Edgar Filing: PALL CORP

PLL-10/31/2012-Q1FY2013

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



R	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended October 31, 2012



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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



	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 November 30, 2012 was 111,091,438.

Table of Contents



		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited).
	Condensed Consolidated Balance Sheets as of October 31, 2012 and July 31, 2012.	3
	Condensed Consolidated Statements of Earnings for the three months ended October 31, 2012 and October 31, 2011.	4
	Condensed Consolidated Statements of Comprehensive Income for the three months ended October 31, 2012 and October 31, 2011.	5
	Condensed Consolidated Statements of Cash Flows for the three months ended October 31, 2012 and October 31, 2011.	6
	Notes to Condensed Consolidated Financial Statements.	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	31
Item 4.	Controls and Procedures.	31
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings.	32
Item 1A.	Risk Factors.	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	32
Item 6.	Exhibits.	32
SIGNATURES

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

PALL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)



	Oct 31, 2012			July 31, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	909,680		$	500,274
Accounts receivable	603,771			655,436
Inventory	398,641			364,766
Prepaid expenses	44,621			40,814
Other current assets	140,119			154,650
Assets held for sale	—			136,517
Total current assets	2,096,832			1,852,457
Property, plant and equipment	771,242			750,993
Goodwill	341,647			338,941
Intangible assets	147,339			151,144
Other non-current assets	163,368			254,357
Total assets	$	3,520,428		$	3,347,892

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable	$	130,009		$	204,940
Accounts payable	161,629			184,868
Accrued liabilities	322,027			380,466
Income taxes payable	67,577			57,422
Current portion of long-term debt	465			453
Dividends payable	28,403			23,979
Total current liabilities	710,110			852,128
Long-term debt, net of current portion	488,683			490,706
Income taxes payable – non-current	167,074			161,684
Deferred taxes and other non-current liabilities	351,752			333,339
Total liabilities	1,717,619			1,837,857

Stockholders’ equity:
Common stock, par value $.10 per share	12,796			12,796
Capital in excess of par value	277,572			271,489
Retained earnings	2,149,033			1,840,926
Treasury stock, at cost	(607,026		)	(552,215		)
Stock option loans	(54		)	(54		)
Accumulated other comprehensive income/(loss):
Foreign currency translation	131,415			97,663
Pension liability adjustment	(163,256		)	(164,444		)
Unrealized investment gains	4,011			3,604
Unrealized gains/(losses) on derivatives	(1,682		)	270
	(29,512		)	(62,907		)
Total stockholders’ equity	1,802,809			1,510,035
Total liabilities and stockholders’ equity	$	3,520,428		$	3,347,892

See accompanying notes to condensed consolidated financial statements.

PALL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)



	Three Months Ended
	Oct 31, 2012			Oct 31, 2011
Net sales	$	627,600		$	651,262
Cost of sales	300,517			315,910
Gross profit	327,083			335,352

Selling, general and administrative expenses	195,965			208,180
Research and development	22,575			19,521
Restructuring and other charges, net	4,274			22,984
Interest (income)/expense, net	(568		)	5,945
Earnings from continuing operations before income taxes	104,837			78,722
Provision for income taxes	15,672			19,070
Net earnings from continuing operations	$	89,165		$	59,652
Earnings from discontinued operations, net of income taxes	$	250,307		$	9,803
Net earnings	$	339,472		$	69,455

Earnings per share from continuing operations:
Basic	$	0.78		$	0.52
Diluted	$	0.77		$	0.51
Earnings per share from discontinued operations:
Basic	$	2.18		$	0.08
Diluted	$	2.15		$	0.08
Earnings per share:
Basic	$	2.96		$	0.60
Diluted	$	2.92		$	0.59

Dividends declared per share	$	0.250		$	0.175

Average shares outstanding:
Basic	114,589			115,824
Diluted	116,097			117,224

See accompanying notes to condensed consolidated financial statements.

PALL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share data)

(Unaudited)



	Three Months Ended
	Oct 31, 2012			Oct 31, 2011

Net earnings	$	339,472		$	69,455
Other comprehensive income/(loss), net of income taxes:
Foreign currency translation	33,752			(24,132		)
Pension liability adjustment	1,188			4,231
Unrealized investment gains/(losses)	407			(6,148		)
Unrealized gains/(loss) on derivatives	(1,952		)	—
Total other comprehensive income/(loss), net of income taxes	$	33,395		$	(26,049	)
Comprehensive income	$	372,867		$	43,406

PALL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Three Months Ended
	Oct 31, 2012			Oct 31, 2011
Operating activities:
Net cash provided by operating activities	$	38,958		$	78,356

Investing activities:
Capital expenditures	(23,477		)	(56,649		)
Acquisition of businesses	—			(28,000		)
Purchases of retirement benefit assets	(15,747		)	(12,241		)
Proceeds from retirement benefit assets	15,220			9,675
Proceeds from sale of assets	535,680			19,837
Other	(617		)	(1,798		)
Net cash provided/(used) by investing activities	511,059			(69,176		)

Financing activities:
Notes payable	(74,931		)	(70,008		)
Dividends paid	(23,979		)	(20,125		)
Long-term borrowings	17			52
Repayments of long-term debt	(120		)	(141		)
Net proceeds from stock plans	13,528			9,759
Purchase of treasury stock	(75,000		)	—
Excess tax benefits from stock-based compensation arrangements	4,779			532
Net cash used by financing activities	(155,706		)	(79,931		)
Cash flow for period	394,311			(70,751		)
Cash and cash equivalents at beginning of year	500,274			557,766
Effect of exchange rate changes on cash and cash equivalents	15,095			(11,621		)
Cash and cash equivalents at end of period	$	909,680		$	475,394
Supplemental disclosures:
Interest paid	$	11,004		$	1,304
Income taxes paid (net of refunds)	49,039			29,379

See accompanying notes to condensed consolidated financial statements.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

The condensed consolidated financial information 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, 2012 (“2012 Form 10-K”). Certain prior year amounts have been reclassified to conform to the current year presentation.

As discussed in Note 16, Discontinued Operations, on August 1, 2012, the Company sold certain assets of its blood collection, filtration and processing product line, which was a component of the Company’s Life Sciences segment, and met the criteria for discontinued operations and held for sale presentation during the third quarter of fiscal year 2012. As such, it has been reported as a discontinued operation in the Company’s condensed consolidated financial statements for all periods presented.

