Ended

	Apr. 30, 2006			Apr. 30, 2005			Apr. 30, 2006			Apr. 30, 2005

Net income	$	25,189		$	43,678		$	82,735		$	97,422

Unrealized translation adjustment		19,045			232			25,440			45,929
Income taxes		519			162			159			2,634

Unrealized translation adjustment, net		19,564			394			25,599			48,563

Change in unrealized investment gains (losses)		33			(4,078	)		2,099			970
Income taxes		—			(121	)		—			(255	)

Change in unrealized investment gains (losses), net		33			(4,199	)		2,099			715

Unrealized (losses) gains on derivatives		(97	)		135			(302	)		473
Income taxes		(17	)		(47	)		(30	)		(165	)

Unrealized (losses) gains on derivatives, net		(114	)		88			(332	)		308

Total comprehensive income	$	44,672		$	39,961		$	110,101		$	147,008

Unrealized investment gains (losses) on available-for-sale securities, net of related taxes, consist of the following:

	Three Months Ended					Nine Months Ended

	Apr. 30, 2006		Apr. 30, 2005			Apr. 30, 2006			Apr. 30, 2005

Unrealized gains (losses) arising during the period		33	$	(4,818	)	$	3,905		$	(2,644	)
Income taxes		—		138			—			3

Net unrealized gains (losses) arising during the period		33		(4,680	)		3,905			(2,641	)
Reclassification adjustment for loss (gain) included in net earnings		—		481			(1,806	)		3,356

Change in unrealized accumulated investment gains (losses), net	$	33	$	(4,199	)	$	2,099		$	715

Back to Contents

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

NOTE 14 – SEGMENT INFORMATION AND GEOGRAPHIES

Financial information on the business segments identified as reporting segments in accordance with the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, follows.

During the three and nine months ended April 30, 2006, certain research and development costs previously managed as a Corporate function were integrated into the Life Sciences and Industrial segments in the Western Hemisphere as part of the Company’s previously reported reorganization efforts.

	Three Months Ended						Nine Months Ended

	Apr. 30, 2006			Apr. 30, 2005			Apr. 30, 2006			Apr. 30, 2005

MARKET SEGMENT INFORMATION
SALES TO UNAFFILIATED CUSTOMERS:
Medical	$	112,737		$	119,065		$	315,194		$	324,888
BioPharmaceuticals		93,200			82,569			247,557			230,976

Total Life Sciences		205,937			201,634			562,751			555,864

General Industrial		189,777			191,379			538,252			533,057
Aerospace		44,790			47,755			133,561			128,536
Microelectronics		69,477			52,775			185,015			160,291

Total Industrial		304,044			291,909			856,828			821,884

Total	$	509,981		$	493,543		$	1,419,579		$	1,377,748

OPERATING PROFIT:
Medical	$	13,031		$	24,883		$	34,874		$	56,212
BioPharmaceuticals		24,518			18,679			61,033			54,244

Total Life Sciences		37,549			43,562			95,907			110,456

General Industrial		17,217			23,911			44,469			54,091
Aerospace		7,842			9,900			20,627			22,286
Microelectronics		19,085			7,683			42,184			26,266

Total Industrial		44,144			41,494			107,280			102,643

Subtotal		81,693			85,056			203,187			213,099
Restructuring and other charges, net (a)		(7,646	)		(4,292	)		(11,838	)		(15,253	)
General corporate expenses		(14,685	)		(17,026	)		(44,485	)		(51,330	)
Interest expense, net		(5,091	)		(7,084	)		(16,472	)		(18,937	)

Earnings before income taxes	$	54,271		$	56,654		$	130,392		$	127,579

Back to Contents

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Nine Months Ended

	Apr. 30, 2006			Apr. 30, 2005			Apr. 30, 2006			Apr. 30, 2005

GEOGRAPHIES
SALES TO UNAFFILIATED CUSTOMERS:
Western Hemisphere	$	185,838		$	181,283		$	518,306		$	500,895
Europe		200,779			204,658			560,664			566,267
Asia		123,364			107,602			340,609			310,586

Total	$	509,981		$	493,543		$	1,419,579		$	1,377,748


INTERCOMPANY SALES BETWEEN GEOGRAPHIC AREAS:
Western Hemisphere	$	65,319		$	61,123			181,839		$	161,382
Europe		26,689			35,418			87,735			92,739
Asia		1,800			1,676			5,189			4,362

Total	$	93,808		$	98,217		$	274,763		$	258,483

TOTAL SALES:
Western Hemisphere	$	251,157		$	242,406			700,145		$	662,277
Europe		227,468			240,076			648,399			659,006
Asia		125,164			109,278			345,798			314,948
Eliminations		(93,808	)		(98,217	)		(274,763	)		(258,483	)

Total	$	509,981		$	493,543		$	1,419,579		$	1,377,748

OPERATING PROFIT:
Western Hemisphere	$	41,429		$	46,523		$	96,414		$	108,396
Europe		19,412			26,002			51,404			67,513
Asia		20,176			15,447			53,543			45,211
Eliminations		676			(2,916	)		1,826			(8,021	)

Subtotal		81,693			85,056			203,187			213,099
Restructuring and other charges, net (a)		(7,646	)		(4,292	)		(11,838	)		(15,253	)
General corporate expenses		(14,685	)		(17,026	)		(44,485	)		(51,330	)
Interest expense, net		(5,091	)		(7,084	)		(16,472	)		(18,937	)

Earnings before income taxes	$	54,271		$	56,654		$	130,392		$