UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
 | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the fiscal year ended August 3, 2002 or | ||
 | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the transition period from to |
Commission File Number 1-4311
PALL CORPORATION
(Exact name of registrant as specified in its charter)
| New York | 11-1541330 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 2200 Northern Boulevard, East Hills, NY | 11548 |
| (Address of principal executive offices) | (Zip Code) |
(516) 484-5400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of exchange on which registered |
| Common Stock $.10 par value | New York Stock Exchange |
| Common Share Purchase Rights | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the registrant was $1,860,412,899, based on the closing price on October 4, 2002.
The number of common shares, $.10 par value, outstanding of the registrant was 122,835,795 shares on October 4, 2002.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s Proxy Statement for the 2002 annual meeting of shareholders, previously filed (hereinafter referred to as the “Proxy Statement”), are incorporated by reference into Part III.
TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS.
(a) General development of business.
Pall Corporation, incorporated in July 1946, and its subsidiaries (hereinafter collectively called “the Company” or referred to as “we” or “our” unless the context requires otherwise) is a leading supplier of fine filters, principally made by the Company using its proprietary filter media, and other fluid clarification and separations equipment for the removal of solid, liquid and gaseous contaminants from a wide variety of liquids and gases.
We serve customers in two principal markets: Life Sciences and Industrial. The two principal markets are further divided into five segments: Blood and BioPharmaceutical (which comprise the Life Sciences business) and General Industrial, Aerospace and Microelectronics (which comprise the Industrial business).
During the past five years, we have continued our development and sale of fluid clarification and separations products in a wide variety of markets. Additionally, in fiscal 2002, we acquired the Filtration and Separations Group (“FSG”) from United States Filter Corporation (“US Filter”), significantly expanding our presence in the Industrial market. For additional information, see Acquisition and Related Matters in Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Acquisitions Note in the notes accompanying the consolidated financial statements.
(b) Financial information about market segments.
For financial information by market segment, please see the Market Segment Information and Geographies Note in the notes accompanying the consolidated financial statements and in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(c) Narrative description of business.
We are a specialty materials and engineering company with the broadest-based filtration, separations and purification capabilities in the world. Our proprietary products are used to discover, develop and produce pharmaceuticals, produce safe drinking water, protect hospital patients, remove white blood cells from blood, enhance the quality and efficiency of manufacturing processes, keep equipment running efficiently and protect the environment. Requirements for product quality, purity, environmental preservation, health and safety apply to a wide range of industries and across geographic borders. We have a 56-year history of commercializing successful products and continue to develop new materials and technologies for the Life Sciences and Industrial markets and their increasingly difficult fluid filtration, purification and separation challenges. We have an array of core materials and technologies that can be combined and manipulated in many ways to solve complex fluid separation challenges. These proprietary materials, coupled with our ability to engineer them into useful forms, are the foundations of our capabilities. Our proprietary materials enable us to provide customers with products that are well matched to their needs, to develop new products and to enter new markets. With the addition of FSG, we have enhanced our library of proprietary materials and technologies with sophisticated offerings such as asymmetric membranes, selective adsorption, melt-blown media, nano ceramic membranes and metallic fiber media.
We actively pursue only those applications in which Pall products can make a substantial difference to the customer and especially target projects that will result in real gains in performance and economics. The products sold are principally filters made with proprietary Pall filter media produced by chemical film casting, melt-blowing of polymer fibers, papermaking and metallurgical processes. Metal and plastic housings for our filters and a wide variety of appurtenant devices are also made. Competition is intense in all of our markets and includes many large and small companies in our global markets; however, no one company has a significant presence in all of our markets.
LIFE SCIENCES BUSINESS:
Our Life Sciences technologies facilitate the process of drug discovery and development and help ensure that drugs are produced to the highest standards. Many of the latest intravenous therapies require administration to patients through a Pall filter. Our capability in the life sciences industry is a unique competitive strength and an important element of our strategy going forward.
Sales in the Blood and BioPharmaceutical markets are made through direct sales and through distribution. Backlog information is omitted for these markets, as it is not considered meaningful to an understanding of these portions of the Company’s business.
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We feel that safety, efficacy, ease of use, technical support, as well as price, are the principal competitive factors in this business, although economy of use is important. Our principal competitors in the Blood segment include Baxter, Asahi Medical, Maco Pharma, Terumo and Fresenius, and our principal competitors in the BioPharmaceutical segment include Millipore, Sartorius and CUNO.
