pallcorp_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ Quarterly report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended April 30,
2010 or
|
|
o Transition report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 For the
transition period from to
|
Commission File Number: 001-
04311
PALL CORPORATION
(Exact name of registrant as specified in its
charter)
New York |
|
11-1541330 |
(State or other jurisdiction of |
|
(I.R.S. Employer |
incorporation or organization) |
|
Identification No.) |
|
|
|
25 Harbor Park
Drive, Port Washington, NY |
11050 |
(Address of
principal executive offices) |
(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 the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes
þ No o
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or
a smaller reporting company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer þ |
Accelerated filer o |
|
Non-accelerated
filer o |
Smaller reporting company o |
(Do not check if a smaller reporting company) |
|
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares of the
registrant’s common stock outstanding as of June 3, 2010 was
116,665,051.
Table of Contents
|
|
|
Page No. |
PART I. FINANCIAL
INFORMATION |
|
|
Item 1. |
|
Financial Statements (Unaudited). |
|
|
|
|
Condensed Consolidated Balance Sheets as
of April 30, 2010 and July 31, 2009. |
3 |
|
|
|
Condensed Consolidated Statements of Earnings for the three and
nine months ended |
|
|
|
|
April 30, 2010 and April 30,
2009. |
4 |
|
|
|
Condensed Consolidated Statements of
Cash Flows for the nine months ended |
|
|
|
|
April 30, 2010 and April 30,
2009. |
5 |
|
|
|
Notes to Condensed Consolidated Financial Statements. |
6 |
|
Item 2. |
|
Management’s Discussion and Analysis of
Financial Condition and Results of Operations. |
26 |
|
Item 3. |
|
Quantitative and Qualitative Disclosures About Market
Risk. |
39 |
|
Item 4 |
|
Controls and Procedures. |
40 |
|
PART II. OTHER
INFORMATION |
|
|
Item 1. |
|
Legal Proceedings. |
41 |
|
Item 1A. |
|
Risk Factors. |
42 |
|
Item 2. |
|
Unregistered Sales of Equity Securities
and Use of Proceeds. |
42 |
|
Item 6. |
|
Exhibits. |
42 |
|
SIGNATURES |
43 |
|
2
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, 2010 |
|
July 31, 2009 |
ASSETS |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
483,884 |
|
|
$ |
414,011 |
|
Accounts receivable |
|
517,558 |
|
|
|
561,063 |
|
Inventories |
|
430,194 |
|
|
|
413,278 |
|
Prepaid expenses |
|
35,870 |
|
|
|
32,204 |
|
Other current assets |
|
148,965 |
|
|
|
149,894 |
|
Total current assets |
|
1,616,471 |
|
|
|
1,570,450 |
|
Property, plant and equipment |
|
687,002 |
|
|
|
681,658 |
|
Goodwill |
|
282,805 |
|
|
|
282,777 |
|
Intangible assets |
|
71,047 |
|
|
|
63,751 |
|
Other non-current assets |
|
231,957 |
|
|
|
242,176 |
|
Total assets |
$ |
2,889,282 |
|
|
$ |
2,840,812 |
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Notes payable |
$ |
40,113 |
|
|
$ |
42,371 |
|
Accounts payable and other current
liabilities |
|
414,129 |
|
|
|
422,794 |
|
Income taxes payable |
|
103,432 |
|
|
|
137,846 |
|
Current portion of long-term
debt |
|
1,999 |
|
|
|
97,432 |
|
Dividends payable |
|
18,685 |
|
|
|
16,947 |
|
Total current
liabilities |
|
578,358 |
|
|
|
717,390 |
|
Long-term debt, net of current
portion |
|
685,975 |
|
|
|
577,666 |
|
Income taxes payable – non-current |
|
126,177 |
|
|
|
133,919 |
|
Deferred taxes and other non-current
liabilities |
|
275,809 |
|
|
|
297,239 |
|
Total liabilities |
|
1,666,319 |
|
|
|
1,726,214 |
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
Common stock, par value $.10 per
share |
|
12,796 |
|
|
|
12,796 |
|
Capital in excess of par value |
|
215,123 |
|
|
|
197,759 |
|
Retained earnings |
|
1,360,136 |
|
|
|
1,237,735 |
|
Treasury stock, at cost |
|
(355,165 |
) |
|
|
(354,274 |
) |
Stock option loans |
|
(228 |
) |
|
|
(435 |
) |
Accumulated other comprehensive
(loss)/income: |
|
|
|
|
|
|
|
Foreign currency
translation |
|
94,488 |
|
|
|
127,015 |
|
Pension liability
adjustment |
|
(108,977 |
) |
|
|
(108,977 |
) |
Unrealized investment
gains |
|
4,889 |
|
|
|
3,423 |
|
Unrealized losses on
derivatives |
|
(99 |
) |
|
|
(444 |
) |
|
|
(9,699 |
) |
|
|
21,017 |
|
Total stockholders’ equity |
|
1,222,963 |
|
|
|
1,114,598 |
|
Total liabilities and stockholders’ equity |
$ |
2,889,282 |
|
|
$ |
2,840,812 |
|
|
|
|
|
|
|
|
|
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 |
|
Nine Months Ended |
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
Net sales |
$ |
615,982 |
|
$ |
555,883 |
|
$ |
1,723,322 |
|
|
$ |
1,677,201 |
Cost of sales |
|
302,450 |
|
|
291,653 |
|
|
855,307 |
|
|
|
877,231 |
Gross profit |
|
313,532 |
|
|
264,230 |
|
|
868,015 |
|
|
|
799,970 |
|
Selling, general and |
|
|
|
|
|
|
|
|
|
|
|
|
administrative expenses |
|
187,303 |
|
|
168,747 |
|
|
550,973 |
|
|
|
516,337 |
Research and development |
|
18,986 |
|
|
16,218 |
|
|
54,874 |
|
|
|
52,570 |
Restructuring and other |
|
|
|
|
|
|
|
|
|
|
|
|
charges, net |
|
2,030 |
|
|
8,369 |
|
|
6,659 |
|
|
|
25,291 |
Interest expense, net |
|
3,254 |
|
|
6,576 |
|
|
6,342 |
|
|
|
22,555 |
Earnings before income taxes |
|
101,959 |
|
|
64,320 |
|
|
249,167 |
|
|
|
183,217 |
Provision for income taxes |
|
32,268 |
|
|
20,158 |
|
|
62,874 |
|
|
|
57,097 |
|
Net earnings |
$ |
69,691 |
|
$ |
44,162 |
|
$ |
186,293 |
|
|
$ |
126,120 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
0.59 |
|
$ |
0.37 |
|
$ |
1.58 |
|
|
$ |
1.06 |
Diluted |
$ |
0.58 |
|
$ |
0.37 |
|
$ |
1.56 |
|
|
$ |
1.05 |
|
Dividends declared per share |
$ |
0.16 |
|
$ |
0.145 |
|
$ |
0.465 |
|
|
$ |
0.42 |
|
Average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
117,589 |
|
|
118,305 |
|
|
117,713 |
|
|
|
118,753 |
Diluted |
|
119,204 |
|
|
119,065 |
|
|
119,107 |
|
|
|
119,689 |
See accompanying notes
to condensed consolidated financial statements.
4
PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(In thousands)
(Unaudited)
|
Nine Months Ended |
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
Operating activities: |
|
|
|
|
|
|
|
Net cash provided by operating activities |
$ |
257,041 |
|
|
$ |
154,912 |
|
|
Investing activities: |
|
|
|
|
|
|
|
Capital expenditures |
|
(93,513 |
) |
|
|
(92,531 |
) |
Proceeds from sale of retirement benefit
assets |
|
31,481 |
|
|
|
13,395 |
|
Purchases of retirement benefit assets |
|
(42,322 |
) |
|
|
(15,086 |
) |
Acquisitions of businesses, net of cash
acquired |
|
(8,984 |
) |
|
|
(37,249 |
) |
Other |
|
(11,798 |
) |
|
|
(11,823 |
) |
Net cash used by investing
activities |
|
(125,136
|
) |
|
|
(143,294 |
) |
|
Financing activities: |
|
|
|
|
|
|
|
Notes payable |
|
(2,050 |
) |
|
|
(6,934 |
) |
Dividends paid |
|
(52,600 |
) |
|
|
(47,862 |
) |
Net proceeds from stock plans |
|
22,762 |
|
|
|
15,329 |
|
Purchase of treasury stock |
|
(36,202 |
) |
|
|
(64,884 |
) |
Long-term borrowings |
|
30,096 |
|
|
|
171,010 |
|
Repayments of long-term debt |
|
(16,739 |
) |
|
|
(177,860 |
) |
Excess tax benefits from stock-based compensation |
|
|
|
|
|
|
|
arrangements |
|
1,468 |
|
|
|
418 |
|
Net cash used by financing
activities |
|
(53,265 |
) |
|
|
(110,783
|
) |
Cash flow for period |
|
78,640 |
|
|
|
(99,165 |
) |
Cash and cash equivalents at beginning
of year |
|
414,011 |
|
|
|
454,065 |
|
Effect of exchange rate changes on cash and cash |
|
|
|
|
|
|
|
equivalents |
|
(8,767 |
) |
|
|
(34,837 |
) |
Cash and cash equivalents at end of
period |
$ |
483,884 |
|
|
$ |
320,063 |
|
Supplemental disclosures: |
|
|
|
|
|
|
|
Interest paid |
$ |
25,392 |
|
|
$ |
39,543 |
|
Income taxes paid (net of
refunds) |
|
75,440 |
|
|
|
71,877 |
|
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 of Pall Corporation and its subsidiaries (hereinafter collectively
called the “Company”) 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, 2009 (“2009 Form 10-K”).
The Company has evaluated subsequent events
for possible disclosure through the date the financial statements were issued,
noting no events that would require adjustment to, or disclosures in, the
unaudited condensed consolidated financial statements as of and for the three
and nine months ended April 30, 2010.
NOTE 2 - ADOPTION OF
NEW ACCOUNTING PRONOUNCEMENTS
In January 2010, the Financial Accounting
Standards Board (“FASB”) issued updated guidance that amends the disclosure
requirements for fair value measurements. This updated guidance: (i) requires
that the amounts of significant transfers in and out of Level 1 and Level 2 fair
value measurements be disclosed separately along with the reasons for the
transfer; (ii) clarifies the requirement that a reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities; and
(iii) clarifies the requirement that a reporting entity should provide
disclosures about the valuation techniques and inputs used to measure fair value
for both recurring and nonrecurring Level 2 and Level 3 fair value measurements.
This new guidance was effective with the Company’s third quarter of fiscal year
2010. Effective for the Company’s first quarter of fiscal year 2012, this
guidance requires that in the reconciliation of Level 3 fair value measurements,
information about purchases, sales, issuances and settlements be presented
separately on a gross basis. See Note 12, Fair Value Measurements, for the
required disclosures.
In June 2009, the FASB issued authoritative
guidance that established the FASB Accounting Standards Codification (“ASC”) as
the source of authoritative accounting principles recognized by the FASB to be
applied in the preparation of financial statements in conformity with United
States (“U.S.”) Generally Accepted Accounting Principles (“GAAP”). In addition,
this guidance also recognizes rules and interpretive releases of the U.S.
Securities and Exchange Commission (“SEC”) as authoritative GAAP for SEC
registrants. This new guidance was effective for the Company beginning with its
first quarter of fiscal year 2010. The ASC does not change current GAAP other
than the manner in which new accounting guidance is referenced, and the adoption
of this authoritative guidance did not have an impact on the Company’s condensed
consolidated financial statements.
In April 2009, the FASB issued authoritative
guidance that requires publicly traded companies to provide disclosures about
fair value of financial instruments in interim financial information. This new
guidance was effective for the Company beginning with its first quarter of
fiscal year 2010. See Note 13, Investment Securities, for the required
disclosures.
In April 2009, the FASB issued authoritative
guidance to require that assets acquired and liabilities assumed in a business
combination that arise from contingencies be recognized at fair value if fair
value can be reasonably determined. If the fair value of such assets or
liabilities cannot be reasonably determined, then they would generally be
recognized in accordance with certain other pre-existing authoritative guidance.
This new guidance also amends the subsequent accounting for assets and
liabilities arising from contingencies in a business combination and certain
other disclosure requirements. This new guidance was effective for the Company
beginning with its first quarter of fiscal year 2010. The adoption of this
authoritative guidance did not have a material impact on the Company’s condensed
consolidated financial statements.
In April 2008, the FASB issued authoritative
guidance that amends the factors that should be considered in developing renewal
or extension assumptions that are used to determine the useful life of a
recognized intangible asset and requires enhanced related disclosures. This new
guidance was effective for the Company beginning with its first quarter of
fiscal year 2010. The adoption of this authoritative guidance did not have any
impact on the Company’s condensed consolidated financial statements.
6
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
In February 2008, the FASB issued
authoritative guidance that permitted the delayed application of fair value
measurement guidance for non-financial assets and liabilities that are
recognized or disclosed at fair value on a non-recurring basis which, including
consideration of the delay, was effective for the Company beginning with its
first quarter of fiscal year 2010. The Company’s non-financial assets and
liabilities subject to this guidance principally consist of intangible assets
acquired through business combinations and long-lived assets. The adoption of
this authoritative guidance did not impact the Company’s condensed consolidated
financial statements. See Note 12, Fair Value Measurements, for further
discussion.
In December 2007, the FASB issued
authoritative guidance related to the accounting for business combinations. This
guidance establishes principles and requirements for how an acquirer recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree;
recognizes and measures the goodwill acquired in the business combination or a
gain from a bargain purchase, and determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. This new guidance was effective for the
Company beginning with its first quarter of fiscal year 2010. The impact of
adopting this authoritative guidance generally impacts the accounting for future
business combinations; specifically, certain aspects of business combination
accounting, such as transaction costs and certain merger-related restructuring
reserves. One exception to the prospective application of this guidance relates
to accounting for income taxes associated with business combinations that closed
prior to the beginning of the Company’s first quarter of fiscal year 2010. Once
the purchase accounting measurement period closes for these acquisitions, any
further adjustments to income taxes recorded as part of these business
combinations will impact income tax expense. Previously, further adjustments
were predominantly recorded as adjustments to goodwill. The Company did not have
any material acquisitions during the first nine months of
fiscal year 2010. The total amount of such unrecognized income tax benefits as
of August 1, 2009 that would impact the effective tax rate was
$15,288.
In December 2007, the FASB issued
authoritative guidance related to the accounting for noncontrolling interests in
consolidated financial statements. This guidance establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. In addition, this guidance also establishes
disclosure requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. This new
guidance was effective for the Company beginning with its first quarter of
fiscal year 2010. The adoption of this authoritative guidance did not have any
impact on the Company’s condensed consolidated financial
statements.