NOTE 2 – BALANCE SHEET DETAILS

The following tables provide details of selected balance sheet items:



	Oct 31, 2012			July 31, 2012
Accounts receivable:
Billed	$	516,178		$	584,449
Unbilled	99,722			82,720
Total	615,900			667,169
Less: Allowances for doubtful accounts	(12,129		)	(11,733		)
	$	603,771		$	655,436

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



	Oct 31, 2012		July 31, 2012
Inventory:
Raw materials and components	$	98,129	$	86,659
Work-in-process	97,826		92,427
Finished goods	202,686		185,680
	$	398,641	$	364,766



Property, plant and equipment:
Property, plant and equipment	$	1,660,512		$	1,608,718
Less: Accumulated depreciation and amortization	(889,270		)	(857,725		)
	$	771,242		$	750,993

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

NOTE 3 – GOODWILL AND INTANGIBLE ASSETS

The following table presents goodwill, allocated by reportable segment.



	Oct 31, 2012		July 31, 2012
Life Sciences	$	180,172	$	178,359
Industrial	161,475		160,582
	$	341,647	$	338,941

Intangible assets, net, consist of the following:



	Oct 31, 2012
	Gross		Accumulated Amortization		Net
Patents and unpatented technology	$	127,662	$	68,530	$	59,132
Customer-related intangibles	94,803		16,222		78,581
Trademarks	13,201		5,555		7,646
Other	4,447		2,467		1,980
	$	240,113	$	92,774	$	147,339

	July 31, 2012
	Gross		Accumulated Amortization		Net
Patents and unpatented technology	$	125,938	$	65,262	$	60,676
Customer-related intangibles	93,901		13,323		80,578
Trademarks	13,104		5,269		7,835
Other	5,179		3,124		2,055
	$	238,122	$	86,978	$	151,144

The changes in both goodwill and intangible assets relate to the impact of changes in foreign exchange rates used to translate the goodwill and intangible assets contained in the financial statements of foreign subsidiaries using the rates at each respective balance sheet date.

Amortization expense from continuing operations for intangible assets for the three months ended October 31, 2012 and October 31, 2011 was $5,278 and $4,147, respectively (excluded is amortization expense included in discontinued operations for the three months ended October 31, 2011 of $45) . Amortization expense is estimated to be approximately $14,017 for the remainder of fiscal year 2013, $17,499 in fiscal year 2014, $15,645 in fiscal year 2015, $14,384 in fiscal year 2016, $14,304 in fiscal year 2017 and $14,185 in fiscal year 2018.

NOTE 4 – TREASURY STOCK

On October 16, 2008, the board authorized an expenditure of $350,000 to repurchase shares. On September 26, 2011, the board authorized an additional expenditure of $250,000 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. Total repurchases in the first quarter of fiscal year 2013 were 1,177 shares at an aggregate cost of $75,000, with an average price per share of $63.75. As of October 31, 2012, $256,873 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 three months ended October 31, 2012, 540 shares were issued under the Company’s stock-based compensation plans. At October 31, 2012, the Company held 14,407 treasury shares.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

NOTE 5 – CONTINGENCIES AND COMMITMENTS

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 in the 2012 Form 10-K, the Company did not have any other current legal proceedings and claims that would individually or in the aggregate have a reasonably possible material adverse effect on its financial condition or operating results. As such, any reasonably possible loss or range of loss, other than those legal proceedings discussed in this note and in the 2012 Form 10-K, is immaterial. 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.

Environmental Matters:

The Company’s condensed consolidated balance sheet at October 31, 2012 includes liabilities for environmental matters of approximately $11,405, which relate primarily to the environmental proceedings discussed in the 2012 Form 10-K. 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.

NOTE 6 – RESTRUCTURING AND OTHER CHARGES, NET

The following tables summarize the restructuring and other charges (“ROTC”) recorded for the three months ended October 31, 2012 and October 31, 2011:



	Three Months Ended Oct 31, 2012
	Restructuring (1)			Other (Gains)/ Charges (2)		Total
Severance benefits	$	3,279		$	—	$	3,279
Loss on sale of assets	43			—		43
Professional fees and other costs, net of receipt of insurance claim payments	443			699		1,142
Reversal of excess restructuring reserves	(190		)	—		(190		)
	$	3,575		$	699	$	4,274

Cash	$	3,532		$	699	$	4,231
Non-cash	43			—		43
	$	3,575		$	699	$	4,274

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)



	Three Months Ended Oct 31, 2011
	Restructuring (1)			Other (Gains)/ Charges (2)			Total
Severance benefits and other employment contract obligations	$	25,408		$	7,970		$	33,378
Gain on sale of assets	(1,515		)	(9,196		)	(10,711		)
Professional fees and other costs, net of receipt of insurance claim payments	775			(412		)	363
Reversal of excess restructuring reserves	(46		)	—			(46		)
	$	24,622		$	(1,638	)	$	22,984

Cash	$	24,622		$	(3,806	)	$	20,816
Non-cash (a)	—			2,168			2,168
	$	24,622		$	(1,638	)	$	22,984

(a) Reflects non-cash stock based compensation expense.

(1) Restructuring:

Restructuring charges recorded in the three months ended October 31, 2012 reflect the expenses incurred in connection with the Company’s structural cost improvement initiatives impacting both segments as well as the Corporate Services Group.

Restructuring charges recorded in the three months ended October 31, 2011 reflect the expenses incurred in connection with the Company’s cost reduction initiatives, primarily in the Industrial segment. Restructuring charges in the three months ended ended October 31, 2011 also includes a gain on the divestiture of a non-strategic asset group.

(2) Other (Gains) / Charges:

Severance benefits and other employment contract obligations:

In the three months ended October 31, 2011, the Company recorded charges related to certain employment contract obligations.

Gain on sale of assets:

The three months ended October 31, 2011 includes a gain of $9,196 on the sale of the Company’s investment in Satair A/S.