We sell disposable blood filtration and cardiovascular filtration products primarily to blood centers and hospitals. Our products are used to remove leukocytes (white blood cells) from blood used in transfusions and to filter out particulates, bacteria and viruses in the course of open-heart surgery, organ transplants, dialysis, intravenous feeding and breathing therapy. Leukocytes in donor blood can cause serious medical complications. Filtering out white blood cells reduces transfusion-related suppression of the immune system and helps protect against post-surgical infection. Based on medical risk and clinical benefits of filtration, hospitals and blood centers around the world have been converting to filtered blood. More than twenty countries either already are filtering all of their donor blood or are moving toward this as a goal. In the U.S., the Food and Drug Administration recommends blood filtration, and we believe that it is becoming the standard of care.
BIOPHARMACEUTICALS:
The BioPharmaceutical segment includes sales of separation systems and disposable filters primarily to pharmaceutical, biotechnology and laboratory companies. We provide a broad range of advanced filtration solutions for each critical stage of drug development. Our product lines start in the laboratory with drug discovery, gene manipulation and proteomics applications. Our filtration systems and validation services allow drug manufacturers the quickest and surest path through the regulatory process and on to the market.
We believe that our established record of product performance and innovation is a particularly strong advantage among biopharmaceutical customers, because of the high costs and safety risks associated with drug development and production.
INDUSTRIAL BUSINESS:
We provide enabling and process enhancing technologies throughout the industrial marketplace. This includes the machinery and equipment, aerospace, microelectronics, municipal and industrial water, fuels, chemicals, energy, and food and beverage industries. We have the capability to provide customers with integrated solutions for all of their process fluids.
GENERAL INDUSTRIAL:
Included in this diverse segment are sales of filters, coalescers and separation systems for hydraulic, fuel and lubrication systems on manufacturing equipment across many industries as well as to producers of oil, gas, electricity, chemicals, food and beverages, municipal and industrial water and paper. Virtually all of the raw materials, process fluids and waste streams that course through industry are candidates for multiple stages of filtration, separation and purification.
We believe that technologies that purify water for use and reuse represent an important opportunity. Governments around the world are implementing stringent new regulations governing drinking water standards and we believe that our filters and systems provide a solution for these requirements. With the acquisition of FSG we have increased our presence in the stable and growing food and beverage sector and we have enhanced our ability to better serve our other industrial markets.
Backlog at August 3, 2002 was approximately $98,627,000. Our sales to General Industrial customers are made through our personnel and through distributors and manufacturers’ representatives. We believe that product performance and quality, and service to the customer, as well as price, are the principal competitive factors in this market. Our principal competitors in the General Industrial segment include CUNO, US Filter, Sartorius and Parker Hannifin.
AEROSPACE:
The Aerospace segment includes sales of filtration and fluid monitoring equipment to the aerospace industry for use on commercial and military aircraft, including hydraulic, lubrication, and fuel filters, coalescers to remove water from fuel, filters to remove viruses from aircraft cabin air and filter monitoring systems. Our products and systems are also used in ships and land-based military vehicles. Commercial and Military sales each represented 50% of total Aerospace sales.
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Our products are sold to customers in this segment through a combination of direct sales and through distribution. Backlog at August 3, 2002 was approximately $70,157,000. Competition varies by product, and no single competitor competes with us across all sub-segments of Aerospace; however, our principal competitors include Donaldson, ESCO Technologies Inc. and FACET.
The Company believes that performance and quality of product and service, as well as price, are determinative in most sales.
MICROELECTRONICS:
Included in this segment are sales of disposable filtration products to producers of semiconductors, computer terminals, fiber optics, disc drives, thin film rigid discs and photographic film. The drive to shrink the size of computer components requires increasingly fine levels of filtration and purification, sometimes down to the level of parts per trillion. From the raw materials of silicon and water to the gases and chemicals of chip manufacture, we have extensive engineered solutions for the needs of this demanding industry.
Our products are sold to customers in this segment through our own personnel, distributors and manufacturers’ representatives. Backlog at August 3, 2002 was approximately $15,058,000. We believe that performance and quality of product and service, as well as price, are determinative in most sales. The principal competitors in the Microelectronics market include, Mykrolis, Parker Hannifin and Mott.
The following comments relate to the five segments discussed above:
RAW MATERIALS:
Most raw materials used by the Company are available from multiple sources. A limited number of materials are proprietary products of major chemical companies. The Company believes that it could find satisfactory substitutes for these materials should they become unavailable, as it has done several times in the past.
PATENTS:
The Company owns a broad range of patents covering its filter media, filter designs and other products, but it considers these to be mainly defensive, and relies on its proprietary manufacturing methods and engineering skills. However, it does act against infringers when it believes such action is economically justified.