NOTE 3 - BALANCE
SHEET DETAILS
The following tables provide details
of selected balance sheet items:
|
Apr. 30, 2010 |
|
July 31, 2009 |
Accounts receivable: |
|
|
|
|
|
|
|
Billed |
$ |
452,765 |
|
|
$ |
464,023 |
|
Unbilled |
|
76,035 |
|
|
|
107,642 |
|
Total |
|
528,800 |
|
|
|
571,665 |
|
Less: Allowances for doubtful
accounts |
|
(11,242 |
) |
|
|
(10,602 |
) |
|
$ |
517,558 |
|
|
$ |
561,063 |
|
|
|
|
|
|
|
|
|
Unbilled receivables principally
relate to long-term contracts recorded under the percentage-of-completion method
of accounting.
|
Apr. 30, 2010 |
|
July 31, 2009 |
Inventories: |
|
|
|
|
|
Raw materials and components |
$ |
118,218 |
|
$ |
115,274 |
Work-in-process |
|
57,941 |
|
|
55,409 |
Finished goods |
|
254,035 |
|
|
242,595 |
|
$ |
430,194 |
|
$ |
413,278 |
|
|
|
|
|
|
7
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
|
Apr. 30, 2010 |
|
July 31, 2009 |
Property, plant and equipment: |
|
|
|
|
|
|
|
Property, plant and
equipment |
$ |
1,525,896 |
|
|
$ |
1,512,624 |
|
Less: Accumulated depreciation |
|
|
|
|
|
|
|
and amortization |
|
(838,894 |
) |
|
|
(830,966 |
) |
|
$ |
687,002 |
|
|
$ |
681,658 |
|
|
|
|
|
|
|
|
|
NOTE 4 - GOODWILL AND
INTANGIBLE ASSETS
The following table presents
goodwill, allocated by reportable segment.
|
Apr. 30, 2010 |
|
July 31, 2009 |
Life Sciences |
$ |
91,052 |
|
$ |
91,361 |
Industrial |
|
191,753 |
|
|
191,416 |
|
$ |
282,805 |
|
$ |
282,777 |
|
|
|
|
|
|
The change in the carrying amount of goodwill
is primarily attributable to the excess cost over fair value of the net assets
acquired relating to an immaterial acquisition of a biotechnology company during
the second quarter of fiscal year 2010, which is reflected in the Life Sciences
segment, partially offset by changes in foreign exchange rates used to translate
the goodwill contained in the financial statements of foreign subsidiaries using
the rates at each respective balance sheet date.
Intangible assets, net, consist of
the following:
|
Apr. 30, 2010 |
|
|
|
|
Accumulated |
|
|
|
|
Gross |
|
Amortization |
|
Net |
Patents and unpatented
technology |
$ |
99,310 |
|
$ |
55,400 |
|
$ |
43,910 |
Customer-related |
|
26,147 |
|
|
2,782 |
|
|
23,365 |
Trademarks |
|
6,443 |
|
|
4,104 |
|
|
2,339 |
Other |
|
3,511 |
|
|
2,078 |
|
|
1,433 |
|
$ |
135,411 |
|
$ |
64,364 |
|
$ |
71,047 |
|
|
July 31, 2009 |
|
|
|
|
Accumulated |
|
|
|
|
Gross |
|
Amortization |
|
Net |
Patents and unpatented
technology |
$ |
96,421 |
|
$ |
49,680 |
|
$ |
46,741 |
Customer-related |
|
13,910 |
|
|
1,297 |
|
|
12,613 |
Trademarks |
|
6,379 |
|
|
3,712 |
|
|
2,667 |
Other |
|
3,780 |
|
|
2,050 |
|
|
1,730 |
|
$ |
120,490 |
|
$ |
56,739 |
|
$ |
63,751 |
|
|
|
|
|
|
|
|
|
The change in the carrying amount of
customer-related intangibles is primarily related to the purchase of certain
distribution rights to a customer base related primarily to the Life Sciences
segment and the acquisition of a biotechnology company, as discussed above.
Amortization expense for intangible assets for
the three and nine months ended April 30, 2010 was $3,161 and $8,475,
respectively. Amortization expense for intangible assets for the three and nine
months ended April 30, 2009 was $2,633 and $7,155, respectively. Amortization
expense is estimated to be approximately $3,092 for the remainder of fiscal year
2010, $12,239 in fiscal year 2011, $11,973 in fiscal year 2012, $8,428 in fiscal
year 2013, $7,212 in fiscal year 2014 and $5,813 in fiscal year 2015.
8
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)
NOTE 5 - TREASURY
STOCK
On November 15, 2006, the board of directors
authorized an expenditure of $250,000 to repurchase shares of the Company’s
common stock. On October 16, 2008, the board authorized an additional
expenditure of $350,000 to repurchase shares. 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,
2010, the Company purchased 961 shares in open-market transactions at an
aggregate cost of $36,202 with an average price per share of $37.65. As of April
30, 2010, $416,741 remains to be expended under the current board repurchase
authorizations. Repurchased shares are held in treasury for use in connection
with the Company’s stock plans and for general corporate purposes.
During the nine months ended April 30, 2010,
1,104 shares were issued under the Company’s stock-based compensation plans. At
April 30, 2010, the Company held 10,940 treasury shares.
NOTE 6 -
CONTINGENCIES AND COMMITMENTS
With respect to the matters described in Note
15, Contingencies and Commitments, to the Company’s consolidated financial
statements included in the 2009 Form 10-K, under the heading Federal Securities
Class Actions, Shareholder Derivative Lawsuits and Other Proceedings, no
liabilities or related receivables for insurance recoveries have been reflected
in the condensed consolidated financial statements as of April 30, 2010 as these
amounts are not currently estimable.
The Company and its subsidiaries are subject
to certain other legal actions that arise in the normal course of business.
Other than those legal proceedings and claims discussed below and in the 2009
Form 10-K, the Company did not have any current other legal proceedings and
claims that would individually or in the aggregate have a reasonably possible
materially adverse affect on its financial condition or operating results.
However, the results of legal proceedings cannot be predicted with certainty. If
the Company failed to prevail in several of these legal matters in the same
reporting period, the operating results of a particular reporting period could
be materially adversely affected.
Federal Securities Class
Actions:
As previously disclosed in Part 1 – Item 3 –
Legal Proceedings in the 2009 Form 10-K, the U.S. District Court for the Eastern
District of New York consolidated four putative class action lawsuits filed
against the Company and certain members of its management team alleging
violations of Sections 10(b) and 20(a) of the Exchange Act and Exchange Act Rule
10b-5 relating to the Company’s understatement of certain U.S. federal income
tax payments and its provision for income taxes in certain prior periods (as
described in Note 2, Audit Committee Inquiry and Restatement to the consolidated
financial statements included in the 2007 Form 10-K). On September 21, 2009, the
Court denied the Company’s motion to dismiss the consolidated amended complaint.
On October 9, 2009, the Company moved for certification for interlocutory
appeal, and the Court denied the motion by Memorandum and Order entered November
25, 2009.
Environmental
Matters:
With respect to the environmental matters at
the Company’s Glen Cove, New York site, previously disclosed in Part I — Item 3
— Legal Proceedings in the Company’s 2009 Form 10-K, the Company and the New
York State Department of Environmental Conservation executed on September 23,
2009 a Consent Decree settling liability for the shallow and intermediate
groundwater zones, termed OU-1. On October 23, 2009, the Consent Decree was
entered by the clerk of the federal District Court for the Eastern District of
New York and became effective. Pursuant to the Consent Decree, the Company
agreed to pay $2 million (which was previously accrued) in exchange for a broad
release of OU-1 claims and liability. The settlement payment of $2 million,
which was due by November 23, 2009, was paid by the Company on November 19,
2009. Claims and losses arising out of or in connection with the deep
groundwater zone, termed OU-2, and any damages to the State’s natural resource
are not covered by the Consent Decree and are thus excluded from the settlement.
As previously disclosed in Part I — Item 3 — Legal Proceedings in the Company’s
2009 Form 10-K, the New York State Department of Environmental Conservation’s
OU-2 investigation continues to be ongoing.
9
PALL CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(In thousands, except per share data)
(Unaudited)
The Company’s condensed consolidated balance
sheet at April 30, 2010 includes liabilities for environmental matters of
approximately $7,969, which relate primarily to the previously reported
environmental proceedings involving a Company subsidiary, Gelman Sciences Inc.,
pertaining to groundwater contamination. In the opinion of management, the
Company is in substantial compliance with applicable environmental laws and its
current accruals for environmental remediation are adequate. However, as
regulatory standards under environmental laws are becoming increasingly
stringent, there can be no assurance that future developments, additional
information and experience gained will not cause the Company to incur material
environmental liabilities or costs beyond those accrued in its condensed
consolidated financial statements. The Company is currently in negotiations with
the Michigan Department of Environmental Quality regarding its Comprehensive
Proposal to Modify Cleanup Program that was submitted to the State of Michigan
on May 4, 2009. It is reasonably possible that the results of these negotiations
may result in a material increase to the Company’s environmental reserves beyond
those accrued in its condensed consolidated balance sheet at April 30, 2010,
however, the impact is not currently estimable.
NOTE 7 -
RESTRUCTURING AND OTHER CHARGES, NET
The following tables summarize the
restructuring and other charges (“ROTC”) recorded for the three and nine months
ended April 30, 2010 and April 30, 2009:
|
|
Three Months Ended Apr. 30,
2010 |
|
Nine Months Ended Apr. 30,
2010 |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Charges/ |
|
|
|
|
|
|
|
|
|
Charges/ |
|
|
|
|
|
|
Restructuring |
|
(Income) |
|
|
|
|
|
Restructuring |
|
(Income) |
|
|
|
|
|
|
(1) |
|
(2) |
|
Total |
|
(1) |
|
(2) |
|
Total |
Severance |
|
$ |
218 |
|
|
$ |
— |
|
$ |
218 |
|
|
$ |
2,510 |
|
|
$ |
— |
|
|
$ |
2,510 |
|
Other costs |
|
|
1,382 |
|
|
|
— |
|
|
1,382 |
|
|
|
4,570 |
|
|
|
— |
|
|
|
4,570 |
|
Environmental
matters (2a) |
|
|
— |
|
|
|
50 |
|
|
50 |
|
|
|
— |
|
|
|
991 |
|
|
|
991 |
|
Legal related costs, net of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(insurance
claim |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
payments) (2b) |
|
|
— |
|
|
|
406 |
|
|
406 |
|
|
|
— |
|
|
|
(799 |
) |
|
|
(799 |
) |
Asset impairment/(gain) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on sale (2c) |
|
|
(26 |
) |
|
|
— |
|
|
(26 |
) |
|
|
237 |
|
|
|
(774 |
) |
|
|
(537 |
) |
|
|
|
1,574 |
|
|
|
456 |
|
|
2,030 |
|
|
|
7,317 |
|
|
|
(582 |
) |
|
|
6,735 |
|
Reversal of excess |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restructuring
reserves |
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
(76 |
) |
|
|
— |
|
|
|
(76 |
) |
|
|
$ |
1,574 |
|
|
$ |
456 |
|
$ |
2,030 |
|
|
$ |
7,241 |
|
|
$ |
(582 |
) |
|
$ |
6,659 |
|
|
Cash |
|
$ |
1,600 |
|
|
$ |
456 |
|
$ |
2,056 |
|
|
$ |
6,265 |
|
|
$ |
(582 |
) |
|
$ |
5,683 |
|
Non-cash |
|
|
(26 |
) |
|
|
— |
|
|
(26 |
) |
|
|
976 |
|
|
|
— |
|
|
|
976 |
|
|
|
$ |
1,574 |
|
|
$ |
456 |
|
$ |
2,030 |
|
|
$ |
7,241 |
|
|
$ |
(582 |
) |
|
$ |
6,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
PALL CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except
per share data)
(Unaudited)
|
|
Three Months Ended Apr. 30,
2009 |
|
Nine Months Ended Apr. 30,
2009 |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Charges / |
|
|
|
|
|
|
|
|
|
Charges/ |
|
|
|
|
|
|
Restructuring |
|
(Income) |
|
|
|
|
|
Restructuring |
|
(Income) |
|
|
|
|
|
|
(1) |
|
(2) |
|
Total |
|
(1) |
|
(2) |
|
Total |
Severance |
|
$ |
6,946 |
|
|
$ |
— |
|
|
$ |
6,946 |
|
|
$ |
14,667 |
|
|
$ |
— |
|
|
$ |
14,667 |
|
Asset impairment/loss on sale (2c) |
|
|
170 |
|
|
|
— |
|
|
|
170 |
|
|
|
174 |
|
|
|
3,477 |
|
|
|
3,651 |
|
Other costs/(income) |
|
|
1,290 |
|
|
|
(524 |
) |
|
|
766 |
|
|
|
3,581 |
|
|
|
(524 |
) |
|
|
3,057 |
|
In-process research and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
(2d) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,743 |
|
|
|
1,743 |
|
Legal related costs, net of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(insurance
claim |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
payments) (2b) |
|
|
— |
|
|
|
84 |
|
|
|
84 |
|
|
|
— |
|
|
|
904 |
|
|
|
904 |
|
Environmental matters (2a) |
|
|
— |
|
|
|
525 |
|
|
|
525 |
|
|
|
— |
|
|
|
1,433 |
|
|
|
1,433 |
|
|
|
|
8,406 |
|
|
|
85 |
|
|
|
8,491 |
|
|
|
18,422 |
|
|
|
7,033 |
|
|
|
25,455 |
|
Reversal of excess |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restructuring
reserves |
|
|
(122 |
) |
|
|
— |
|
|
|
(122 |
) |
|
|
(164 |
) |
|
|
— |
|
|
|
(164 |
) |
|
|
$ |
8,284 |
|
|
$ |
85 |
|
|
$ |
8,369 |
|
|
$ |
18,258 |
|
|
$ |
7,033 |
|
|
$ |
25,291 |
|
|
Cash |
|
$ |
8,573 |
|
|
$ |
85 |
|
|
$ |
8,658 |
|
|
$ |
18,695 |
|
|
$ |
1,813 |
|
|
$ |
20,508 |
|
Non-cash |
|
|
(289 |
) |
|
|
— |
|
|
|
(289 |
) |
|
|
(437 |
) |
|
|
5,220 |
|
|
|
4,783 |
|
|
|
$ |
8,284 |
|
|
$ |
85 |
|
|
$ |
8,369 |
|
|
$ |
18,258 |
|
|
$ |
7,033 |
|
|
$ |
25,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Restructuring:
Restructuring charges reflect the expenses
incurred in connection with the Company’s cost reduction initiatives, including
severance liabilities for the termination of certain employees worldwide as well
as various other costs related to these initiatives.
The following table summarizes the activity
related to restructuring liabilities that were recorded in the nine months ended
April 30, 2010 and in fiscal year 2009.
|
|
|
|
|
|
Lease |
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
|
|
|
|
|
|
|
|
Liabilities & |
|
|
|
|
|
|
Severance |
|
Other |
|
Total |
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Original charge |
|
$ |
2,510 |
|
|
$ |
4,570 |
|
|
$ |
7,080 |
|
Utilized |
|
|
(1,940 |
) |
|
|
(4,480 |
) |
|
|
(6,420 |
) |
Translation |
|
|
2 |
|
|
|
(12 |
) |
|
|
(10 |
) |
Balance at Apr. 30, 2010 |
|
$ |
572 |
|
|
$ |
78 |
|
|
$ |
650 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Original charge |
|
$ |
18,938 |
|
|
$ |
4,734 |
|
|
$ |
23,672 |
|
Utilized |
|
|
(12,757 |
) |
|
|
(4,133 |
) |
|
|
(16,890 |
) |
Translation |
|
|
412 |
|
|
|
20 |
|
|
|
432 |
|
Balance at Jul. 31, 2009 |
|
|
6,593 |
|
|
|
621 |
|
|
|
7,214 |
|
Utilized |
|
|
(4,889 |
) |
|
|
(287 |
) |
|
|
(5,176 |
) |
Reversal of excess reserves
(a) |
|
|
(16 |
) |
|
|
— |
|
|
|
(16 |
) |
Translation |
|
|
(60 |
) |
|
|
(21 |
) |
|
|
(81 |
) |
Balance at Apr. 30, 2010 |
|
$ |
1,628 |
|
|
$ |
313 |
|
|
$ |
1,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
PALL CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(In thousands, except per share data)
(Unaudited)
(a) Reflects the reversal of excess restructuring reserves originally
recorded in fiscal year 2009.