Professional fees and other:

In the three months ended October 31, 2012 and October 31, 2011, the Company recorded legal and other professional fees related to the Federal Securities Class Actions, Shareholder Derivative Lawsuits and Other Proceedings (see Note 14, Contingencies and Commitments in the 2012 Form 10-K) 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 offset the majority of the costs discussed above in the three months ended October 31, 2012 and more than offset such costs in the three months ended and October 31, 2011.

The three months ended October 31, 2012 also includes a loss related to a fire at a manufacturing facility.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

The following table summarizes the activity related to restructuring liabilities recorded for the Company's structural cost improvement initiatives and Industrial cost reduction initiatives which began in fiscal year 2012:



	Severance			Other			Total

Original charge	$	61,852		$	3,448		$	65,300
Utilized	(27,365		)	(2,798		)	(30,163		)
Translation	(123		)	(47		)	(170		)
Balance at Jul 31, 2012	$	34,364		$	603		$	34,967
Additions	3,279			443			3,722
Utilized	(8,143		)	(545		)	(8,688		)
Reversal of excess reserves	(169		)	(19		)	(188		)
Translation	272			10			282
Balance at Oct 31, 2012	$	29,603		$	492		$	30,095

Excluded from the table above are restructuring liabilities relating to restructuring plans initiated in fiscal years 2009 and 2010. At October 31, 2012, the balance of these liabilities was $644.

NOTE 7 – INCOME TAXES

The Company's effective tax rate on continuing operations for the three months ended October 31, 2012 and October 31, 2011 was 14.9% and 24.2%, respectively. For the three months ended October 31, 2012, the effective tax rate varied from the U.S. federal statutory rate primarily due to the benefits of foreign operations and a net tax benefit of $7,757 primarily from the resolution of a U.S. tax audit partly offset by the establishment of deferred tax liabilities for the repatriation of foreign earnings. For the three months ended October 31, 2011, the effective tax rate varied from the U.S. federal statutory rate primarily due to the benefits of foreign operations.

During the three months ended October 31, 2012, the Company reached a final agreement with the Internal Revenue Service (“IRS”) resolving the outstanding tax positions for fiscal years ended 2006 through 2008. As a result, the Company reversed $10,193 of previously recorded liabilities related to tax and penalties, as well as $6,704 related to interest ($4,268 net of income tax cost) that were accrued but not assessed as part of the IRS agreement.

At October 31, 2012 and July 31, 2012, the Company had gross unrecognized income tax benefits of $176,920 and $194,829, respectively. During the three months ended October 31, 2012, the amount of gross unrecognized tax benefits decreased by $17,909, primarily due to the settlement of the IRS income tax examinations for fiscal years ended 2006 through 2008, partially offset by tax positions taken during the current period and the impact of foreign currency translation. As of October 31, 2012, the amount of net unrecognized income tax benefits that, if recognized, would impact the effective tax rate was $122,041.

At October 31, 2012 and July 31, 2012, the Company had liabilities of $16,786 and $25,314, respectively, for potential payment of interest and penalties.

Due to the potential resolution of tax examinations and the expiration of various statutes of limitation, the Company believes that it is reasonably possible that the gross amount of unrecognized tax benefits may decrease within the next twelve months by a range of zero to $2,847.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

NOTE 8 – COMPONENTS OF NET PERIODIC PENSION COST

Net periodic pension benefit cost for the Company’s defined benefit pension plans includes the following components (included in the table below is net periodic benefit cost included in discontinued operations for the three months ended October 31, 2011 of $183):



	Three Months Ended
	U.S. Plans						Foreign Plans						Total
	Oct 31, 2012			Oct 31, 2011			Oct 31, 2012			Oct 31, 2011			Oct 31, 2012			Oct 31, 2011
Service cost	$	2,648		$	2,231		$	1,189		$	1,210		$	3,837		$	3,441
Interest cost	2,617			3,596			4,018			4,635			6,635			8,231
Expected return on plan assets	(2,383		)	(2,303		)	(4,103		)	(3,964		)	(6,486		)	(6,267		)
Amortization of prior service cost/(credit)	393			657			(17		)	(33		)	376			624
Amortization of actuarial loss	2,411			3,454			1,400			1,335			3,811			4,789
Gain due to curtailments and settlements	16			—			—			—			16			—
Net periodic benefit cost	$	5,702		$	7,635		$	2,487		$	3,183		$	8,189		$	10,818

NOTE 9 – STOCK–BASED PAYMENT

The Company currently has four stock-based employee and director compensation award types (Restricted Stock Unit, Stock Option Plans, Management Stock Purchase Plan (“MSPP”), and Employee Stock Purchase Plan (“ESPP”)), which are more fully described in Note 15, Common Stock, to the consolidated financial statements included in the 2012 Form 10-K.

The detailed components of stock-based compensation expense recorded in the condensed consolidated statements of earnings for the three months ended October 31, 2012 and October 31, 2011 are reflected in the table below (excluded from the table below is stock-based compensation expense included in discontinued operations for the three months ended October 31, 2011 of $150):



	Three Months Ended
	Oct 31, 2012		Oct 31, 2011
Restricted stock units	$	3,308	$	4,702
Stock options	1,134		1,874
ESPP	388		1,151
MSPP	850		993
Total	$	5,680	$	8,720

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

NOTE 10 – 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 restricted stock units aggregating 561 and 984 shares were not included in the computation of diluted shares for the three months ended October 31, 2012 and October 31, 2011, respectively, because their effect would have been antidilutive. The following is a reconciliation between basic shares outstanding and diluted shares outstanding:



	Three Months Ended
	Oct 31, 2012	Oct 31, 2011
Basic shares outstanding	114,589	115,824
Effect of stock plans	1,508	1,400
Diluted shares outstanding	116,097	117,224

NOTE 11 – 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.