The following comments relate to the Company’s business in general:
| 1) | With few exceptions, research activities conducted by the Company are company-sponsored. Such expenditures totaled $54,778,000 in 2002, $56,041,000 in 2001 and $51,434,000 in 2000. | |||
| 2) | No one customer provided 10% or more of the Company’s consolidated sales in fiscal 2002, 2001 or 2000. | |||
| 3) | The Company is in substantial compliance with federal, state and local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. To date, compliance with environmental matters has not had a material effect upon the Company’s capital expenditures or competitive position. | |||
| 4) | For a further description of environmental issues see Item 3, Legal Proceedings and the Contingencies and Commitments Note in the notes accompanying the consolidated financial statements. | |||
| 5) | At August 3, 2002, the Company employed approximately 10,700 persons. |
(d) Financial information about geographic areas.
For financial information by geographic area, please see the Segment Information and Geographies Note in the notes accompanying the consolidated financial statements.
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ITEM 2. PROPERTIES.
The following represent the Company’s significant facilities.
| Location | Type | Markets | Square Feet | |||||||
| OWNED: | ||||||||||
| Western Hemisphere | ||||||||||
| Cortland, NY | Plant & office | Life Sciences & Industrial | 338,000 | |||||||
| East Hills, NY | Office, plant & warehouse | Headquarters & all markets | 326,000 | |||||||
| DeLand, FL | Plant | Industrial | 275,000 | |||||||
| Fajardo, Puerto Rico | Plants, warehouse & laboratory | Life Sciences & Industrial | 259,000 | |||||||
| Pt. Washington, NY | Office, laboratory & training center | Life Sciences & Industrial | 215,000 | |||||||
| Ann Arbor, MI | Plant, office & warehouse | Life Sciences | 180,000 | |||||||
| New Port Richey, FL | Plant & office | Industrial | 166,000 | |||||||
| Timonium, MD | Plant & office | Industrial | 160,000 | |||||||
| Covina, CA | Plant, office & laboratory | Life Sciences | 134,000 | |||||||
| Ft. Myers, FL | Plant, office & warehouse | Industrial | 111,000 | |||||||
| Hauppauge, NY | Plant & office | Life Sciences | 75,000 | |||||||
| Pensacola, FL | Plant | Life Sciences | 73,000 | |||||||
| Putnam, CT | Plant | Life Sciences & Industrial | 62,000 | |||||||
| Europe | ||||||||||
| Bad Kreuznach, Germany | Plant & office | Life Sciences & Industrial | 470,000 | |||||||
| Waldstetten, Germany | Plant & office | Industrial | 420,000 | |||||||
| Portsmouth, U.K. | Plant, office, warehouse & laboratory | Life Sciences & Industrial | 248,000 | |||||||
| Tipperary, Ireland | Plant | Life Sciences & Industrial | 178,000 | |||||||
| Redruth, U.K. | Plant, office & warehouse | Industrial | 163,000 | |||||||
| Crailsheim, Germany | Plant & office | Industrial | 120,000 | |||||||
| Ilfracombe, U.K. | Plant & office | Life Sciences & Industrial | 112,000 | |||||||
| Newquay, U.K. | Plant & office | Life Sciences & Industrial | 106,000 | |||||||
| Bazet, France | Plant | Industrial | 111,000 | |||||||
| Frankfurt, Germany | Office & warehouse | Life Sciences & Industrial | 72,000 | |||||||
| Ascoli, Italy | Plant, office & warehouse | Life Sciences | 71,000 | |||||||
| Paris, France | Office & warehouse | Life Sciences & Industrial | 65,000 | |||||||
| Lyon, France | Plant | Industrial | 26,000 | |||||||
| Asia | ||||||||||
| Tsukuba, Japan | Plant, laboratory & warehouse | Life Sciences & Industrial | 120,000 | |||||||
| LEASED: | ||||||||||
| Western Hemisphere | ||||||||||
| Timonium, MD | Plant | Industrial | 71,000 | |||||||
| Covina, CA | Plant & warehouse | Life Sciences | 66,000 | |||||||
| Cortland, NY | Warehouse | Industrial | 40,000 | |||||||
| Tijuana, Mexico | Plant | Life Sciences | 40,000 | |||||||
| Europe | ||||||||||
| Frankfurt & Hamburg, Germany | Office & warehouse | Life Sciences & Industrial | 100,000 | |||||||
| Milan, Italy | Office & warehouses | Life Sciences & Industrial | 54,000 | |||||||
| Vienna, Austria | Office & warehouse | Life Sciences & Industrial | 100,000 | |||||||
| Madrid, Spain | Office & warehouse | Life Sciences & Industrial | 28,000 | |||||||
| Asia | ||||||||||
| Beijing, China | Plant, office & warehouse | Life Sciences & Industrial | 137,000 | |||||||
| Tokyo, Osaka, Nagoya, Japan | Offices | Life Sciences & Industrial | 39,000 |
In the opinion of management, these premises are suitable and adequate to meet the Company’s requirements.
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ITEM 3. LEGAL PROCEEDINGS.