Excluded from the tables above are
restructuring liabilities relating to fiscal years 2006 through 2008. At April
30, 2010, the balance of these restructuring liabilities in the aggregate was
$159.
(2) Other
Charges/(Income):
(a) Environmental matters:
In the three and nine months ended April 30,
2010 and April 30, 2009, the Company increased its previously established
environmental reserve related to matters in Pinellas Park, Florida and Ann
Arbor, Michigan. Such costs in the nine months ended April 30, 2009 were partly
offset by the receipt of an insurance claim payment.
(b) Legal related items:
In the three and nine months ended April 30,
2010 and April 30, 2009, the Company recorded legal and other professional fees
related to the Federal Securities Class Actions, Shareholder Derivative Lawsuits
and Other Proceedings (see Note 6, Commitments and Contingencies) which pertain
to matters that had been under audit committee inquiry as discussed in Note 2,
Audit Committee Inquiry and Restatement, to the consolidated financial
statements included in the Company’s Annual Report on Form 10-K for the fiscal
year ended July 31, 2007 (“2007 Form 10-K”). The receipt of insurance claim
payments more than offset such costs in the nine months ended April 30,
2010.
(c) Impairment and gain on sale of assets:
In the three months ended October 31, 2008,
the Company recorded a charge of $1,977 for the deemed to be
other-than-temporary diminution in value of certain equity and debt investment
securities held by its benefits protection trust. In the three months ended
January 31, 2010, the Company recorded a gain of $774 on the sale of certain
equity and debt investment securities held by its benefits protection trust.
In the three months ended January 31, 2009,
the Company recorded a charge of $1,500 for the impairment of capitalized
software development costs related to discontinued projects.
(d) In-process research and development:
In the three months ended October 31, 2008,
the Company recorded a charge of $1,743 to write off in-process research and
development acquired in the acquisition of GeneSystems, SA.
NOTE 8 – INCOME
TAXES
The Company’s effective tax rate for the nine
months ended April 30, 2010 and April 30, 2009 was 25.2% and 31.2%,
respectively. For the nine months ended April 30, 2010, the effective tax rate
varied from the U.S. federal statutory rate primarily due to the benefits of
foreign operations and the resolution of foreign tax audits resulting in the
recognition of $16,200 of income tax benefit. For the nine months ended April
30, 2009, the effective tax rate varied from the U.S. federal statutory rate
primarily due to the benefits of foreign operations and the retroactive
extension of the federal research credit per the Emergency Economic
Stabilization Act of 2008.
At April 30, 2010 and July 31, 2009, the
Company had gross unrecognized income tax benefits of $213,434 and $240,683,
respectively. During the nine months ended April 30, 2010, the amount of
unrecognized income tax benefits decreased by $27,249, primarily due to the
aforementioned resolution of foreign tax audits which covered fiscal years 2001
through 2004, the resolution of a U.S. federal tax audit covering fiscal years
1996 through 1998, and the expiration of various foreign statutes of limitation,
partially offset by tax positions taken during the current period. As of April
30, 2010, the amount of net unrecognized income tax benefits that, if
recognized, would impact the effective tax rate was $153,335.
12
PALL CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(In thousands, except per share data)
(Unaudited)
The Company recognizes accrued interest
expense related to unrecognized income tax benefits in interest expense and the
balance at the end of a reporting period is recorded in accounts payable and
other current liabilities as well as deferred taxes and other non-current
liabilities in the Company’s condensed consolidated balance sheet. Penalties are
accrued as part of the provision for income taxes and the unpaid balance at the
end of a reporting period is recorded as part of current or non-current income
taxes payable. At April 30, 2010 and July 31, 2009, the Company had accrued
$61,159 and $75,157, respectively, for potential payment of interest and
penalties. The decrease of $13,998 was primarily due to the aforementioned
resolution of the foreign and federal tax audits and the expiration of various
foreign statutes of limitation. As previously disclosed in Note 2, Audit
Committee Inquiry and Restatement, to the consolidated financial statements
included in the 2007 Form 10-K, the actual amounts due and payable upon final
settlement of the matters that are under review by taxing authorities in the
U.S. and other taxing jurisdictions may differ materially from the Company’s
estimate. In particular, the Company may be subject to potential additional
penalties that may be asserted by the U.S. and foreign taxing authorities of up
to $121,135. In determining the probability of those potential additional
penalties being assessed, the Company concluded that it was not more likely than
not that those potential additional penalties will be assessed. As a result, the
Company did not recognize the potential additional penalties of up to $121,135
in the condensed consolidated financial statements as of April 30, 2010.
Due to the potential resolution of tax
examinations and the expiration of various statutes of limitations, the Company
believes that it is reasonably possible that the gross amount of unrecognized
income tax benefits may decrease within the next twelve months by a range of
zero to $81,179.
NOTE 9 - 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, 2010 |
|
Apr. 30, 2009 |
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
|
Apr. 30, 2010 |
|
Apr.
30, 2009 |
Service cost |
|
$
|
1,983 |
|
|
$ |
2,033 |
|
|
$
|
1,202 |
|
|
$
|
1,196 |
|
|
$
|
3,185 |
|
|
$ |
3,229 |
|
Interest cost |
|
|
3,048 |
|
|
|
3,107 |
|
|
|
4,328 |
|
|
|
3,766 |
|
|
|
7,376 |
|
|
|
6,873 |
|
Expected return on plan assets |
|
|
(2,023 |
) |
|
|
(2,114 |
) |
|
|
(3,252 |
) |
|
|
(3,065 |
) |
|
|
(5,275 |
) |
|
|
(5,179 |
) |
Amortization of prior service cost |
|
|
446 |
|
|
|
385 |
|
|
|
64 |
|
|
|
60 |
|
|
|
510 |
|
|
|
445 |
|
Recognized actuarial loss |
|
|
608 |
|
|
|
264 |
|
|
|
675 |
|
|
|
271 |
|
|
|
1,283 |
|
|
|
535 |
|
Net periodic benefit
cost |
|
$ |
4,062 |
|
|
$ |
3,675 |
|
|
$ |
3,017 |
|
|
$ |
2,228 |
|
|
$ |
7,079 |
|
|
$ |
5,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
Ended |
|
|
U.S. Plans |
|
Foreign Plans |
|
Total |
|
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
|
Apr. 30, 2010 |
|
Apr.
30, 2009 |
Service cost |
|
$
|
5,949 |
|
|
$ |
6,099 |
|
|
$
|
3,682 |
|
|
$
|
3,673 |
|
|
$
|
9,631 |
|
|
$ |
9,772 |
|
Interest cost |
|
|
9,144 |
|
|
|
9,321 |
|
|
|
13,517 |
|
|
|
12,230 |
|
|
|
22,661 |
|
|
|
21,551 |
|
Expected return on plan assets |
|
|
(6,069 |
) |
|
|
(6,342 |
) |
|
|
(10,148 |
) |
|
|
(10,105 |
) |
|
|
(16,217 |
) |
|
|
(16,447 |
) |
Amortization of prior service cost |
|
|
1,338 |
|
|
|
1,155 |
|
|
|
190 |
|
|
|
175 |
|
|
|
1,528 |
|
|
|
1,330 |
|
Recognized actuarial loss |
|
|
1,824 |
|
|
|
792 |
|
|
|
2,111 |
|
|
|
902 |
|
|
|
3,935 |
|
|
|
1,694 |
|
Net periodic benefit
cost |
|
$ |
12,186 |
|
|
$ |
11,025 |
|
|
$ |
9,352 |
|
|
$ |
6,875 |
|
|
$ |
21,538 |
|
|
$ |
17,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10 - STOCK-BASED
PAYMENT
The Company currently has four stock-based
employee and director compensation award types (Stock Option, Restricted Stock
Unit (“RSU”), Management Stock Purchase Plan (“MSPP”) and the Employee Stock
Purchase Plan (“ESPP”)), which are more fully described in Note 16, Common
Stock, to the consolidated financial statements included in the 2009 Form 10-K.
13
PALL CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(In thousands, except per share data)
(Unaudited)
The detailed components of stock-based
compensation expense recorded in the condensed consolidated statements of
earnings for the three and nine months ended April 30, 2010 and April 30, 2009
are reflected in the table below.
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
Stock options |
|
$ |
1,779 |
|
$ |
1,166 |
|
$ |
3,788 |
|
$ |
3,353 |
Restricted stock units |
|
|
2,522 |
|
|
2,184 |
|
|
8,631 |
|
|
7,844 |
ESPP |
|
|
1,047 |
|
|
1,248 |
|
|
3,509 |
|
|
3,520 |
MSPP |
|
|
946 |
|
|
899 |
|
|
2,804 |
|
|
2,870 |
Total |
|
$ |
6,294 |
|
$ |
5,497 |
|
$ |
18,732 |
|
$ |
17,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table illustrates the
income tax effects related to stock-based compensation.
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
Excess tax benefits in cash flows
from |
|
|
|
|
|
|
|
|
|
|
|
|
financing activities |
|
$ |
784 |
|
$ |
11 |
|
$ |
1,468 |
|
$ |
418 |
Tax benefit recognized related to |
|
|
|
|
|
|
|
|
|
|
|
|
total stock-based compensation
expense |
|
|
1,919 |
|
|
1,442 |
|
|
5,495 |
|
|
5,015 |
Actual tax benefit realized for tax
deductions |
|
|
|
|
|
|
|
|
|
|
|
|
from option exercises of
stock-based |
|
|
|
|
|
|
|
|
|
|
|
|
payment arrangements |
|
|
1,599 |
|
|
511 |
|
|
5,090 |
|
|
2,208 |
Stock Options and ESPP
A summary of option activity for all stock
option plans during the nine months ended April 30, 2010 is presented below:
Stock Options |
|
Shares |
|
Weighted- Average Exercise Price |
|
Weighted- Average Remaining Contractual Term (in
years) |
|
Aggregate Intrinsic Value |
Outstanding at August 1, 2009
(a) |
|
3,724 |
|
|
$ |
28.04 |
|
|
|
|
|
Granted |
|
— |
|
|
|
— |
|
|
|
|
|
Exercised |
|
(40 |
) |
|
|
23.30 |
|
|
|
|
|
Forfeited or
Expired |
|
(1 |
) |
|
|
30.08 |
|
|
|
|
|
Outstanding at October 31,
2009 |
|
3,683 |
|
|
$ |
28.09 |
|
3.9 |
|
$ |
20,285 |
Granted |
|
363 |
|
|
|
37.19 |
|
|
|
|
|
Exercised |
|
(56 |
) |
|
|
22.74 |
|
|
|
|
|
Forfeited or
Expired |
|
(16 |
) |
|
|
31.14 |
|
|
|
|
|
Outstanding at January 31,
2010 |
|
3,974 |
|
|
$ |
28.98 |
|
4.0 |
|
$ |
26,622 |
Granted |
|
3 |
|
|
|
35.39 |
|
|
|
|
|
Exercised |
|
(217 |
) |
|
|
22.83 |
|
|
|
|
|
Forfeited or
Expired |
|
(8 |
) |
|
|
24.51 |
|
|
|
|
|
Outstanding at April 30, 2010 |
|
3,752 |
|
|
$ |
29.35 |
|
3.9 |
|
$ |
37,481 |
Expected to vest at April 30, 2010 |
|
1,427 |
|
|
$ |
33.88 |
|
5.6 |
|
$ |
7,942 |
Exercisable at April 30, 2010 |
|
2,299 |
|
|
$ |
26.49 |
|
2.8 |
|
$ |
29,390 |
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
This amount
differs from the 2009 Form 10-K relating to option grants to the chairman
and chief executive officer in fiscal years 2007 - 2009 that inadvertently
exceeded a limitation applicable to option awards under the Pall
Corporation 2005 Stock Compensation Plan, and the excess options were
determined to be void as of the grant date. The effects of the void
options on stock-based compensation expense were immaterial to the results
of operations for all periods
impacted.
|
14
PALL CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(In thousands, except per share data)
(Unaudited)
As of April 30, 2010, there was $8,809 of
total unrecognized compensation cost related to nonvested stock options, which
is expected to be recognized over a weighted-average period of 2.8 years. The
total intrinsic value of options exercised during the three and nine months
ended April 30, 2010 was $3,719 and $4,859, respectively. The total intrinsic
value of options exercised during the three and nine months ended April 30, 2009
was $123 and $1,270, respectively.
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 300 shares and 323 shares were issued under the ESPP
during the semi-annual stock purchase periods ended April 30, 2010 and April 30,
2009, respectively. A total of 319 shares and 244 shares were issued under the
ESPP related to the semi-annual stock purchase periods ended October 31, 2009
and October 31, 2008, respectively.
The following weighted average assumptions
were used in estimating the fair value of stock options and ESPP shares granted
during the three and nine months ended April 30, 2010 and April 30, 2009 (there
were no stock options granted during the three months ended April 30, 2009 or
grants related to the ESPP during the three months ended April 30, 2010 and
April 30, 2009):
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
Apr. 30, 2010 |
|
Apr. 30,
2009 |
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
Stock Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at grant date |
|
$ |
9.96 |
|
|
N/A |
|
$ |
10.50 |
|
|
$ |
6.37 |
|
Valuation assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
|
2.0 |
% |
|
N/A |
|
|
2.0 |
% |
|
|
1.8 |
% |
Expected
volatility |
|
|
34.9 |
% |
|
N/A |
|
|
34.9 |
% |
|
|
31.0 |
% |
Expected life
(years) |
|
|
5.0 |
|
|
N/A |
|
|
5.0 |
|
|
|
5.0 |
|
Risk-free interest
rate |
|
|
2.4 |
% |
|
N/A |
|
|
2.4 |
% |
|
|
1.6 |
% |
|
ESPP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at grant date |
|
|
N/A |
|
|
N/A |
|
$ |
7.90 |
|
|
$ |
7.67 |
|
Valuation assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend
yield |
|
|
N/A |
|
|
N/A |
|
|
2.0 |
% |
|
|
1.4 |
% |
Expected
volatility |
|
|
N/A |
|
|
N/A |
|
|
35.8 |
% |
|
|
50.3 |
% |
Expected life
(years) |
|
|
N/A |
|
|
N/A |
|
|
½ year |
|
|
½ year |
Risk-free interest
rate |
|
|
N/A |
|
|
N/A |
|
|
0.2 |
% |
|
|
1.1 |
% |
The fair value of the options and ESPP shares
granted is estimated using a Black-Scholes-Merton option-pricing formula and
amortized to expense over the options’ service periods. The Company has placed
exclusive reliance on historical volatility in its estimate of expected
volatility. The Company used a sequential period of historical data equal to the
expected term (or expected life) of the options and ESPP shares granted using a
simple average calculation based upon the daily closing prices of the
aforementioned period.
The expected life (years) represents the
period of time for which the options and ESPP shares granted are expected to be
outstanding. This estimate was derived from historical share option exercise
experience, which management believes provides the best estimate of the expected
term.
15
PALL CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(In thousands, except per share data)
(Unaudited)
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 a four year period for matches made thereafter.
Such restricted units aggregated 1,020 and 984 as of April 30, 2010 and April
30, 2009, respectively. As of April 30, 2010, there was $7,392 of total
unrecognized compensation cost related to nonvested restricted stock units
granted under the MSPP, which is expected to be recognized over a
weighted-average period of 2.6 years.