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 on a recurring basis as of October 31, 2012:



	Fair Value Measurements
	As of
	Oct 31, 2012		Level 1		Level 2		Level 3
Financial assets carried at fair value
Money market funds	$	4,637	$	4,637	$	—	$	—
Available-for-sale securities:
Equity securities	214		214		—		—
Debt securities:
Corporate	32,324		—		32,324		—
U.S. Treasury	10,410		—		10,410		—
Federal Agency	26,503		—		26,503		—
Mortgage-backed	6,803		—		6,803		—
Municipal government	1,003		—		1,003		—
Derivative financial instruments:
Foreign exchange forward contracts	$	558	—		558		—
Financial liabilities carried at fair value
Derivative financial instruments:
Foreign exchange forward contracts	$	2,287	—		2,287		—

The following table presents, for each of these hierarchy levels, the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of July 31, 2012:



	Fair Value Measurements
	As of
	Jul 31, 2012		Level 1		Level 2		Level 3
Financial assets carried at fair value
Money market funds	$	4,684	$	4,684	$	—	$	—
Available-for-sale securities:
Equity securities	206		206		—		—
Debt securities:
Corporate	32,378		—		32,378		—
U.S. Treasury	8,610		—		8,610		—
Federal Agency	27,231		—		27,231		—
Mortgage-backed	6,392		—		6,392		—
Municipal government	1,004		—		1,004		—
Derivative financial instruments:
Foreign exchange forward contracts	3,778		—		3,778		—
Financial liabilities carried at fair value
Derivative financial instruments:
Foreign exchange forward contracts	1,457		—		1,457		—

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

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.

The fair value of the Company’s investments in debt securities are valued utilizing third party pricing services and verified by management. The pricing services use 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 values of the Company’s foreign currency forward contracts are 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.

NOTE 12 – INVESTMENT SECURITIES

The following is a summary of the Company’s available-for-sale investment securities by category which are classified within other non-current assets in the Company’s condensed consolidated balance sheets. Contractual maturity dates of debt securities held by the trust at October 31, 2012 range from 2012 to 2044.



	Cost/ Amortized Cost Basis		Fair Value		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Net Unrealized Holding Gains/(Losses)
October 31, 2012
Equity securities	$	220	$	214	$	—	$	(6	)	$	(6	)
Debt securities:
Corporate	30,177		32,324		2,150		(3		)	2,147
U.S. Treasury	9,843		10,410		569		(2		)	567
Federal agency	24,520		26,503		1,984		(1		)	1,983
Mortgage-backed	6,480		6,803		347		(24		)	323
Municipal government	1,000		1,003		3		—			3
	$	72,240	$	77,257	$	5,053	$	(36	)	$	5,017

July 31, 2012
Equity securities	$	212	$	206	$	—	$	(6	)	$	(6	)
Debt securities:
Corporate	30,548		32,378		1,838		(8		)	1,830
U.S. Treasury	8,049		8,610		562		(1		)	561
Federal agency	25,454		27,231		1,777		—			1,777
Mortgage-backed	6,129		6,392		290		(27		)	263
Municipal government	1,000		1,004		4		—			4
	$	71,392	$	75,821	$	4,471	$	(42	)	$	4,429

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

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
	Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses
October 31, 2012
Debt securities:
Corporate	$	701	$	3	$	—	$	—	$	701	$	3
U.S. Treasury	649		2		—		—		649		2
Mortgage-backed	—		—		1,506		24		1,506		24
Federal agency	143		1		—		—		143		1
Equity securities	27		6		—		—		27		6
	$	1,520	$	12	$	1,506	$	24	$	3,026	$	36



	Less than 12 months				12 months or greater				Total
	Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses
July 31, 2012
Debt securities:
Mortgage-backed	$	—	$	—	$	1,504	$	27	$	1,504	$	27
U.S. Treasury	589		1		—		—		589		1
Corporate	—		—		462		8		462		8
Equity securities	27		6		—		—		27		6
	$	616	$	7	$	1,966	$	35	$	2,582	$	42

The following table shows the proceeds and gross gains and losses from the sale of available-for-sale investments for the three months ended October 31, 2012 and October 31, 2011:



	Three Months Ended
	Oct 31, 2012		Oct 31, 2011
Proceeds from sales	$	5,597	$	16,047
Realized gross gains on sales	192		9,363
Realized gross losses on sales	2		16

NOTE 13 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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 & Poors and Moody’s Investor Services, in accordance with the Company’s policies. The Company does not utilize derivative instruments for trading or speculative purposes.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

Foreign Exchange Related:

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 the changes in fair value of these receivables and payables from fluctuating foreign exchange rates. The notional amount of foreign currency forward contracts entered into during the three months ended October 31, 2012 was $606,767. The notional amount of foreign currency forward contracts outstanding as of October 31, 2012 was $300,859.

b. Cash Flow Hedges

The Company uses foreign exchange forward contracts for cash flow hedging on its future transactional exposure to the Euro due to changes in market rates to exchange Euros for British Pounds. The hedges cover a British subsidiary (British Pound functional) with Euro revenues and a Swiss subsidiary (Euro functional) with British Pound expenses. The probability of the occurrence of these transactions is high and our assessment is based on observable facts including the frequency and amounts of similar past transactions. The objective of the cash flow hedges is to lock the British Pound equivalent amount of Euro sales for the British subsidiary and the Euro equivalent amount of British Pound expenses for the Swiss subsidiary at the agreed upon exchange rates in the foreign exchange forward contracts. The notional amount of foreign currency forward contracts outstanding as of October 31, 2012 was $60,777 and cover certain monthly transactional exposures through July 2013.

c. Net Investment Hedges

The risk management objective of designating the Company’s foreign currency loan as a hedge of a portion 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 a JPY loan outstanding 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 Rate Related:

As of October 31, 2012, there are no existing interest rate related derivatives.

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
October 31, 2012	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign exchange forward contracts	Other current assets	$	—	Other current liabilities	$	1,831
Derivatives not designated as hedging instruments
Foreign exchange forward contracts	Other current assets	$	558	Other current liabilities	$	456
Total derivatives		$	558		$	2,287
Nonderivative instruments designated as hedging instruments
Net investment hedge				Long-term debt, net of current portion	$	113,040

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)



	Asset Derivatives			Liability Derivatives
July 31, 2012	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign exchange forward contracts	Other current assets	$	270	Other current liabilities	$	—
Derivatives not designated as hedging instruments
Foreign exchange forward contracts	Other current assets	$	3,508	Other current liabilities	$	1,457
Total derivatives		$	3,778		$	1,457
Nonderivative instruments designated as hedging instruments
Net investment hedge				Long-term debt, net of current portion	$	115,129

The amounts of the gains and losses related to the Company's derivative financial instruments designated as hedging instruments for the three months ended October 31, 2012 and October 31, 2011 are presented as follows:



	Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)					Location of Gain or (Loss) Reclassified from Accumulated OCI into Earnings	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) (a)
	Oct 31, 2012			Oct 31, 2011		(Effective Portion)	Oct 31, 2012			Oct 31, 2011
Derivatives in cash flow hedging relationships
Foreign exchange forward contracts	$	(1,952	)	$	—	Foreign exchange	$	(91	)	$	—


(a)	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 Oct 31, 2012 and Oct 31, 2011.