The following is a summary of MSPP
activity during the three and nine months ended April 30, 2010 and April 30,
2009:
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
Deferred compensation and cash |
|
|
|
|
|
|
|
|
|
|
|
|
contributions |
|
$ |
111 |
|
$ |
50 |
|
$ |
2,758 |
|
$ |
4,807 |
Fair value of restricted stock units vested |
|
$ |
1 |
|
$ |
72 |
|
$ |
2,624 |
|
$ |
1,684 |
Vested units distributed |
|
|
2 |
|
|
9 |
|
|
179 |
|
|
151 |
RSUs
A summary of restricted stock unit activity,
related to employees, for the Pall Corporation 2005 Stock Compensation Plan
(“2005 Stock Plan”) during the nine months ended April 30, 2010, is presented
below:
|
|
Shares |
|
Weighted- Average Grant-Date Fair
Value |
Nonvested at August 1, 2009 |
|
1,216 |
|
|
$ |
33.10 |
Granted |
|
— |
|
|
|
— |
Vested |
|
(5 |
) |
|
|
31.50 |
Forfeited |
|
— |
|
|
|
— |
Nonvested at October 31, 2009 |
|
1,211 |
|
|
$ |
33.10 |
Granted |
|
107 |
|
|
|
37.22 |
Vested |
|
(52 |
) |
|
|
28.68 |
Forfeited |
|
(10 |
) |
|
|
34.91 |
Nonvested at January 31, 2010 |
|
1,256 |
|
|
$ |
33.62 |
Granted |
|
1 |
|
|
|
35.39 |
Vested |
|
(1 |
) |
|
|
35.61 |
Forfeited |
|
(6 |
) |
|
|
32.42 |
Nonvested at April 30, 2010 |
|
1,250 |
|
|
$ |
33.61 |
|
|
|
|
|
|
|
As of April 30, 2010, there was $22,070 of
total unrecognized compensation cost related to nonvested restricted stock units
granted under the 2005 Stock Plan, which is expected to be recognized over a
weighted-average period of 2.7 years.
There were no annual award units
granted to non-employee directors of the Company during the three months ended
April 30, 2010. Non-employee directors of the Company were granted in the
aggregate 34 annual award units of restricted stock during the nine months ended
April 30, 2010, with a weighted-average fair market value of $36.69 per share.
As of April 30, 2010, approximately
6,191 shares of common stock of the Company were reserved for stock-based
compensation plans. Of the 6,191 shares, approximately 2,984 shares were
reserved for vested awards and approximately 3,207 shares were reserved for
unvested awards. The Company currently uses treasury shares that have been
repurchased through the Company’s stock repurchase program to satisfy share
award exercises.
16
PALL CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(In thousands, except per share data)
(Unaudited)
NOTE 11 - EARNINGS
PER SHARE
The condensed consolidated statements of
earnings present basic and diluted earnings per share. Basic earnings per share
is determined by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share considers the potential effect of dilution on basic earnings
per share assuming potentially dilutive shares that meet certain criteria, such
as those issuable upon exercise of stock options, were outstanding. The treasury
stock method reduces the dilutive effect of potentially dilutive securities as
it assumes that cash proceeds (from the issuance of potentially dilutive
securities) are used to buy back shares at the average share price during the
period. Employee stock options and units aggregating 803 and 3,099 shares were
not included in the computation of diluted shares for the three months ended
April 30, 2010 and April 30, 2009, respectively, because their effect would have
been antidilutive. For the nine months ended April 30, 2010 and April 30, 2009,
1,341 and 2,740 antidilutive shares, respectively, were excluded. The following
is reconciliation between basic shares outstanding and diluted shares
outstanding:
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
Basic shares outstanding |
|
117,589 |
|
118,305 |
|
117,713 |
|
118,753 |
Effect of stock plans |
|
1,615 |
|
760 |
|
1,394 |
|
936 |
Diluted shares outstanding |
|
119,204 |
|
119,065 |
|
119,107 |
|
119,689 |
|
|
|
|
|
|
|
|
|
NOTE 12 - FAIR VALUE
MEASUREMENTS
The Company records certain of its financial
assets and liabilities at fair value, which is the price that would be received
to sell an asset or paid to transfer a liability in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants at the measurement date.
The current authoritative guidance discusses
valuation techniques, such as the market approach (comparable market prices),
the income approach (present value of future income or cash flow), and the cost
approach (cost to replace the service capacity of an asset or replacement cost).
Authoritative guidance utilizes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value into three broad
levels. The following is a brief description of those three levels:
- Level 1: Use of observable inputs
such as quoted prices (unadjusted) in active markets for identical assets or
liabilities.
- Level 2: Use of inputs other than
quoted prices included in Level 1, which are observable for the asset or
liability, either directly or indirectly. These include quoted prices for
similar assets or liabilities in active markets, quoted prices for identical
or similar assets or liabilities in markets that are not active, or other
inputs that are observable or can be corroborated by observable market
data.
- Level 3: Use of inputs that are
unobservable.
17
PALL CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(In thousands, except per share data)
(Unaudited)
The following table presents, for each of
these hierarchy levels, the Company’s financial assets and liabilities that are
measured at fair value as of April 30, 2010:
|
|
|
|
|
Fair Value
Measurements |
|
|
As of |
|
|
|
|
|
|
|
|
|
|
|
Apr. 30, 2010 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
Financial assets carried at fair
value |
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
8,691 |
|
$ |
8,691 |
|
$ |
— |
|
$ |
— |
Available-for-sale
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities |
|
|
5,831 |
|
|
5,831 |
|
|
— |
|
|
— |
Debt
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury |
|
|
18,882 |
|
|
— |
|
|
18,882 |
|
|
— |
Other
U.S. government |
|
|
18,136 |
|
|
— |
|
|
18,136 |
|
|
— |
CMO/mortgage-backed |
|
|
265 |
|
|
— |
|
|
265 |
|
|
— |
Corporate |
|
|
23,854 |
|
|
— |
|
|
23,854 |
|
|
— |
Derivative financial
instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange forward contracts |
|
|
592 |
|
|
— |
|
|
592 |
|
|
— |
|
Financial liabilities carried at fair
value |
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial
instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap contract |
|
|
152 |
|
|
— |
|
|
152 |
|
|
— |
Foreign
exchange forward contracts |
|
|
735 |
|
|
— |
|
|
735 |
|
|
— |
The following table presents, for each of
these hierarchy levels, the Company’s financial assets and liabilities that are
measured at fair value as of July 31, 2009:
|
|
|
|
|
Fair Value
Measurements |
|
|
As of |
|
|
|
|
|
|
|
|
|
|
|
Jul. 31, 2009 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
Financial assets carried at fair value
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
Money market
funds |
|
$ |
50,173 |
|
$ |
50,173 |
|
$ |
— |
|
$ |
— |
Available-for-sale
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities |
|
|
7,114 |
|
|
7,114 |
|
|
— |
|
|
— |
Debt
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury |
|
|
15,210 |
|
|
— |
|
|
15,210 |
|
|
— |
Other
U.S. government |
|
|
12,467 |
|
|
— |
|
|
12,467 |
|
|
— |
CMO/mortgage-backed |
|
|
319 |
|
|
— |
|
|
319 |
|
|
— |
Corporate |
|
|
23,680 |
|
|
— |
|
|
23,680 |
|
|
— |
Derivative financial
instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange forward contracts |
|
|
1,307 |
|
|
— |
|
|
1,307 |
|
|
— |
|
Financial liabilities carried at fair
value |
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial
instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap contract |
|
|
688 |
|
|
— |
|
|
688 |
|
|
— |
Foreign
exchange forward contracts |
|
|
371 |
|
|
— |
|
|
371 |
|
|
— |
(a)
|
|
During the
third quarter of fiscal year 2010, the Company determined that its
investments in U.S. Treasury, Other U.S. government, CMO/mortgage-backed
and Corporate debt securities, previously aggregated as available-for-sale
debt securities and classified as Level 1 in the fair value hierarchy,
should be classified as Level 2. Also, investments in money market funds
were previously omitted from this disclosure. The Company adjusted the
prior period information accordingly and has concluded that the adjustment
to prior period disclosure is
immaterial.
|
The Company’s money market funds and equity
securities are valued using quoted market prices and, as such, are classified
within Level 1 of the fair value hierarchy.
18
PALL CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(In thousands, except per share data)
(Unaudited)
The fair value of the Company’s investments
in debt securities, have been valued utilizing third party pricing services. The
pricing services use many inputs to determine fair value which are derived from
observable market sources including reportable trades, benchmark curves, credit
spreads, broker/dealer quotes, bids, offers, and other industry and economic
events. These investments are included in Level 2 of the fair value
hierarchy.
The fair value of the Company’s outstanding
interest rate swap contract was determined based upon a non-binding valuation
from the counterparty that is corroborated by observable market data such as
Japanese Yen (“JPY”) interest rates and yield curves. The fair values of the
Company’s foreign currency forward contracts were valued using pricing models,
with all significant inputs derived from or corroborated by observable market
data such as yield curves, currency spot and forward rates and currency
volatilities. These investments are included in Level 2 of the fair value
hierarchy.
The Company completed its annual goodwill
impairment test for all reporting units in the third quarter of fiscal year 2010
and determined that no impairment existed. In addition, the Company had no
impairment of goodwill in the prior year. In connection with the annual goodwill
impairment test, the Company estimates the fair value of its reporting units
using a market approach employing Level 3 inputs as defined in the fair value
hierarchy.
NOTE 13 – INVESTMENT
SECURITIES
Included within other non-current assets is a
benefits protection trust, with assets aggregating $69,053 and $57,337 as of
April 30, 2010 and July 31, 2009, respectively. The trust was established for
the primary purpose of satisfying certain supplemental post-employment benefit
obligations in the U.S. for eligible executives in the event of a change of
control of the Company. In addition to holding cash equivalents primarily to
satisfy short-term cash requirements relating to benefit payments, the trust
primarily invests in U.S. government obligations, debt obligations of
corporations and financial institutions with high credit ratings and equity
mutual fund shares. Contractual maturity dates of debt securities held by the
trust range from 2010 to 2039. Such debt and equity securities are classified as
available-for-sale and recorded in other non-current assets in the Company’s
condensed consolidated balance sheets at aggregate fair values of $62,139 and
$56,170 as of April 30, 2010 and July 31, 2009, respectively.
Also included within non-current assets is the
Company’s investment in Satair A/S (“Satair”) of $4,794 and $2,588, at April 30,
2010 and July 31, 2009, respectively, which is classified as available-for-sale.
19
PALL CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except per share data)
(Unaudited)
The following is a summary of the
Company’s available-for-sale investments by category:
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
Net |
|
|
Cost/ |
|
|
|
|
Unrealized |
|
Unrealized |
|
Unrealized |
|
|
Amortized |
|
|
|
|
Holding |
|
Holding |
|
Holding |
|
|
Cost Basis |
|
Fair Value |
|
Gains |
|
Losses |
|
Gains |
April 30,
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$
|
2,395 |
|
$
|
5,831 |
|
$
|
3,436 |
|
$
|
— |
|
|
$ |
3,436 |
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
18,096 |
|
|
18,882 |
|
|
829 |
|
|
(43 |
) |
|
|
786 |
Other U.S. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
government |
|
|
17,444 |
|
|
18,136 |
|
|
703 |
|
|
(11 |
) |
|
|
692 |
CMO/mortgage- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
backed |
|
|
240 |
|
|
265 |
|
|
25 |
|
|
— |
|
|
|
25 |
Corporate |
|
|
22,388 |
|
|
23,854 |
|
|
1,491 |
|
|
(25 |
) |
|
|
1,466 |
|
|
$ |
60,563 |
|
$ |
66,968 |
|
$ |
6,484 |
|
$ |
(79 |
) |
|
$ |
6,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
5,550 |
|
$ |
7,114 |
|
$ |
1,566 |
|
$ |
(2 |
) |
|
$ |
1,564 |
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
14,417 |
|
|
15,210 |
|
|
841 |
|
|
(48 |
) |
|
|
793 |
Other U.S. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
government |
|
|
11,609 |
|
|
12,467 |
|
|
868 |
|
|
(10 |
) |
|
|
858 |
CMO/mortgage- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
backed |
|
|
298 |
|
|
319 |
|
|
21 |
|
|
— |
|
|
|
21 |
Corporate |
|
|
22,367 |
|
|
23,680 |
|
|
1,314 |
|
|
(1 |
) |
|
|
1,313 |
|
|
$ |
54,241 |
|
$ |
58,790 |
|
$ |
4,610 |
|
$ |
(61 |
) |
|
$ |
4,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the gross unrealized
losses and fair value of the Company’s available-for-sale investments with
unrealized losses aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position:
|
|
Less than 12 months |
|
12 months or greater |
|
|
Total |
|
|
|
|
|
Gross |
|
|
|
Gross |
|
|
|
|
Gross |
|
|
|
|
|
Unrealized |
|
|
|
Unrealized |
|
|
|
|
Unrealized |
|
|
Fair |
|
Holding |
|
Fair |
|
Holding |
|
Fair |
|
Holding |
|
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
April 30,
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
3,160 |
|
|
43 |
|
|
— |
|
|
— |
|
|
3,160 |
|
|
43 |
Other U.S. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
government |
|
|
4,043 |
|
|
11 |
|
|
— |
|
|
— |
|
|
4,043 |
|
|
11 |
CMO/mortgage– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
backed |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Corporate |
|
|
1,066 |
|
|
25 |
|
|
— |
|
|
— |
|
|
1,066 |
|
|
25 |
|
|
$ |
8,269 |
|
$ |
79 |
|
$ |
— |
|
$ |
— |
|
$ |
8,269 |
|
$ |
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
PALL CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except per share data)
(Unaudited)
|
|
Less than 12 months |
|
12 months or greater |
|
Total |
|
|
|
|
|
Gross |
|
|
|
|
Gross |
|
|
|
|
Gross |
|
|
|
|
|
Unrealized |
|
|
|
|
Unrealized |
|
|
|
|
Unrealized |
|
|
Fair |
|
Holding |
|
Fair |
|
Holding |
|
Fair |
|
Holding |
|
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
July 31,
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
32 |
|
$ |
2 |
|
$ |
— |
|
$ |
— |
|
$ |
32 |
|
$ |
2 |
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
1,085 |
|
|
48 |
|
|
— |
|
|
— |
|
|
1,085 |
|
|
48 |
Other U.S. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
government |
|
|
1,152 |
|
|
10 |
|
|
— |
|
|
— |
|
|
1,152 |
|
|
10 |
CMO/mortgage– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
backed |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Corporate |
|
|
297 |
|
|
1 |
|
|
— |
|
|
— |
|
|
297 |
|
|
1 |
|
|
$ |
2,566 |
|
$ |
61 |
|
$ |
— |
|
$ |
— |
|
$ |
2,566 |
|
$ |
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the proceeds and
gross gains and losses from the sale of available-for-sale investments for the
three and nine months ended April 30, 2010 and April 30, 2009:
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
Proceeds from sales |
|
$
|
2,677 |
|
$
|
3,560 |
|
$
|
12,637 |
|
$
|
6,939 |
Realized gross gains on sales |
|
|
171 |
|
|
74 |
|
|
1,114 |
|
|
230 |
Realized gross losses on sales |
|
|
— |
|
|
270 |
|
|
— |
|
|
316 |
NOTE 14 - DERIVATIVE
FINANCIAL INSTRUMENTS
As of April 30, 2010, the Company had an
interest rate swap and foreign currency forward contracts outstanding with
notional amounts aggregating $95,814 and $181,400 respectively, whose aggregate
fair values were a liability of $152 and a liability of $143, respectively.