The amounts of the gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments for the three months ended October 31, 2012 and October 31, 2011 are presented as follows:



		Amount of Gain or (Loss) Recognized in Earnings on Derivatives
		Three Months Ended
	Location of Gain or (Loss) Recognized in Earnings on Derivatives	Oct 31, 2012			Oct 31, 2011
Derivatives not designated as hedging relationships
Foreign exchange forward contracts	Selling, general and administrative expenses	$	(2,438	)	$	1,415

The amounts of the gains and losses related to the Company’s nonderivative financial instruments designated as hedging instruments for the three months ended October 31, 2012 and October 31, 2011 are presented as follows:



	Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)					Location of Gain or (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) ^(b)
	Three Months Ended						Three Months Ended
	Oct 31, 2012		Oct 31, 2011				Oct 31, 2012		Oct 31, 2011
Nonderivatives designated as hedging relationships
Net investment hedge	$	1,337	$	(1,849	)	N/A	$	—	$	—


(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 October 31, 2012 and October 31, 2011.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

NOTE 14 – COMPONENTS OF OTHER COMPREHENSIVE INCOME



	Three Months Ended
	Oct 31, 2012			Oct 31, 2011
Unrealized translation adjustment	$	34,503		$	(24,934	)
Income taxes	(751		)	802
Unrealized translation adjustment, net	$	33,752		$	(24,132	)

Pension liability adjustment	$	1,986		$	6,254
Income taxes	(798		)	(2,023		)
Pension liability adjustment, net	$	1,188		$	4,231

Change in unrealized investment gains/(losses)	$	588		$	(9,606	)
Income taxes	(181		)	3,458
Change in unrealized investment gains/(losses), net	$	407		$	(6,148	)

Change in unrealized gains/(losses) on derivatives	$	(2,122	)	$	—
Income taxes	170			—
Change in unrealized gains/(losses) on derivatives, net	$	(1,952	)	$	—

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



	Three Months Ended
	Oct 31, 2012			Oct 31, 2011
Unrealized gains/(losses) arising during the period	$	778		$	(375	)
Income taxes	(249		)	(28		)
Net unrealized gains/(losses) arising during the period	529			(403		)
Reclassification adjustment for gains included in net earnings	(122		)	(5,745		)
Change in unrealized investment gains/(losses), net	$	407		$	(6,148	)

NOTE 15 – SEGMENT INFORMATION

The Company’s reportable segments, which are also its operating segments, consist of the Company’s Life Sciences and Industrial businesses.

The following table presents sales and segment profit from continuing operations by business segment reconciled to earnings from continuing operations before income taxes, for the three months ended October 31, 2012 and October 31, 2011. The Life Sciences and Industrial results for the three months ended October 31, 2011 have been restated to reflect the change in allocation of certain shared expenses on a continuing operations basis.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)



	Three Months Ended
	Oct 31, 2012			Oct 31, 2011
SALES:
Life Sciences	$	299,951		$	301,754
Industrial	327,649			349,508
Total	$	627,600		$	651,262
SEGMENT PROFIT:
Life Sciences	$	69,842		$	79,717
Industrial	52,766			43,635
Total segment profit	122,608			123,352
Corporate Services Group	14,065			15,701
Operating profit	108,543			107,651
ROTC	4,274			22,984
Interest (income)/expense, net	(568		)	5,945
Earnings from continuing operations before income taxes	$	104,837		$	78,722

NOTE 16 – DISCONTINUED OPERATIONS

On April 28, 2012, the Company entered into an asset purchase agreement (“APA”) to sell certain assets of its blood collection, filtration and processing product line (the “Product Line”) to Haemonetics Corporation (“Haemonetics”) for approximately $550,000. The transaction involved the transfer of manufacturing facilities and equipment in Covina, California; Tijuana, Mexico; Ascoli, Italy and a portion of the Company’s operations in Fajardo, Puerto Rico. In addition to the manufacturing facilities and related equipment, the Company transferred Product Line related inventory and intangible assets. Haemonetics also assumed certain employee-related liabilities. The sale closed on August 1, 2012, and approximately 1,400 employees transitioned to Haemonetics at that time.

Separate from these manufacturing facilities, the Company also agreed to transfer related blood media manufacturing capabilities and assets to Haemonetics. The transfer of the related media lines is expected to be completed by calendar year 2016. Until that time, the Company will provide these media products to Haemonetics under a supply agreement. Under the terms of the APA, approximately $535,000 was paid upon closing, with the balance of the purchase price payable upon the Company’s delivery of the aforementioned blood media manufacturing capability and related assets. Final determination of cash proceeds, gain on sale and tax impact are subject to working capital and certain other adjustments and final allocation of proceeds by jurisdiction.

The Product Line, which was a component of the Company’s Life Sciences segment, met the criteria for discontinued operations and held for sale presentation during the third quarter of fiscal year 2012 and has been reported as a discontinued operation in the Company’s condensed consolidated financial statements. The Company did not allocate any portion of the Company’s interest expense to discontinued operations.

The key components of discontinued operations for the three months ended October 31, 2012 were as follows:



	Three Months Ended
	Oct 31, 2012		Oct 31, 2011
Net sales	$	3,027	$	54,379

Earnings from discontinued operations before income taxes	$	399,984	$	13,771
Provision for income taxes	149,677		3,968
Earnings from discontinued operations, net of income taxes	$	250,307	$	9,803

Included in earnings from discontinued operations before income taxes above are a gain on the sale of the Product Line of $400,283 for the three months ended October 31, 2012.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

As of July 31, 2012, the aggregate components of assets and liabilities classified as held for sale in the condensed consolidated balance sheet consisted of the following:



	Jul 31, 2012
Inventory	$	40,090
Prepaid expenses and other current assets	1,883
Total current assets	$	41,973

Property, plant and equipment	$	75,506
Goodwill	18,514
Intangible assets	524
Other non-current assets	—
Total non-current assets	$	94,544
Total assets	$	136,517

Total liabilities	$	2,643

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, 2012 (“2012 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 affecting 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 contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that address activities, events or developments that the Company or management intends, expects, projects, believes or anticipates will or may occur in the future. All statements regarding future performance, earnings projections, earnings guidance, management’s expectations about its future cash needs, dilution from the disposition or future allocation of capital 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 management’s assumptions and assessments in light of past experience and trends, current conditions, expected future developments and other relevant factors.