Accumulated other comprehensive income includes $99, net of tax, of cumulative
unrealized losses on the floating-to-fixed interest rate swap (i.e., cash flow
hedge).
The Company manages certain financial
exposures through a risk management program that includes the use of foreign
exchange and interest rate derivative financial instruments. Derivatives are
executed with counterparties with a minimum credit rating of “A” by Standard
& Poor’s and Moody’s Investor Services, in accordance with the Company’s
policies. The Company does not utilize derivative instruments for trading or
speculative purposes.
Foreign Exchange
a. Derivatives Not
Designated as Hedging Instruments
The risk management objective of holding
foreign exchange derivatives is to mitigate volatility to earnings and cash
flows due to changes in foreign exchange rates. The Company and its subsidiaries
conduct transactions in currencies other than their functional currencies. These
transactions include non-functional intercompany and external sales as well as
intercompany and external purchases. The Company uses foreign exchange forward
contracts, matching the notional amounts and durations of the receivables and
payables resulting from the aforementioned underlying foreign currency
transactions, to mitigate the exposure to earnings and cash flows caused by
changing foreign exchange rates. The notional amount of foreign currency forward
contracts entered into during the three and nine months ended April 30, 2010 was
$333,019 and $979,581, respectively. The notional amount of foreign currency
forward contracts outstanding as of April 30, 2010 was $181,400.
21
PALL CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except per share data)
(Unaudited)
b. Net Investment
Hedges
The risk management objective of designating
the Company’s foreign currency loan as a hedge of its net investment in a wholly
owned Japanese subsidiary is to mitigate the change in the fair value of the
Company’s net investment due to changes in foreign exchange rates. The Company
uses its outstanding JPY loan to hedge its equity of the same amount in the
Japanese wholly owned subsidiary. The hedge of net investment consists of a JPY
9 billion loan.
Interest Rates
a. Cash Flow
Hedges
The risk management objective of holding a
floating-to-fixed interest rate swap is to lock in fixed interest cash outflows
on a floating rate debt obligation. The associated risk is created by changes in
market interest rates in Japan. The Company has an outstanding JPY loan with
variable interest rates based on JPY-LIBOR-BBA. The Company meets the stated
risk management objective through a “receive variable, pay fixed” interest rate
swap entered into on June 20, 2007 related to the JPY 9 billion loan that
matures in June 2010, whereby the Company receives payments at a variable rate
based upon JPY LIBOR and makes payments at a fixed rate of 1.58% on a notional
amount of JPY 9 billion.
The fair values of the Company’s derivative
financial instruments included in the condensed consolidated balance sheets are
presented as follows:
|
|
Asset Derivatives |
|
Liability
Derivatives |
April 30,
2010 |
|
Balance Sheet
Location |
|
Fair
Value |
|
Balance Sheet Location |
|
Fair
Value |
Derivatives designated as hedging
instruments |
|
|
|
|
|
|
|
|
Interest rate swap contract |
|
Other current assets |
|
$ |
— |
|
Other current liabilities |
|
$ |
152 |
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging
instruments |
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
Other current assets |
|
$ |
592 |
|
Other current liabilities |
|
$ |
735 |
Total derivatives |
|
|
|
$ |
592 |
|
|
|
$ |
887 |
|
|
|
|
|
|
|
|
|
|
|
Nonderivative instruments designated as
hedging instruments |
|
|
|
|
|
|
|
|
Net investment hedge |
|
|
|
|
|
|
Long-term debt, net of current |
|
|
|
|
|
|
|
|
|
|
portion(a) |
|
$ |
95,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
Liability
Derivatives |
July 31,
2009 |
|
Balance Sheet
Location |
|
Fair
Value |
|
Balance Sheet Location |
|
Fair
Value |
Derivatives designated as hedging
instruments |
|
|
|
|
|
|
|
|
Interest rate swap contract |
|
Other current assets |
|
$ |
— |
|
Other current liabilities |
|
$ |
688 |
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging
instruments |
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
Other current assets |
|
$ |
1,307 |
|
Other current liabilities |
|
$ |
371 |
Total derivatives |
|
|
|
$ |
1,307 |
|
|
|
$ |
1,059 |
|
|
|
|
|
|
|
|
|
|
|
Nonderivative instruments designated as
hedging instruments |
|
|
|
|
|
|
|
|
Net investment hedge |
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
95,121 |
(a) |
|
On May 26,
2010, the Company refinanced its JPY 9 billion loan, which was due on
June 20, 2010. The new loan matures May 26, 2015. As such, as of April 30,
2010, the loan was reported as part of long-term debt, net of current
portion in the Company’s condensed consolidated balance
sheet.
|
22
PALL CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except per share data)
(Unaudited)
The amounts of the gains and losses related to
the Company’s derivative financial instruments designated as hedging instruments
for the three and nine months ended April 30, 2010 and April 30, 2009 are
presented as follows:
|
|
|
|
Location of Gain
or |
|
|
|
|
|
|
(Loss)
Reclassified |
|
|
|
|
Amount of Gain or
(Loss) |
|
from
Accumulated |
|
Amount of Gain or
(Loss) Reclassified |
|
|
Recognized in OCI on
Derivatives |
|
OCI into
Earnings |
|
from Accumulated OCI into
Earnings |
|
|
(Effective Portion) |
|
(Effective Portion) |
|
(Effective Portion) (b) |
|
|
Three Months |
|
Three Months |
|
|
|
Three Months |
|
Three Months |
|
|
Ended Apr. 30, |
|
Ended Apr. 30, |
|
|
|
Ended Apr. 30, |
|
Ended Apr. 30, |
|
|
2010 |
|
2009 |
|
|
|
2010 |
|
2009 |
Derivatives in cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
flow hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract |
|
$ |
178 |
|
$ |
70 |
|
Interest expense |
|
$ |
(272 |
) |
|
$ |
(99 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) |
|
There were no
gains or losses recognized
in earnings related to the ineffective portion of the hedging relationship
or related to the amount excluded from the assessment of hedge
effectiveness for the three months ended April 30, 2010 and April 30,
2009.
|
|
|
|
|
|
Location of Gain
or |
|
|
|
|
|
|
|
(Loss)
Reclassified |
|
|
|
|
Amount of Gain or
(Loss) |
|
from Accumulated |
|
Amount of Gain or
(Loss) Reclassified |
|
|
Recognized in OCI on
Derivatives |
|
OCI into
Earnings |
|
from Accumulated OCI into
Earnings |
|
|
(Effective Portion) |
|
(Effective Portion) |
|
(Effective Portion) (c) |
|
|
Nine Months |
|
Nine Months |
|
|
|
|
Nine Months |
|
Nine Months |
|
|
Ended Apr. 30, |
|
Ended Apr. 30, |
|
|
|
|
Ended Apr. 30, |
|
Ended Apr. 30, |
|
|
2010 |
|
2009 |
|
|
|
2010 |
|
2009 |
Derivatives in cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
flow hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract |
|
$ |
345 |
|
$ |
(215 |
) |
|
Interest expense |
|
$ |
(744 |
) |
|
$ |
(307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
There were no
gains or losses recognized in earnings related to the ineffective portion
of the hedging relationship or related to the amount excluded from the
assessment of hedge effectiveness for the nine months ended April 30, 2010
and April 30, 2009.
|
The amounts of the gains and losses related to
the Company’s derivative financial instruments not designated as hedging
instruments for the three and nine months ended April 30, 2010 and April 30,
2009 are presented as follows:
|
|
|
|
Amount of Gain or (Loss) Recognized
in |
|
|
|
|
Earnings on
Derivatives |
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
Location of Gain or (Loss)
Recognized |
|
Apr. 30, |
|
Apr. 30, |
|
Apr. 30, |
|
Apr. 30, |
|
|
in Earnings on
Derivatives |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Derivatives not designated
as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hedging relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward |
|
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contracts |
|
expenses |
|
$ |
(2,689 |
) |
|
$ |
1,445 |
|
$ |
(4,779 |
) |
|
$ |
(11,614 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
PALL CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except per share data)
(Unaudited)
The amounts of the gains and losses related to
the Company’s nonderivative financial instruments designated as hedging
instruments for the three and nine months ended April 30, 2010 and April 30,
2009 are presented as follows:
|
|
|
|
Location of Gain
or |
|
|
|
|
|
|
(Loss)
Reclassified |
|
|
|
|
Amount of Gain or
(Loss) |
|
from Accumulated |
|
Amount of Gain or
(Loss) Reclassified from |
|
|
Recognized in OCI on
Derivatives |
|
OCI into
Earnings |
|
Accumulated OCI into
Earnings |
|
|
(Effective Portion) |
|
(Effective Portion) |
|
(Effective
Portion) (d) |
|
|
Three Months |
|
Three Months |
|
|
|
|
|
|
|
|
Ended |
|
Ended |
|
|
|
Three Months Ended |
|
Three Months Ended |
|
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
|
|
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
Nonderivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
designated as hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedge |
|
$ |
2,500 |
|
$ |
5,708 |
|
N/A |
|
$ |
— |
|
$ |
— |
(d) |
|
There were no
gains or losses recognized in earnings related to the ineffective portion
of the hedging relationship or related to the amount excluded from the
assessment of hedge effectiveness for the three months ended April 30,
2010 and April 30, 2009.
|
|
|
|
|
|
Location of Gain
or |
|
|
|
|
|
|
|
(Loss)
Reclassified |
|
|
|
|
Amount of Gain or
(Loss) |
|
from Accumulated |
|
Amount of Gain or
(Loss) Reclassified from |
|
|
Recognized in OCI on
Derivatives |
|
OCI into
Earnings |
|
Accumulated OCI into
Earnings |
|
|
(Effective Portion) |
|
(Effective Portion) |
|
(Effective
Portion) (e) |
|
|
Nine Months |
|
Nine Months |
|
|
|
|
|
|
|
|
Ended Apr. 30, |
|
Ended Apr. 30, |
|
|
|
Nine Months Ended |
|
Nine Months Ended |
|
|
2010 |
|
2009 |
|
|
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
Nonderivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
designated as hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedge |
|
$ |
(443 |
) |
|
$ |
(5,017 |
) |
|
N/A |
|
$ |
— |
|
$ |
— |
(e) |
|
There were no
gains or losses recognized in earnings related to the ineffective portion
of the hedging relationship or related to the amount excluded from the
assessment of hedge effectiveness for the nine months ended April 30, 2010
and April 30, 2009.
|
NOTE 15 -
COMPREHENSIVE INCOME (LOSS)
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
Net earnings |
|
$
|
69,691 |
|
|
$
|
44,162 |
|
|
$
|
186,293 |
|
|
$
|
126,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized translation
adjustment |
|
|
(18,900 |
) |
|
|
17,873 |
|
|
|
(31,765 |
) |
|
|
(110,398 |
) |
Income taxes |
|
|
(1,063 |
) |
|
|
(2,060 |
) |
|
|
(762 |
) |
|
|
(6,675 |
) |
Unrealized translation adjustment,
net |
|
|
(19,963 |
) |
|
|
15,813 |
|
|
|
(32,527 |
) |
|
|
(117,073 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized investment
gains |
|
|
625 |
|
|
|
1,106 |
|
|
|
1,856 |
|
|
|
37 |
|
Income taxes |
|
|
(224 |
) |
|
|
— |
|
|
|
(390 |
) |
|
|
122 |
|
Change in
unrealized investment gains, net |
|
|
401 |
|
|
|
1,106 |
|
|
|
1,466 |
|
|
|
159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains/(losses) on
derivatives |
|
|
275 |
|
|
|
108 |
|
|
|
536 |
|
|
|
(330 |
) |
Income taxes |
|
|
(97 |
) |
|
|
(38 |
) |
|
|
(191 |
) |
|
|
115 |
|
Unrealized gains/(losses) on
derivatives, net |
|
|
178 |
|
|
|
70 |
|
|
|
345 |
|
|
|
(215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
50,307 |
|
|
$ |
61,151 |
|
|
$ |
155,577 |
|
|
$ |
8,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
PALL CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except per share data)
(Unaudited)
Unrealized investment gains/(losses) on
available-for-sale securities, net of related income taxes, consist of the
following:
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
Unrealized gains/(losses) arising
during |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the period |
|
$
|
788 |
|
|
$
|
812 |
|
$
|
4,735 |
|
|
$
|
(2,097 |
) |
Income taxes |
|
|
(224 |
) |
|
|
— |
|
|
(390 |
) |
|
|
122 |
|
Net unrealized gains/(losses)
arising |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during the period |
|
|
564 |
|
|
|
812 |
|
|
4,345 |
|
|
|
(1,975 |
) |
Reclassification adjustment for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(gains)/losses included in net
earnings |
|
|
(163 |
) |
|
|
294 |
|
|
(2,879 |
) |
|
|
2,134 |
|
Change in unrealized investment
gains, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net |
|
$ |
401 |
|
|
$ |
1,106 |
|
$ |
1,466 |
|
|
$ |
159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 16 - SEGMENT
INFORMATION
The Company’s reportable segments, which are
also its operating segments, consist of the Company’s two vertically integrated
businesses, Life Sciences and Industrial.
The following table presents sales and
operating profit by segment reconciled to earnings before income taxes, for the
three and nine months ended April 30, 2010 and April 30, 2009.
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
SALES: |
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences |
|
$ |
262,309 |
|
$ |
236,320 |
|
$ |
748,642 |
|
$ |
681,671 |
Industrial |
|
|
353,673 |
|
|
319,563 |
|
|
974,680 |
|
|
995,530 |
Total |
|
$ |
615,982 |
|
$ |
555,883 |
|
$ |
1,723,322 |
|
$ |
1,677,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING PROFIT: |
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences |
|
$ |
63,339 |
|
$ |
52,459 |
|
$ |
182,660 |
|
$ |
142,929 |
Industrial |
|
|
56,938 |
|
|
40,569 |
|
|
118,139 |
|
|
131,557 |
Total operating profit |
|
|
120,277 |
|
|
93,028 |
|
|
300,799 |
|
|
274,486 |
General corporate expenses |
|
|
13,034 |
|
|
13,763 |
|
|
38,631 |
|
|
43,423 |
Earnings before ROTC, interest expense, |
|
|
|
|
|
|
|
|
|
|
|
|
net and income taxes |
|
|
107,243 |
|
|
79,265 |
|
|
262,168 |
|
|
231,063 |
ROTC |
|
|
2,030 |
|
|
8,369 |
|
|
6,659 |
|
|
25,291 |
Interest expense, net |
|
|
3,254 |
|
|
6,576 |
|
|
6,342 |
|
|
22,555 |
Earnings before income taxes |
|
$ |
101,959 |
|
$ |
64,320 |
|
$ |
249,167 |
|
$ |
183,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements and Risk
Factors
The following discussion should be read
together with the accompanying condensed consolidated financial statements and
notes thereto and other financial information in this Form 10-Q and in the Pall
Corporation and its subsidiaries (hereinafter collectively called the “Company”)
Annual Report on Form 10-K for the fiscal year ended July 31, 2009 (“2009 Form
10-K”). The discussion under the subheading “Review of Operating Segments” below
is in local currency (i.e., had exchange rates not changed year over year)
unless otherwise indicated. Company management considers local currency change
to be an important measure because by excluding the impact of volatility of
exchange rates, underlying volume change is clearer. Dollar amounts discussed
below are in thousands, unless otherwise indicated, except per share dollar
amounts. In addition, per share dollar amounts are discussed on a diluted
basis. The Company utilizes certain estimates and
assumptions that affect the reported financial information as well as to
quantify the impact of various significant factors that contribute to the
changes in the Company’s periodic results included in the discussion below.
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. All statements regarding future
performance, earnings projections, earnings guidance, management’s expectations
about its future cash needs and effective tax rate, and other future events or
developments are forward-looking statements. Forward-looking statements are
those that use terms such as “may”, “will”, “expect”, “believe”, “intend”,
“should”, “could”, “anticipate”, “estimate”, “forecast”, ”project”, “plan”,
“predict”, “potential” and similar expressions. Forward-looking statements
contained in this and other written and oral reports are based on the Company’s
assumptions and assessments in light of past experience and trends, current
conditions, expected future developments and other relevant factors. They are
not guarantees of future performance, and actual results, developments and
business decisions may differ from those envisaged by the Company’s
forward-looking statements.
The Company’s forward-looking statements are
also subject to risks and uncertainties, which can affect our performance in
both the near- and long-term and cause actual results to differ materially. Such
risks and uncertainties include, but are not limited to, those discussed in Part
I, Item 1A, “Risk Factors” in the 2009 Form 10-K, and other reports the Company
files with the Securities and Exchange Commission, including the effect of litigation and
regulatory inquiries associated with the restatement of the Company’s prior
period financial statements, the Company’s ability to successfully complete its
business improvement initiatives, which include integrating and upgrading its
information systems and the effect of a serious disruption in its information
systems, the impact of legislative, regulatory and political developments
globally and the impact of the uncertain global economic environment and the
timing and strength of a recovery in the markets and regions the Company serves,
and the extent to which adverse economic conditions may affect the Company’s
sales volume and results, demand for the Company’s products and business
relationships with key customers and suppliers, which may be impacted by their
cash flow and payment practices, as well as delays or cancellations in
shipments, and volatility in foreign currency exchange rates, interest rates and
energy costs and other macro economic challenges currently affecting the
Company; changes in product mix, market mix and product pricing, particularly
relating to the expansion of the systems business; increase in costs of
manufacturing and operating costs; our ability to obtain regulatory approval or
market acceptance of new technologies, enforce patents and protect proprietary
products and manufacturing techniques; fluctuations in the Company’s effective
tax rate; the Company’s ability to successfully complete or integrate any
acquisitions; the impact of pricing and other actions by competitors; and the
ability to achieve the savings anticipated from cost reduction and gross margin
improvement initiatives. Factors or events that could cause the Company’s actual
results to differ may emerge from time to time, and it is not possible to
predict all of them. The Company makes these statements as of the date of this
disclosure and undertakes no obligation to update them, whether as a result of
new information, future developments or otherwise.
26
Results of Operations
Review of Consolidated Results
Sales in the third quarter of fiscal year 2010
increased 10.8% to $615,982 from $555,883 in the third quarter of fiscal year
2009. Sales in the nine months of fiscal year 2010 increased 2.8% compared to
the nine months of fiscal year 2009. Exchange rates used to translate foreign
subsidiary results into U.S. Dollars increased reported sales by $28,630 in the
quarter and $69,919 in the nine months, primarily due to the weakening of the
U.S. Dollar against the Euro, Australian Dollar, Japanese Yen (“JPY”), Korean
Won and British Pound. In local currency, sales increased 5.7% in the quarter
and decreased 1.4% in the nine months compared to the same periods in fiscal
year 2009. Increased pricing contributed $526 to overall sales in the quarter,
reflecting an improvement in the Life Sciences segment partly offset by a
decline in the Industrial segment. In the nine months, increased pricing
contributed $7,048 to overall sales, primarily attributable to an improvement in
the Life Sciences segment.
Life Sciences segment sales increased 6.4% (in
local currency) in the quarter and 5.9% (in local currency) in the nine months,
driven by double-digit growth in the BioPharmaceuticals market. Sales in the
Medical market were down in the low single-digit range in the quarter and flat
in the nine months. Industrial segment sales increased 5.1% (in local currency)
in the quarter, reflecting strong growth in the Microelectronics market partly
offset by declines in the Energy, Water & Process Technologies (“EWPT”) and
Aerospace & Transportation markets. In the nine months, Industrial segment
sales decreased 6.4% (in local currency), reflecting declines in the EWPT and
Aerospace & Transportation markets partly offset by growth in the
Microelectronics market. Overall systems sales decreased 13.9% (in local
currency) in the quarter primarily attributable to a decline in the EWPT market.
In the nine months, overall systems sales decreased 20% (in local currency),
reflecting decreases in all markets. Systems sales represented 10.5% of total
sales in the quarter compared to 13% in the third quarter of fiscal year 2009.
In the nine months, systems sales represented 9.8% of total sales compared to
11.9% in the nine months of fiscal year 2009. For a detailed discussion of
sales, refer to the section “Review of Operating Segments” below.
Gross margin in the third quarter of fiscal
year 2010 increased to 50.9% from 47.5% in the third quarter of fiscal year
2009. Gross margin in the nine months of fiscal year 2010 increased to 50.4%
from 47.7% in the nine months of fiscal year 2009. The increase in gross margin
in the quarter and nine months reflect improvements in both the Life Sciences
and Industrial segments. Pricing did not have a material impact on gross margins
in the quarter or nine months. For a detailed discussion of the factors
impacting gross margin by segment for the quarter and nine months, refer to the
section “Review of Operating Segments” below.
Selling, general and administrative
(“SG&A”) expenses in the third quarter of fiscal year 2010 increased by
$18,556, or 11.0% (an increase of $10,210, or 6.1%, in local currency). SG&A
(in local currency) in Life Sciences and Industrial increased in the quarter,
while SG&A in Corporate was down. The overall increase in SG&A (in local
currency) reflects the impact of strategic and structural investments and
company-wide inflationary increases in payroll and employee benefit costs partly
offset by cost savings from headcount reductions in the Industrial segment. The
strategic and structural investments made include:
- costs related to the establishment
of the Life Sciences European headquarters in Switzerland,
- investments in information
technology, impacting both Life Sciences and Industrial
- geographic expansion in Latin
America, Middle East and Asia, primarily impacting Industrial
- costs incurred for changes in
sales channels from distribution to direct, that primarily impacted the Life
Sciences segment, and
- costs related to the purchase of a
biotechnology company (refer to Note 4, Goodwill and Intangible Assets, to the
accompanying condensed consolidated financial statements for further
discussion)
It is estimated that these strategic and
structural investments accounted for approximately 50% of the local currency
increase in SG&A. As a percentage of sales, SG&A expenses were 30.4% on
par with the third quarter of fiscal year 2009.
27
SG&A expenses in the nine months of fiscal
year 2010 increased by $34,636, or 6.7% (an increase of $15,076, or 2.9% in
local currency). The increase in SG&A expenses (in local currency) in the
nine months reflects the impact of strategic and structural investments
discussed above and company-wide inflationary increases in payroll and employee
benefit costs, partly offset by cost savings resulting from headcount reductions
in the Industrial segment and reductions in discretionary spending company-wide.
It is estimated that the strategic and structural investments accounted for
approximately 80% of the local currency increase in SG&A in the nine months.
SG&A (in local currency) in both Life Sciences and Industrial increased in
the nine months, partly offset by a decline in Corporate. As a percentage of
sales, SG&A expenses were 32.0% compared to 30.8% in the nine months of
fiscal year 2009. The increase in SG&A expenses as a percentage of sales
primarily reflects the increase in spending, which outpaced the growth in
revenue. For a detailed discussion of SG&A by segment, refer to the section
“Review of Operating Segments” below.
Research and development (“R&D”) expenses
were $18,986 in the third quarter of fiscal year 2010 compared to $16,218 in the
third quarter of fiscal year 2009, an increase of 17.1% (15.2% in local
currency). The increase in R&D reflects increased spending in both the Life
Sciences and Industrial segments. As a percentage of sales, R&D expenses in
the third quarter were 3.1% compared to 2.9% in the third quarter of fiscal year
2009. R&D expenses were $54,874 in the nine months of fiscal year 2010
compared to $52,570 in the nine months of fiscal year 2009, an increase of 4.4%
(3.3% in local currency). The increase in R&D in the nine months reflects an
increase in spending in the Life Sciences segment partly offset by a decrease in
spending in the Industrial segment. As a percentage of sales, R&D expenses
in the nine months were 3.2%, compared to 3.1% in the nine months of fiscal year
2009. For a detailed discussion of R&D by segment, refer to the section
“Review of Operating Segments” below.
In the third quarter and nine months of fiscal
year 2010, the Company recorded restructuring and other charges (“ROTC”) of
$2,030 and $6,659, respectively. ROTC in the quarter was primarily comprised of
severance and other costs related to the Company’s on-going cost reduction
initiatives. ROTC in the nine months was primarily comprised of severance and
other costs related to the Company’s on-going cost reduction initiatives, an
increase to previously established environmental reserves and legal and other
professional fees in connection with the Federal Securities Class Actions,
Shareholder Derivative Lawsuits and Other Proceedings (see Note 6, Commitments
and Contingencies, to the accompanying condensed consolidated financial
statements). Such costs were partly offset by the receipt of insurance claim
payments related to matters that had been under inquiry by the audit committee
as well as by a gain on the sale of certain securities held by the Company’s
benefits protection trust that had previously been written down for an
other-than-temporary diminution in value.
In the third quarter of fiscal year 2009, the
Company recorded ROTC of $8,369. ROTC in the quarter was primarily comprised of
severance and other costs related to the Company’s cost reduction initiatives
and an increase to a previously established environmental reserve. Such charges
were partly offset by the reversal of excess restructuring reserves that were
previously recorded in the Company’s consolidated statements of earnings in
fiscal years 2008 and 2007. In the nine months of fiscal year 2009, the Company
recorded ROTC of $25,291, which was primarily comprised of severance and other
costs related to the Company’s on-going cost reduction initiatives, a charge to
write-off in-process R&D acquired in the acquisition of GeneSystems, SA, a
charge for the other-than-temporary diminution in value of certain equity and
debt investment securities held by its benefits protection trust, a charge for
the impairment of capitalized software, increases to previously established
environmental reserves, net of an insurance settlement and legal fees and other
professional fees in connection with the Federal Securities Class Actions,
Shareholder Derivative Lawsuits and Other Proceedings as discussed above. Such
charges were partly offset by the reversal of excess restructuring reserves that
were previously recorded in the Company’s consolidated statements of earnings in
fiscal years 2008 and 2007.
The details of ROTC for the three and nine
months ended April 30, 2010 and April 30, 2009 as well as the activity related
to restructuring liabilities that were recorded in the nine months ended April
30, 2010 and in fiscal year 2009 can be found in Note 7, Restructuring and Other
Charges, Net, to the accompanying condensed consolidated financial
statements.
28
Earnings before interest and income taxes
(“EBIT”) were $105,213 in the third quarter of fiscal year 2010 compared to
$70,896 in the third quarter of fiscal year 2009. The impact of foreign currency
translation increased EBIT by $7,177 in the third quarter of fiscal year 2010.
As a percentage of sales, EBIT were 17.1% compared to 12.8% in the third quarter
of fiscal year 2009. EBIT were $255,509 in the nine months of fiscal year 2010
compared to $205,772 in the nine months of fiscal year 2009. The impact of
foreign currency translation increased EBIT by $17,418 in the nine months of
fiscal year 2010. As a percentage of sales, EBIT were 14.8% compared to 12.3% in
the third quarter of fiscal year 2009.
Net interest expense in the third quarter of
fiscal year 2010 was $3,254 compared to $6,576 in the third quarter of fiscal
year 2009. Net interest expense in the quarter reflects the reversal of $2,553
of accrued interest primarily related to the resolution of a foreign tax audits
and expiring statutes of limitation for assessment related to uncertain tax
positions. Excluding these items, net interest expense decreased $769 compared
to the third quarter of fiscal year 2009. Net interest expense in the nine
months of fiscal year 2010 was $6,342 compared to $22,555 in the nine months of
fiscal year 2009. Net interest expense in the nine months reflects the reversal
of $11,537 of accrued interest primarily related to the resolution of a foreign
tax audit and expiring statutes of limitation for assessment. Excluding these
items, net interest expense decreased $4,676 compared to the nine months of
fiscal year 2009, reflecting the repayment of higher rate foreign debt in the
second and third quarters of fiscal year 2009, the impact of lower interest
rates in the U.S. on outstanding debt and a reduction in interest bearing
tax liabilities. A decline in interest income, related to lower interest rates,
partly offset the above.
In the third quarter of fiscal year 2010, the
Company’s effective tax rate was 31.6% as compared to 31.3% in the third quarter
of fiscal year 2009. In the nine months of fiscal year 2010, the Company’s
effective tax rate was 25.2% as compared to 31.2% in the nine months of fiscal
year 2009. The decrease in the effective tax rate for the nine month period was
primarily driven by the favorable resolution of foreign tax audits for the
fiscal years 2001 through 2004. For the nine months ended April 30, 2010, the
effective tax rate varied from the U.S. federal statutory rate primarily due to
the benefits of foreign operations and the resolution of foreign tax audits
resulting in the recognition of $16,200 of income tax benefit. For the nine
months ended April 30, 2009, the effective tax rate varied from the U.S. federal
statutory rate primarily due to the benefits of foreign operations and the
retroactive extension of the federal research credit per the Emergency Economic
Stabilization Act of 2008. Based on an expected underlying rate of 31%, the
Company expects its effective tax rate to be 27% for the full fiscal year 2010,
exclusive of the impact of discrete items in future periods. The tax rate for
the full fiscal year 2010 may differ materially based on several factors,
including the geographical mix of earnings in tax jurisdictions, enacted tax
laws, the resolution of tax audits, the timing and amount of foreign dividends,
state and local taxes, the ratio of permanent items to pretax book income, and
the implementation of various global tax strategies, as well as other factors.
Net earnings in the third quarter of fiscal
year 2010 were $69,691, or 58 cents per share, compared with net earnings of
$44,162, or 37 cents per share in the third quarter of fiscal year 2009. In
summary, the increase in net earnings and earnings per share reflects the
increase in EBIT and the decline in net interest expense. Net earnings in the
nine months of fiscal year 2010 were $186,293, or $1.56 per share, compared with
net earnings of $126,120, or $1.05 per share in the nine months of fiscal year
2009. In summary, the increase in net earnings and earnings per share reflect
the increase in EBIT, the decline in net interest expense and a decrease in the
effective tax rate. Company management estimates that foreign currency
translation increased net earnings per share by 4 cents in the third quarter of
fiscal year 2010 and 10 cents in the nine months of fiscal year 2010.