The Company’s forward-looking statements are subject to risks and uncertainties and are not guarantees of future performance, and actual results, developments and business decisions may differ materially from those envisaged by the Company’s forward-looking statements. Such risks and uncertainties include, but are not limited to, those discussed in Part I–Item 1A.–Risk Factors in the 2012 Form 10-K, and other reports the Company files with the Securities and Exchange Commission, including: the impact of legislative, regulatory and political developments globally; the impact of the uncertain global economic environment; 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; delays or cancellations in shipments; the Company’s ability to develop and commercialize new technologies or to obtain regulatory approval or market acceptance of new technologies; increase in costs of manufacturing and operating costs; the Company’s ability to achieve and sustain the savings anticipated from its structural cost initiatives; the Company's ability to meet its regulatory obligations; changes in product mix, market mix and product pricing, particularly relating to the expansion of the systems business; the Company's ability to successfully complete the Company's business improvement initiatives, which include supply chain enhancements and integrating and upgrading the Company's information systems; the effect of a serious disruption in the Company's information systems; fluctuations in the Company's effective tax rate; the Company’s ability to enforce patents and protect proprietary products and manufacturing techniques; the Company's ability to successfully complete or integrate any acquisitions; volatility in foreign currency exchange rates, interest rates and energy costs and other macroeconomic challenges currently affecting the Company; the impact of pricing and other actions by competitors; the effect of litigation and regulatory inquiries associated with the restatement of the Company’s prior period financial statements; the Company's ability to attract and retain management talent or the loss of members of its senior management team; and the effect of the restrictive covenants in the Company’s debt facilities. Factors or events that could cause the Company’s actual results to differ may emerge from time to time, and it is not possible for the Company 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.

Discontinued Operations

Review of Consolidated Results from Continuing Operations

Sales in the first quarter of fiscal year 2013 decreased 3.6% to $627,600 from $651,262 in the first quarter of fiscal year 2012. Exchange rates used to translate foreign subsidiary results into U.S. Dollars decreased reported sales by $22,875, primarily due to the strengthening of the U.S. Dollar against the Euro. In local currency, sales were flat compared to the first quarter of fiscal year 2012.

Life Sciences segment sales increased 3.8% (in local currency) in the first quarter, while Industrial segment sales decreased 3.5%. For a detailed discussion of sales by segment, refer to the section “Review of Operating Segments” below. Consumable filtration products sales (including appurtenant hardware) were flat in the first quarter, as an increase in Life Sciences of 4.0% was offset by a decline in Industrial of 3.4%. Increased pricing contributed $3,411, or 0.6% to consumables sales growth in the quarter, reflecting increases in both segments.

Systems sales declined 2.4% (in local currency) reflecting a decline in Industrial of 4.3%, partly offset by growth of 2.1% in Life Sciences. Systems sales represented 12.0% of total sales in the first quarter of fiscal year 2013 compared to 12.2% in the first quarter of fiscal year 2012.

The Company defines its emerging markets as high growth and/or developing areas of the world in which the Company has focused growth resources. In the Americas, emerging markets include Latin America, primarily the countries of Brazil, Argentina and Mexico. In Europe, emerging markets include Eastern European countries, primarily Russia, Turkey and Poland, as well as various countries in the Middle East and Africa. In Asia, emerging markets primarily include the countries of China, India, Philippines, Indonesia and Vietnam. Sales in emerging markets, which represented about 20% of total sales, declined approximately 5% in the first quarter. This reflects a decline in consumables sales as well as pressure on capital spending by customers.

Gross margin in the first quarter of fiscal year 2013 was 52.1%, compared to 51.5% in the first quarter of fiscal year 2012. This reflects an increase in gross margin in the Industrial segment of 110 basis points offset by a decline in the Life Sciences segment of 40 basis points. For a detailed discussion of the factors impacting gross margin by segment, refer to the section “Review of Operating Segments” below.

The Company has risks to gross margin from the fluctuation of the costs of products that are sourced in a currency different than the currency they are sold in (transactional impact). In the fourth quarter of fiscal year 2012, the Company began to use foreign exchange contracts for cash flow hedging of its forecasted transactional exposure. With the Company’s current manufacturing footprint, a significant portion of products purchased by the Company in the Eurozone are sourced outside of the Eurozone. Sales in the Eurozone are approximately 25% of total Company sales. About 70% of the cost of goods on those sales are denominated in British pounds or U.S. Dollars.The Company currently estimates that the transactional impact of a 5% fluctuation in the U.S. Dollar or the Pound Sterling relationship to the Euro would impact the Company’s consolidated gross margin by a range of approximately 40-60 basis points on an annualized basis, before the impact of the Company's cash flow hedging program.

Looking at these currency pairs weighted to Pall's sales, for the three months ended October 31, 2012 the Euro had depreciated approximately 9% against the U.S. Dollar and 9% against the Pound Sterling compared to the average exchange rates for the three months ended October 31, 2011.

Selling, general and administrative (“SG&A”) expenses in the first quarter of fiscal year 2013 decreased by $12,215, or 5.9% (approximately $4,700, or 2%, in local currency). This reflects a decrease in the Industrial segment and the Corporate Services Group partly offset by an increase in the Life Sciences segment. Selling expenses decreased approximately 10% in the quarter, while general and administrative (“G&A”) expenses were flat.

The decline in overall SG&A (in local currency) in the quarter reflects the savings generated by our structural cost improvement initiatives net of the following:


•	increased expenses to structure the Company for future growth, and


•	incremental costs related to the acquisition of ForteBio in the third quarter of fiscal year 2012 , impacting Life Sciences.