29
Review of Operating
Segments
The following table presents sales and
operating profit by segment, reconciled to earnings before income taxes, for the
three and nine months ended April 30, 2010 and April 30, 2009.
|
|
Apr. 30, |
|
% |
|
Apr. 30, |
|
% |
|
% |
|
Three Months Ended |
2010 |
|
Margin |
|
2009 |
|
Margin |
|
Change |
|
SALES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences |
$ |
262,309 |
|
|
|
$ |
236,320 |
|
|
|
11.0 |
|
|
Industrial |
|
353,673 |
|
|
|
|
319,563 |
|
|
|
10.7 |
|
|
Total |
$ |
615,982 |
|
|
|
$ |
555,883 |
|
|
|
10.8 |
|
|
OPERATING PROFIT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences |
$ |
63,339 |
|
24.1 |
|
$ |
52,459 |
|
22.2 |
|
20.7 |
|
|
Industrial |
|
56,938 |
|
16.1 |
|
|
40,569 |
|
12.7 |
|
40.3 |
|
|
Total operating profit |
|
120,277 |
|
19.5 |
|
|
93,028 |
|
16.7 |
|
29.3 |
|
|
General corporate expenses |
|
13,034 |
|
|
|
|
13,763 |
|
|
|
(5.3 |
) |
|
Earnings before ROTC, interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
and income taxes |
|
107,243 |
|
17.4 |
|
|
79,265 |
|
14.3 |
|
35.3 |
|
|
ROTC |
|
2,030 |
|
|
|
|
8,369 |
|
|
|
|
|
|
Interest expense, net |
|
3,254 |
|
|
|
|
6,576 |
|
|
|
|
|
|
Earnings before income taxes |
$ |
101,959 |
|
|
|
$ |
64,320 |
|
|
|
|
|
|
|
|
|
Apr. 30, |
|
% |
|
Apr. 30, |
|
% |
|
% |
|
Nine Months Ended |
2010 |
|
Margin |
|
2009 |
|
Margin |
|
Change |
|
SALES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences |
$ |
748,642 |
|
|
|
$ |
681,671 |
|
|
|
9.8 |
|
|
Industrial |
|
974,680 |
|
|
|
|
995,530 |
|
|
|
(2.1 |
) |
|
Total |
$ |
1,723,322 |
|
|
|
$ |
1,677,201 |
|
|
|
2.8 |
|
|
OPERATING PROFIT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences |
$ |
182,660 |
|
24.4 |
|
$ |
142,929 |
|
21.0 |
|
27.8 |
|
|
Industrial |
|
118,139 |
|
12.1 |
|
|
131,557 |
|
13.2 |
|
(10.2 |
) |
|
Total operating profit |
|
300,799 |
|
17.5 |
|
|
274,486 |
|
16.4 |
|
9.6 |
|
|
General corporate expenses |
|
38,631 |
|
|
|
|
43,423 |
|
|
|
(11.0 |
) |
|
Earnings before ROTC, interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
and income taxes |
|
262,168 |
|
15.2 |
|
|
231,063 |
|
13.8 |
|
13.5 |
|
|
ROTC |
|
6,659 |
|
|
|
|
25,291 |
|
|
|
|
|
|
Interest expense, net |
|
6,342 |
|
|
|
|
22,555 |
|
|
|
|
|
|
Earnings before income taxes |
$ |
249,167 |
|
|
|
$ |
183,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Life Sciences:
Presented below are Summary Statements of
Operating Profit for the Life Sciences segment for the three and nine months
ended April 30, 2010 and April 30, 2009:
|
Three Months Ended |
Apr. 30, 2010 |
|
% of Sales |
|
Apr. 30, 2009 |
|
% of Sales |
|
Sales |
$
|
262,309 |
|
|
|
$
|
236,320 |
|
|
|
Cost of sales |
|
115,497 |
|
44.0 |
|
|
111,662 |
|
47.3 |
|
Gross margin |
|
146,812 |
|
56.0 |
|
|
124,658 |
|
52.7 |
|
SG&A |
|
71,872 |
|
27.4 |
|
|
62,454 |
|
26.4 |
|
R&D |
|
11,601 |
|
4.4 |
|
|
9,745 |
|
4.1 |
|
Operating profit |
$ |
63,339 |
|
24.1 |
|
$ |
52,459 |
|
22.2 |
|
|
|
Nine Months Ended |
Apr. 30, 2010 |
|
% of Sales |
|
Apr. 30, 2009 |
|
% of Sales |
|
Sales |
$ |
748,642 |
|
|
|
$ |
681,671 |
|
|
|
Cost of sales |
|
325,399 |
|
43.5 |
|
|
327,192 |
|
48.0 |
|
Gross margin |
|
423,243 |
|
56.5 |
|
|
354,479 |
|
52.0 |
|
SG&A |
|
207,881 |
|
27.8 |
|
|
181,924 |
|
26.7 |
|
R&D |
|
32,702 |
|
4.4 |
|
|
29,626 |
|
4.3 |
|
Operating profit |
$ |
182,660 |
|
24.4 |
|
$ |
142,929 |
|
21.0 |
|
|
|
|
|
|
|
|
|
|
|
The tables below present sales by market and
geography within the Life Sciences segment for the three and nine months ended
April 30, 2010 and April 30, 2009, including the effect of exchange rates for
comparative purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
Exchange |
|
Change |
|
|
|
|
|
|
|
|
% |
|
Rate |
|
in Local |
|
Three Months Ended |
Apr. 30, 2010 |
|
Apr. 30, 2009 |
|
Change |
|
Impact |
|
Currency |
|
By
Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioPharmaceuticals |
$ |
162,606 |
|
$ |
138,269 |
|
17.6 |
|
$ |
7,248 |
|
12.4 |
|
|
Medical |
|
99,703 |
|
|
98,051 |
|
1.7 |
|
|
3,512 |
|
(1.9 |
) |
|
Total Life Sciences |
$ |
262,309 |
|
$ |
236,320 |
|
11.0 |
|
$ |
10,760 |
|
6.4 |
|
|
|
|
By
Geography |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Hemisphere |
$ |
100,246 |
|
$ |
92,170 |
|
8.8 |
|
$ |
647 |
|
8.1 |
|
|
Europe |
|
119,814 |
|
|
107,663 |
|
11.3 |
|
|
6,047 |
|
5.7 |
|
|
Asia |
|
42,249 |
|
|
36,487 |
|
15.8 |
|
|
4,066 |
|
4.7 |
|
|
Total Life Sciences |
$ |
262,309 |
|
$ |
236,320 |
|
11.0 |
|
$ |
10,760 |
|
6.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
Exchange |
|
Change |
|
|
|
|
|
|
|
|
% |
|
Rate |
|
in Local |
|
Nine Months Ended |
Apr. 30, 2010 |
|
Apr. 30, 2009 |
|
Change |
|
Impact |
|
Currency |
|
By
Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioPharmaceuticals |
$ |
452,801 |
|
$ |
394,327 |
|
14.8 |
|
$ |
17,711 |
|
10.3 |
|
|
Medical |
|
295,841 |
|
|
287,344 |
|
3.0 |
|
|
8,993 |
|
(0.2 |
) |
|
Total Life Sciences |
$ |
748,642 |
|
$ |
681,671 |
|
9.8 |
|
$ |
26,704 |
|
5.9 |
|
|
|
|
By
Geography |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Hemisphere |
$ |
279,506 |
|
$ |
258,353 |
|
8.2 |
|
$ |
1,005 |
|
7.8 |
|
|
Europe |
|
352,294 |
|
|
324,797 |
|
8.5 |
|
|
15,990 |
|
3.5 |
|
|
Asia |
|
116,842 |
|
|
98,521 |
|
18.6 |
|
|
9,709 |
|
8.7 |
|
|
Total Life Sciences |
$ |
748,642 |
|
$ |
681,671 |
|
9.8 |
|
$ |
26,704 |
|
5.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences segment sales increased 6.4% in
the third quarter of fiscal year 2010 compared to the third quarter of fiscal
year 2009. Increased pricing (driven by the Biopharmaceuticals market)
contributed $2,693, or 1.1%, to overall sales growth in the quarter and, as
such, the volume increase was 5.3%. In the nine months of fiscal year 2010, Life
Sciences segment sales increased 5.9% compared to the nine months of fiscal year
2009. Increased pricing (driven by the Biopharmaceuticals market) contributed
$6,976, or 1%, to overall sales growth in the nine months, and as such, the
volume increase was 4.9%. Life Sciences sales represented approximately 43% of
total sales in the third quarter and nine months of fiscal year 2010 compared to
43% and 41% in the third quarter and nine months of fiscal year 2009,
respectively.
Sales in the BioPharmaceuticals market, which
is comprised of two submarket groupings (Pharmaceuticals and Laboratory)
increased 12.4% in the third quarter and 10.3% in the nine months. The sales
growth was primarily driven by the Pharmaceuticals submarket as discussed below.
Growth in the Laboratory submarket, which represented less than 10% of Life
Sciences sales, contributed to this result as well.
Sales in the Pharmaceuticals submarket, which
represented approximately 51% of total Life Sciences sales, increased 8.6% in
the third quarter and 8.7% in the nine months of fiscal year 2010 compared to
the same periods of fiscal year 2009. The growth in the quarter reflects an
increase in consumables sales of 8.9% (all geographies contributing) and an
increase in systems sales of 6.0%. The growth in the nine months reflects an
increase in consumables sales of 13.4% (all geographies contributing), partly
offset by a decline in systems sales of 31.4%. Consumables sales growth in the
Pharmaceuticals submarket in the quarter and nine months was driven by increased
demand in the vaccine marketplace and the use of the Company’s single-use
processing technologies. Furthermore, the Western Hemisphere benefited from a
change in route to market (from distributor to direct), and Asia benefited from
strong growth in China as drug producers are increasingly adopting FDA
manufacturing standards which will enable them to export their products to the
U.S. The decline in systems sales in the nine months reflects a slowdown in
capital investments by customers in the first half of fiscal year
2010.
Sales in the Medical market, which is
comprised of blood filtration product sales and other infection and patient
protection products sold to hospitals, original equipment manufacturers (“OEM”)
and cell therapy developers, decreased 1.9% in the third quarter and were flat
in the nine months.
Sales of blood filtration products, which
represented approximately 22% of total Life Sciences sales, decreased 2.0% in
the third quarter and increased 1.0% in the nine months of fiscal year 2010
compared to the same periods of fiscal year 2009. The decrease in blood
filtration sales in the quarter primarily reflects a decline in Europe related
to decreased blood collections in the United Kingdom and Russia. Sales in the
Western Hemisphere, the Company’s largest blood filtration geographic market,
were flat as increased sales to independent blood centers in the U.S. were
offset by decreased demand in hospitals due to a decline in elective surgeries.
The growth in blood filtration sales in the nine months was primarily related to
increased sales to independent blood centers in the U.S. and growth in Asia,
related to adoption of universal leukoreduction in certain countries and new
tender wins.
Life Sciences gross margins in the third
quarter increased 330 basis points to 56.0% from 52.7%. Key drivers of the
improvement in gross margins in the quarter were:
- favorable absorption of
manufacturing overhead, due to increased volume and the estimated benefit of
cost savings initiatives, including improved efficiency in manufacturing
operations, that outpaced inflation, contributing an estimated 200-230 basis
points in margin,
- a change in mix estimated to have
increased gross margin percentage by 50 basis points, comprised of:
|
Ø |
|
a favorable
impact from a higher proportion of consumables sales to Pharmaceuticals
customers versus Medical customers, the former generally carrying higher
gross margins, and
|
|
|
|
|
|
Ø |
|
an increase in
sales of higher margin consumable products within markets, that positively
impacted margin, and
|
|
|
|
|
|
Ø |
|
an unfavorable
impact due to a higher proportion of sales of larger scale systems versus
smaller scale standard systems, the former which generally carry lower
margins,
|
- an increase in pricing as well as
the benefit of sales channel changes from distribution to direct contributing
an estimated 40 basis points in margin.
32
In the nine months, Life Sciences gross
margins increased 450 basis points to 56.5% from 52.0%. Key drivers of the
improvement in gross margins in the nine months were:
- the estimated benefit of favorable
absorption and cost savings initiatives that outpaced inflation, contributing
an estimated 250-280 basis points in margin in the nine
months,
- a change in mix estimated to have
increased gross margin percentage by 150 basis points, primarily driven by the
following:
|
Ø |
|
a higher
proportion of consumables sales to Pharmaceuticals customers versus
Medical customers as discussed above, and
|
|
|
|
|
|
Ø |
|
a decrease in
systems sales, which typically have lower gross margins than consumables.
The mix of systems sales to Pharmaceuticals customers decreased to 3.4% of
total Life Sciences sales in the nine months compared to 5.2% in the nine
months of fiscal year 2009. Within systems sales, there was a higher
proportion of sales of smaller scale standard systems, which generally
carry higher margins,
|
- an increase in pricing as well as
the benefit of sales channel changes from distribution to direct contributing
an estimated 40 basis points in margin.
SG&A expenses in the third quarter
increased by $9,418, or 15.1% (an increase of $6,382, or 10.2% in local
currency), compared to fiscal year 2009. The increase in SG&A in local
currency principally reflects the impact of strategic and structural investments
discussed above and inflationary increases in payroll and employee benefit
costs. SG&A as a percentage of sales increased to 27.4% from 26.4% in the
third quarter of fiscal year 2009, reflecting the increase in spending. SG&A
expenses in the nine months of fiscal year 2010 increased by $25,957, or 14.3%
(an increase of $19,338, or 10.6% in local currency), compared to fiscal year
2009. The increase in SG&A in local currency in the nine months principally
reflects the same factors as in the quarter. SG&A as a percentage of sales
increased to 27.8% in the nine months of fiscal year 2010 from 26.7% in the nine
months of fiscal year 2009 reflecting the increase in spending.
R&D expenses were $11,601 compared to
$9,745 in the third quarter of fiscal year 2009, an increase of 19% (16.7% in
local currency). As a percentage of sales, R&D expenses were 4.4% compared
to 4.1% in the third quarter of fiscal year 2009. In the nine months of fiscal
year 2010, R&D expenses were $32,702 compared to $29,626 in the nine months
of fiscal year 2009, an increase of 10.4% (9.3% in local currency). As a
percentage of sales, R&D expenses were 4.4% compared to 4.3% in the nine
months of fiscal year 2009.
Operating profit dollars in the third quarter
were $63,339, an increase of 20.7% (14.6% in local currency) compared to the
third quarter of fiscal year 2009. Operating margin improved to 24.1% from 22.2%
in the third quarter of fiscal year 2009. Operating profit dollars in the nine
months of fiscal year 2010 were $182,660, an increase of 27.8% (20.9% in local
currency) compared to the nine months of fiscal year 2009. Operating margin
improved to 24.4% from 21.0% in the nine months of fiscal year
2009.