As a percentage of sales, SG&A expenses declined to 31.2% from 32.0% in the first quarter of fiscal year 2012. The selling and G&A expense components of SG&A as a percentage of sales in the quarter were as follows:


•	selling expenses were 16.8% compared to 18.1% in the first quarter of fiscal year 2012, primarily due to the rationalization of sales management, and


•	G&A expenses were 14.4% compared to 13.9% in the first quarter of fiscal year 2012, primarily due to incremental costs related to the acquisition of ForteBio as well as incremental depreciation expense resulting from the go-live of the the last significant phase of the Company’s global ERP system implementation.

For a discussion of SG&A by business, refer to the section “Review of Operating Segments” below.

Research and development (“R&D”) expenses were $22,575 in the first quarter of fiscal year 2013 compared to $19,521 in the first quarter of fiscal year 2012, an increase of $3,054, or 15.6% ($3,400, or 17% in local currency). The increase in R&D expenses in local currency in the quarter reflects increased spending in the Life Sciences segment partly offset by a decline in the Industrial segment. As a percentage of sales, R&D expenses were 3.6% in the quarter compared to 3.0% in the first quarter of fiscal year 2012. For a discussion of R&D expenses by business, refer to the section “Review of Operating Segments” below.

In the first quarter of fiscal year 2013, the Company recorded restructuring and other charges (“ROTC”) of $4,274, primarily comprised of severance costs related to the Company’s structural cost improvement initiatives.

In the first quarter of fiscal year 2012, the Company recorded ROTC of $22,984. ROTC in the quarter was primarily comprised of severance, professional fees and other costs related to the Company's cost reduction initiatives, primarily in the Industrial segment as well as charges related to certain employment contract obligations. Such charges were partly offset by a gain on the sale of an investment.

The details of ROTC for the three months ended October 31, 2012 as well as the activity related to restructuring liabilities that were recorded related to the Company's structural cost improvement initiatives and Industrial cost reduction initiatives, can be found in Note 6, Restructuring and Other Charges, Net, to the accompanying condensed consolidated financial statements.

Earnings before interest and income taxes (“EBIT”) were $104,269 in the first quarter of fiscal year 2013, an increase of 23.2% compared to $84,667 in the first quarter of fiscal year 2012. The impact of foreign currency translation decreased EBIT by approximately $4,400, or 5% in the first quarter of fiscal year 2013. As a percentage of sales, EBIT were 16.6% compared to 13.0% in the first quarter of fiscal year 2012.

Net interest income in the first quarter of fiscal year 2013 was $568 compared to net interest expense of $5,945 in the first quarter of fiscal year 2012. Net interest income in the quarter reflects the reversal of of $6,704 of accrued interest related to the resolution of a U.S. tax audit. Excluding this benefit, net interest expense increased $191 compared to the first quarter of fiscal year 2012.

The Company's effective tax rate for the first quarter of fiscal years 2013 and 2012 was 14.9% and 24.2%, respectively. The effective tax rate for the first quarter of fiscal year 2013 reflects a net tax benefit of $7,757 primarily from the resolution of a U.S. tax audit partly offset by the establishment of deferred tax liabilities for the repatriation of foreign earnings. Excluding these impacts, as well as the impact of ROTC discussed above, the effective tax rate for the first quarter of fiscal years 2013 and 2012 would have been 23.3% and 23.9%, respectively. The Company expects its effective tax rate for the full fiscal year 2013 to be approximately 24.0%, exclusive of the impact of ROTC and discrete items in future periods. The actual effective tax rate for the full fiscal year 2013 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 first quarter of fiscal year 2013 were $89,165, or 77 cents per share, compared with net earnings of $59,652, or 51 cents in the first quarter of fiscal year 2012. Company management estimates that foreign currency translation decreased earnings per share by 3 cents in the first quarter of fiscal year 2013.

Review of Operating Segments from Continuing Operations

The following table presents sales and segment profit by business segment, reconciled to earnings before income taxes, for the three months ended October 31, 2012 and October 31, 2011.



Three Months Ended	Oct 31, 2012			% Margin	Oct 31, 2011		% Margin	% Change
SALES:
Life Sciences	$	299,951			$	301,754		(0.6	)
Industrial	327,649				349,508			(6.3	)
Total	$	627,600			$	651,262		(3.6	)
SEGMENT PROFIT :
Life Sciences	$	69,842		23.3	$	79,717	26.4	(12.4	)
Industrial	52,766			16.1	43,635		12.5	20.9
Total segment profit	122,608			19.5	123,352		18.9	(0.6	)
Corporate Services Group	14,065				15,701			(10.4	)
Operating profit	108,543			17.3	107,651		16.5	0.8
ROTC, net	4,274				22,984
Interest (income)/expense, net	(568		)		5,945
Earnings before income taxes	$	104,837			$	78,722

Life Sciences:

Presented below are Summary Statements of Segment Profit for the Life Sciences segment for the three months ended October 31, 2012 and October 31, 2011:



Three Months Ended	Oct 31, 2012		% of Sales	Oct 31, 2011		% of Sales	% Change
Sales	$	299,951		$	301,754		(0.6	)
Cost of sales	123,997		41.3	123,541		40.9	0.4
Gross margin	175,954		58.7	178,213		59.1	(1.3	)
SG&A	90,905		30.3	87,066		28.9	4.4
R&D	15,207		5.1	11,430		3.8	33.0
Segment profit	$	69,842	23.3	$	79,717	26.4	(12.4	)

The tables below present sales by market and region within the Life Sciences segment for the three months ended October 31, 2012 and October 31, 2011, including the effect of exchange rates for comparative purposes.



Three Months Ended	Oct 31, 2012		Oct 31, 2011		% Change		Exchange Rate Impact			% Change in Local Currency
By Market
BioPharmaceuticals	$	202,577	$	196,012	3.3		$	(8,916	)	7.9
Food & Beverage	49,586		56,019		(11.5	)	(2,602		)	(6.8	)
Medical	47,788		49,723		(3.9	)	(1,871		)	(0.1	)
Total Life Sciences	$	299,951	$	301,754	(0.6	)	$	(13,389	)	3.8
By Region
Americas	$	97,798	$	90,724	7.8		$	(736	)	8.6
Europe	143,665		153,878		(6.6	)	(11,459		)	0.8
Asia	58,488		57,152		2.3		(1,194		)	4.4
Total Life Sciences	$	299,951	$	301,754	(0.6	)	$	(13,389	)	3.8

Life Sciences segment sales increased 3.8% in the first quarter compared to the first quarter of fiscal year 2012, reflecting growth consumables sales of 4.0% and growth in systems sales of 2.1%. Sales in emerging markets grew approximately 1% while sales in mature markets grew about 5%.

Increased pricing (in the BioPharmaceuticals and Food & Beverage markets) contributed $1,740, or about 0.6% to consumables sales growth in the first quarter and the volume related increase to consumables sales was 3.4%.

Systems sales represented 7.9% of total Life Sciences sales in the first quarter, on par with the first quarter of fiscal year 2012. Life Sciences sales represented approximately 48% of total Company sales in the first quarter compared to 46%, in the same period of fiscal year 2012.

Sales in the BioPharmaceuticals market, which is comprised of two submarket groupings (Pharmaceuticals and Laboratory), and represented approximately 70% of total Life Sciences sales, increased 7.9% in the quarter. The sales results by the submarkets are discussed below:

•

Sales in the Pharmaceuticals submarket, which represented about 60% of total Life Sciences sales, increased 9.5% in the quarter compared to the same period of fiscal year 2012, reflecting growth in all three regions. Consumables sales increased 8.6% in the quarter, while systems sales grew 20.3%. Continued strength in the biotech sector was a key growth driver. Furthermore, the ForteBio acquisition (acquired in the third quarter of fiscal year 2012), added approximately $6,300 million, or 4% in consumables sales growth in the quarter.


•	Sales in the Laboratory submarket, which represented close to 10% of Life Sciences sales, were down 1.6%. Growth in this market was hampered by residual supply chain issues related to the implementation of the last phase of the Company's new Enterprise Resource Planning system in the latter part of fiscal year 2012, primarily impacting the Americas.

Sales in the Food & Beverage market, which represented close to 20% of total Life Sciences sales, decreased 6.8%. Consumables sales were down 3.1%. Excluding the impact of a divestiture in Italy, consumables sales were up slightly. This reflects strong consumables sales growth in the Americas, due in part to Latin America, largely offset by weakness in Europe related to sluggishness in beer and wine production levels. Overall systems sales declined 22.5%, reflective of weak capital spending in the Americas.

Sales in the Medical market, which is comprised of patient protection products sold to hospitals, original equipment manufacturers (“OEM”) and cell therapy developers, represented about 15% of total Life Sciences sales. Sales were flat in the first quarter compared to the first quarter of fiscal year 2012:


•	OEM sales, which represented less than 10% of total Life Sciences sales, decreased 6.6% in the quarter primarily reflecting timing of shipments in the prior year.


•	Sales to Hospitals, which represented less than 10% of total Life Sciences sales, were up about 1% reflecting increased point of use water filtration sales in the Americas and Europe.

Life Sciences gross margin in the first quarter of fiscal year 2013 decreased 40 basis points to 58.7% from 59.1% in the first quarter of fiscal year 2012. The major drivers impacting gross margin quarter over quarter are as follows:


•	the detrimental effect of the weakening Euro on British Pound and U.S. dollar denominated goods sourced in the Eurozone, that decreased gross margin by approximately 140-160 basis, and


•	favorable mix primarily related to the increase in Pharmaceuticals consumables sales which increased gross margin by approximately 90-110 basis points.

SG&A expenses in the first quarter of fiscal year 2013, increased by $3,839, or 4.4% (an increase of approximately $8,000, or 9% in local currency) compared to the first quarter of fiscal year 2012. Selling expenses declined approximately 4% in the quarter, while G&A expenses increased approximately 19%. The overall increase in SG&A (in local currency) principally reflects incremental costs related to the acquisition of ForteBio and investments the Company is making to structure it for future growth. SG&A as a percentage of sales increased to 30.3% from 28.9% in the first quarter of fiscal year 2012. The selling and G&A expense components of SG&A as a percentage of sales in the quarter were as follows:

•selling expenses were 17.5% compared to 18.2% in the first quarter of fiscal year 2012, and

•G&A expenses were 12.8% compared to 10.7% in the first quarter of fiscal year 2012.

R&D expenses in the first quarter of fiscal year 2013 were $15,207, an increase of $3,777, or 33.0% (approximately $4,000, or 35% in local currency). The increase in R&D expenses reflects increased focus on development of our instrumentation capabilities, including spend related to the Company's ForteBio product lines. As a percentage of sales, R&D expenses were 5.1% compared to 3.8% in the first quarter of fiscal year 2012.

Segment profit dollars were $69,842, a decrease of $9,875, or 12.4% (approximately $6,600, or 8% in local currency) compared to the first quarter of fiscal year 2012. Segment profit margin declined to 23.3% from 26.4% in the first quarter of fiscal year 2012.

Industrial:

Presented below are summary Statements of Segment Profit for the Industrial segment for the three months ended October 31, 2012 and October 31, 2011:



	Oct 31, 2012		% of Sales	Oct 31, 2011		% of Sales	% Change
Sales	$	327,649		$	349,508		(6.3	)
Cost of sales	176,520		53.9	192,369		55.0	(8.2	)
Gross margin	151,129		46.1	157,139		45.0	(3.8	)
SG&A	90,995		27.8	105,413		30.2	(13.7	)
R&D	7,368		2.2	8,091		2.3	(8.9	)
Segment profit	$	52,766	16.1	$	43,635	12.5	20.9

The tables below present sales by market and region within the Industrial segment for the three months ended October 31, 2012 and October 31, 2011, including the effect of exchange rates for comparative purposes.



	Oct 31, 2012		Oct 31, 2011		% Change		Exchange Rate Impact			% Change in Local Currency
By Market
Process Technologies	$	198,534	$	214,285	(7.4	)	$	(7,074	)	(4.0	)
Aerospace	58,435		56,633		3.2		(1,051		)	5.0
Microelectronics	70,680		78,590		(10.1	)	(1,361		)	(8.3	)
Total Industrial	$	327,649	$	349,508	(6.3