Industrial:
Presented below are summary Statements of
Operating Profit for the Industrial segment for the three and nine months ended
April 30, 2010 and April 30, 2009:
|
|
|
|
|
% of |
|
|
|
|
% of |
|
Three Months Ended |
Apr. 30, 2010 |
|
Sales |
|
Apr. 30, 2009 |
|
Sales |
|
Sales |
$
|
353,673 |
|
|
|
$
|
319,563 |
|
|
|
Cost of sales |
|
186,953 |
|
52.9 |
|
|
179,991 |
|
56.3 |
|
Gross margin |
|
166,720 |
|
47.1 |
|
|
139,572 |
|
43.7 |
|
SG&A |
|
102,397 |
|
29.0 |
|
|
92,530 |
|
29.0 |
|
R&D |
|
7,385 |
|
2.1 |
|
|
6,473 |
|
2.0 |
|
Operating profit |
$ |
56,938 |
|
16.1 |
|
$ |
40,569 |
|
12.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
% of |
|
Nine Months Ended |
Apr. 30, 2010 |
|
Sales |
|
Apr. 30, 2009 |
|
Sales |
|
Sales |
$ |
974,680 |
|
|
|
$ |
995,530 |
|
|
|
Cost of sales |
|
529,908 |
|
54.4 |
|
|
550,039 |
|
55.3 |
|
Gross margin |
|
444,772 |
|
45.6 |
|
|
445,491 |
|
44.7 |
|
SG&A |
|
304,461 |
|
31.2 |
|
|
290,990 |
|
29.2 |
|
R&D |
|
22,172 |
|
2.3 |
|
|
22,944 |
|
2.3 |
|
Operating profit |
$ |
118,139 |
|
12.1 |
|
$ |
131,557 |
|
13.2 |
|
|
|
|
|
|
|
|
|
|
|
33
The tables below present sales by market and
geography within the Industrial segment for the three and nine months ended
April 30, 2010 and April 30, 2009, including the effect of exchange rates for
comparative purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
Exchange |
|
Change |
|
|
|
|
|
|
|
|
% |
|
Rate |
|
in Local |
|
Three Months Ended |
Apr. 30, 2010 |
|
Apr. 30, 2009 |
|
Change |
|
Impact |
|
Currency |
|
By
Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EWPT |
$ |
216,823 |
|
$ |
207,382 |
|
4.6 |
|
|
$ |
11,716 |
|
(1.1 |
) |
|
Aerospace & |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation |
|
64,530 |
|
|
73,842 |
|
(12.6 |
) |
|
|
1,895 |
|
(15.2 |
) |
|
Microelectronics |
|
72,320 |
|
|
38,339 |
|
88.6 |
|
|
|
4,259 |
|
77.5 |
|
|
Total Industrial |
$ |
353,673 |
|
$ |
319,563 |
|
10.7 |
|
|
$ |
17,870 |
|
5.1 |
|
|
|
|
By
Geography |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Hemisphere |
$ |
105,691 |
|
$ |
98,557 |
|
7.2 |
|
|
$ |
1,349 |
|
5.9 |
|
|
Europe |
|
123,312 |
|
|
114,511 |
|
7.7 |
|
|
|
6,159 |
|
2.3 |
|
|
Asia |
|
124,670 |
|
|
106,495 |
|
17.1 |
|
|
|
10,362 |
|
7.3 |
|
|
Total Industrial |
$ |
353,673 |
|
$ |
319,563 |
|
10.7 |
|
|
$ |
17,870 |
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
Exchange |
|
Change |
|
|
|
|
|
|
|
|
% |
|
Rate |
|
in Local |
|
Nine Months Ended |
Apr. 30, 2010 |
|
Apr. 30, 2009 |
|
Change |
|
Impact |
|
Currency |
|
By
Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EWPT |
$ |
605,552 |
|
$ |
626,313 |
|
(3.3 |
) |
|
$ |
29,612 |
|
(8.0 |
) |
|
Aerospace & |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation |
|
179,292 |
|
|
212,925 |
|
(15.8 |
) |
|
|
4,277 |
|
(17.8 |
) |
|
Microelectronics |
|
189,836 |
|
|
156,292 |
|
21.5 |
|
|
|
9,326 |
|
15.5 |
|
|
Total Industrial |
$ |
974,680 |
|
$ |
995,530 |
|
(2.1 |
) |
|
$ |
43,215 |
|
(6.4 |
) |
|
|
|
By
Geography |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Hemisphere |
$ |
268,725 |
|
$ |
300,521 |
|
(10.6 |
) |
|
$ |
2,096 |
|
(11.3 |
) |
|
Europe |
|
351,338 |
|
|
364,031 |
|
(3.5 |
) |
|
|
16,153 |
|
(7.9 |
) |
|
Asia |
|
354,617 |
|
|
330,978 |
|
7.1 |
|
|
|
24,966 |
|
(0.4 |
) |
|
Total Industrial |
$ |
974,680 |
|
$ |
995,530 |
|
(2.1 |
) |
|
$ |
43,215 |
|
(6.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial segment sales increased 5.1% in the
third quarter of fiscal year 2010, reflecting an increase of 77.5% in the
Microelectronics market partly offset by declines of 1.1% in the EWPT market and
15.2% in the Aerospace & Transportation market. Industrial segment sales
decreased 6.4% in the nine months of fiscal year 2010, reflecting declines of
8.0% in the EWPT market and 17.8% in the Aerospace & Transportation market
partly offset by growth of 15.5% in the Microelectronics market. Industrial
sales represented approximately 57% of total sales in the third quarter and nine
months of fiscal year 2010 compared to 57% and 59% in the third quarter and nine
months of fiscal year 2009, respectively.
The EWPT market sells process related products
to producers of municipal water, power generation, fuels & chemicals, foods
& beverages as well as to the Industrial Manufacturing submarkets, which
consist of a grouping of producers of pulp and paper, mining, automotive and
metals. The sales results by the submarkets that comprise EWPT are discussed
below:
- Sales in the Fuels & Chemicals
submarkets, which represented approximately 20% of total Industrial sales,
were down 8.2% in the third quarter reflecting a decline in consumables sales
of 10.6% (all geographies down). Systems sales were flat in the quarter. The
decline in consumables sales reflects a decrease in demand in the chemical and
refining sectors. In the nine months, sales in the Fuels & Chemicals
submarkets were down 7.2%, reflecting a decline in consumables sales of 13.8%
(all geographies down) partly offset by an increase in systems sales of 18.2%
reflecting the timing of projects. The decline in consumables sales in the
nine months reflects the same trend evident in the quarter.
34
- Sales in the Food and Beverage
submarkets, which represented approximately 16% of total Industrial sales,
decreased 3.9% in the third quarter and 10.5% in the nine months. The overall
decline in sales reflects a slowdown in capital investment in the beer, wine
and bottled water sectors. Systems sales were down 33.6% in the quarter and
41.5% in the nine months. An improving trend has emerged, with orders growth
over the last two quarters, particularly in systems. Consumables sales
increased 6.8% in the quarter (all geographies contributing). Consumables
sales growth in the Western Hemisphere and Asia were particularly strong, as
these regions began to recover. Consumables sales in Europe, the Company’s
largest Food & Beverage market, were up slightly. In the nine months,
consumables sales were down 1.0%.
- Sales in the Industrial
Manufacturing submarkets, which represented approximately 12% of total
Industrial sales, increased 21.0% in the third quarter (all geographies
contributing). In the nine months, sales in the Industrial Manufacturing
submarkets decreased 3.1% as increased sales in the Western Hemisphere and
Asia were offset by a decline in Europe. This submarket, which was negatively
impacted by the global macroeconomic environment, rebounded in the quarter as
customers began to replenish depleted inventories.
- Municipal Water submarkets sales,
which represented less than 10% of total Industrial sales, decreased 13.3% in
the third quarter as growth in the Western Hemisphere was offset by declines
in Europe and Asia. In the nine months, Municipal Water sales decreased 24.8%
(all geographies down). The overall sales decline in the quarter and nine
months reflect a slowing of orders in fiscal year 2009 (order to shipment in
the Municipal Water submarkets can be one to two years). Order activity has
been strong in the nine months of fiscal year 2010 and as a result backlog is
up over 50% compared to a year ago.
- Sales in the Power Generation
submarkets, which represented less than 10% of total Industrial sales,
increased 11.0% in the quarter and 7.1% in the nine months, primarily driven
by growth in Asia. The increase in sales in Asia was fueled by demand in the
wind-turbine market.
The Aerospace & Transportation market is
comprised of sales of air, water, lubrication, fuel and machinery/hydraulic
protection products to OEM manufacturers and end-user customers in Military
Aerospace, Commercial Aerospace and Transportation. The decrease in Aerospace
and Transportation sales in the third quarter reflects declines in the Military
Aerospace and Commercial Aerospace submarket groupings of 17.6% and 24.4%,
respectively, partly offset by an increase in the Transportation submarket
18.7%. The decrease in Aerospace and Transportation sales in the nine months
reflects declines in the Military Aerospace, Commercial Aerospace and
Transportation submarket groupings of 24.8%, 14.5% and 6.0%, respectively.
- Sales to the Military Aerospace
submarket, which represented less than 10% of total Industrial sales,
decreased in the quarter and nine months reflecting delay in orders and
projects in fiscal year 2009 that will not repeat this fiscal
year.
- Sales to the Commercial Aerospace
submarket, which represented less than 10% of total Industrial sales,
decreased in the quarter and nine months primarily reflecting reductions in
the Western Hemisphere related to weakness in the regional and private jet
marketplace.
- Sales in the Transportation
submarket, which represented less than 10% of total Industrial sales,
increased in the quarter driven by an increase in OEM activity, as the mining
market began to recover. In the
nine months, sales in the transportation market decreased reflecting weakness
in the overall marketplace during the last four quarters, particularly in the
mining vehicle market.
Microelectronics sales increased 77.5% in the
third quarter reflecting strong growth in all geographies. Overall, the sales
growth in the quarter reflects a recovery in the semiconductor market as well as
an increase in OEM activity. Sales in the Macroelectronics markets, such as the
inkjet and LED sectors, also contributed to the growth in the quarter. In the
nine months, Microelectronics sales increased 15.5% reflecting the same trend as
in the quarter.
Industrial gross margins in the third quarter
of fiscal year 2010 increased 340 basis points to 47.1% from 43.7% in the third
quarter of fiscal year 2009. The key drivers of the improvement in gross margins
in the quarter were:
- volume increases that
significantly increased the absorption of manufacturing overheads, driven by
growth principally in Microelectronics, and the beneficial impact attendant to
the mix change, increased gross margin by 260-280 basis points,
and
- the estimated benefit of cost
savings initiatives, including improved efficiency in manufacturing operations
that outpaced inflation, contributing an estimated 80-100 basis points in
margin.
35
The above favorable impacts were partly offset
by decreased pricing that adversely impacted gross margins by an estimated 30
basis points.
Industrial gross margins in the nine months of
fiscal year 2010 increased 90 basis points to 45.6% from 44.7% in the nine
months of fiscal year 2009 primarily reflecting a change in mix estimated to
have increased gross margin percentage by 130 basis points, primarily driven by
the growth in Microelectronics. This favorable impact was partly offset by
increased warranty costs and inflation that outpaced cost savings initiatives,
including improved efficiency in manufacturing operations.
SG&A expenses in the third quarter
increased by $9,867, or 10.7% (an increase of $4,673, or 5.1% in local
currency), compared to the third quarter of fiscal year 2009. The increase in
SG&A in local currency principally reflects the impact of strategic and
structural investments, principally investments in information technology and
geographic expansion, inflationary increases (principally payroll and employee
benefit costs), and increased incentive compensation partly offset by cost
savings as discussed above. SG&A expenses as a percentage of sales were
29.0% on par with the third quarter of fiscal year 2009. SG&A expenses in
the nine months of fiscal year 2010 increased by $13,471, or 4.6% compared to
the nine months of fiscal year 2009. In local currency, SG&A expenses
increased $697, or 0.2%. This result reflects the impact of cost savings earlier
in the year offset by the cost increases discussed above for the quarter.
SG&A expenses as a percentage of sales were 31.2% compared to 29.2% in the
nine months of fiscal year 2009 primarily reflecting the impact of the decline
in sales.
R&D expenses were $7,385 compared to
$6,473 in the third quarter of fiscal year 2009, an increase of 14.1% (13.0% in
local currency). As a percentage of sales, R&D expenses were 2.1% compared
to 2.0% in the third quarter of fiscal year 2009. In the nine months of fiscal
year 2010, R&D expenses were $22,172 compared to $22,944 in the nine months
of fiscal year 2009, a decrease of 3.4% (4.4% in local currency). As a
percentage of sales, R&D expenses were 2.3%, on par with the nine months of
fiscal year 2009.
Operating profit dollars in the third quarter
were $56,938, an increase of 40.3% (30.2% in local currency) compared to the
third quarter of fiscal year 2009. Operating margin increased to 16.1% from
12.7% in the third quarter of fiscal year 2009. Operating profit dollars in the
nine months of fiscal year 2010 were $118,139, a decrease of 10.2% (16.1% in
local currency) compared to the nine months of fiscal year 2009. Operating
margin decreased to 12.1% from 13.2% in the nine months of fiscal year 2009.
Corporate:
Corporate expenses in the third quarter of
fiscal year 2010 were $13,034 compared to $13,763 in the third quarter of fiscal
year 2009, a decrease of $729 or 5.3% (6.1% in local currency). The decrease in
Corporate expenses primarily reflects a decrease in consulting fees, decreased
facilities costs associated with the consolidation into the new Corporate
headquarters, and gains on the sale of investment securities held by the
Company’s benefit protection trust. Corporate expenses in the nine months of
fiscal year 2010 were $38,631 compared to $43,423 in the nine months of fiscal
year 2009, a decrease of $4,792 or 11.0% (11.4% in local currency). The decrease
in Corporate expenses primarily reflects a decrease in consulting fees, a
decrease in foreign currency transaction losses, and gains on the sale of
investment securities as discussed above.
Liquidity and Capital Resources
Non-cash working capital, which is defined as
working capital excluding cash and cash equivalents, notes receivable, notes
payable and the current portion of long-term debt, was approximately $595,300 at
April 30, 2010 as compared with $577,900 at July 31, 2009. Excluding the effect
of foreign exchange (discussed below), non-cash working capital increased
approximately $28,900 compared to July 31, 2009.
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 April 30, 2010 to those at July 31, 2009,
the Japanese Yen has strengthened against the U.S. Dollar, while the Euro and
the British Pound have weakened against the U.S. Dollar. The effect of foreign
currency translation decreased non-cash working capital by $11,466, including
net inventory, net accounts receivable and other current assets by $6,750,
$8,597 and $2,500, respectively, as compared to July 31, 2009. Additionally,
foreign currency translation decreased accounts payable and other current
liabilities by $6,981 and increased current income taxes payable by $600.
Net cash provided by operating activities in
the nine months of fiscal year 2010 was $257,041 as compared to $154,912 in the
nine months of fiscal year 2009, an increase of $102,129, or about 66%. The
increase in net cash provided by operating activities primarily reflects the
increase in net earnings, a 24-day improvement in the Company’s cash conversion
cycle as discussed below and a decrease in interest paid of $14,151.
36
The Company’s full cash conversion cycle,
defined as days in inventory outstanding (“DIO”) plus days sales outstanding
(“DSO”) less days payable outstanding (“DPO”), decreased to 137 days in the
quarter ended April 30, 2010 from 160 days in the quarter ended April 30, 2009.
This improvement reflects a decrease in DIO and DSO as well as an increase in
DPO.
Free cash flow, which is defined as net cash
provided by operating activities less capital expenditures, was $163,528 in the
nine months of fiscal year 2010, as compared with $62,381 in the nine months of
fiscal year 2009. The increase in free cash flow reflects the increase in net
cash provided by operating activities as discussed above, partly offset by an
increase in capital expenditures. The Company utilizes free cash flow as one way
to measure its current and future financial performance. Company management
believes this measure is important because it is a key element of its planning.
The following table reconciles net cash provided by operating activities to free
cash flow.
|
|
Apr. 30, 2010 |
|
Apr. 30, 2009 |
|
Net cash provided by operating
activities |
$
|
257,041 |
|
$
|
154,912 |
|
Less capital expenditures |
|
93,513 |
|
|
92,531 |
|
Free cash flow |
$ |
163,528 |
|
$ |
62,381 |
|
|
|
|
|
|
|
Overall, net debt (debt net of cash and cash
equivalents) as a percentage of total capitalization (net debt plus equity) was
16.6% at April 30, 2010 as compared to 21.4% at July 31, 2009. Net debt
decreased by approximately $59,300 compared with July 31, 2009, comprised of an
increase in cash and cash equivalents of $79,500 partly offset by an increase in
gross debt of $11,300. The impact of foreign exchange rates increased net debt
by about $8,900 including the revaluation of the JPY loan of 9 billion
($95,814 at April 30, 201