In February 1988, an action was filed in the Circuit Court for Washtenaw County, Michigan (“Court”) by the State of Michigan (“State”) against Gelman Sciences Inc. (“Gelman”), a subsidiary acquired by the Company in February 1997. The action sought to compel Gelman to investigate and remediate contamination near Gelman’s Ann Arbor facility and requested reimbursement of costs the State had expended in investigating the contamination, which the State alleged was caused by Gelman’s disposal of waste water from its manufacturing process. Pursuant to a consent judgment entered into by Gelman and the State in October 1992 (amended September 1996 and October 1999), which resolved that litigation, Gelman is remediating the contamination without admitting wrongdoing. In February 2000, the State Assistant Attorney General filed a Motion to Enforce Consent Judgment in the Court seeking approximately $4,900,000 in stipulated penalties for the alleged violations of the consent judgment and additional injunctive relief. Gelman disputed these assertions. In July 2000, the Court took the matter of penalties “under advisement.” The Court issued a Remediation Enforcement Order requiring Gelman to submit and implement a detailed plan that will reduce the contamination to acceptable levels within five years. The Company’s plan has been submitted to, and approved by, both the Court and the State. In the opinion of management, to date the Court has expressed its satisfaction with the Company’s progress. More recently, the State asserted in correspondence dated June 5, 2001 that additional stipulated penalties in the amount of $141,500 were owed for a separate alleged violation of the consent judgment. The Court found that a “substantial basis” for Gelman’s position existed and again took the State’s request under advisement, pending the results of certain groundwater monitoring data. Finally, on August 9, 2001, the State made a written demand for reimbursement of $227,462 it has allegedly incurred for groundwater monitoring. Gelman considers this claim barred by the consent judgment. The reserve of approximately $19,600,000 of accruals reflected in the Company’s balance sheet at August 3, 2002 relates mainly to the aforementioned cleanup. In the opinion of management, the Company is in substantial compliance with applicable environmental laws and its current accruals for environmental remediation are adequate.
Reference is also made to the Contingencies and Commitments Note in the notes accompanying the consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of shareholders during the fourth quarter of fiscal year 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Pall Corporation’s Common Stock is listed on the New York and London stock exchanges. The table below sets forth quarterly data relating to the Company’s Common Stock prices and cash dividends declared per share for the past two fiscal years.
| 2002 | 2001 | Cash dividends declared per share | |||||||||||||||||
| Price per share | High | Low | High | Low | 2002 | 2001 | |||||||||||||
| Quarter: | First | $ | 24.74 | $ | 17.50 | $ | 23.31 | $ | 19.06 | $ | 0.170 | $ | 0.165 | ||||||
| Second | 25.00 | 20.16 | 24.88 | 17.94 | 0.170 | 0.170 | |||||||||||||
| Third | 23.40 | 16.75 | 26.25 | 20.20 | 0.090 | 0.170 | |||||||||||||
| Fourth | 23.42 | 15.90 | 24.35 | 22.25 | 0.090 | 0.170 | |||||||||||||
In April 2002, the Company reduced the quarterly dividend to $0.09 from the previous $0.17 level. The approximately $40 million in cash conserved annually may be used for future investments, debt reduction or other means of creating shareholder value.
There are approximately 5,300 holders of record of the Company’s Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data for the last five years. This selected financial data should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Form 10-K.
On April 24, 2002, the Company acquired FSG. The acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141, Business Combinations (“SFAS No. 141”). The operating results of FSG are reported in the Company’s results of operations from April 28, 2002. Refer to the Acquisitions Note in the notes accompanying the consolidated financial statements for a discussion of this transaction, including pro forma information.
| (In millions, except per share data and number of employees) | 2002 | 2001 | 2000 | 1999 | 1998 | |||||||||||
| RESULTS FOR THE YEAR: | ||||||||||||||||
| Sales | $ | 1,290.8 | $ | 1,235.4 | $ | 1,224.1 | $ | 1,147.1 | $ | 1,087.3 | ||||||
| Costs of Sales | 654.9 | 591.2 | 565.5 | 555.3 | 480.8 | |||||||||||
| Selling, general and administrative expenses | 440.0 | 404.0 | 396.1 | 398.7 | 385.9 | |||||||||||
| Research and development | 54.8 | 56.1 | 51.4 | 56.5 | 58.5 | |||||||||||
| Restructuring and other charges, net | 26.8 | 17.2 | 8.6 | 64.7 | 19.2 | |||||||||||
| Interest expense, net | 14.3 | 16.6 | 14.1 | 13.0 | 7.9 | |||||||||||
| Earnings before taxes | 100.0 | (b) | 150.3 | (c) | 188.4 | (d) | 58.9 | (e) | 135.0 | (f) | ||||||
| Income taxes | 26.8 | 32.3 | 41.8 | 7.4 | 41.4 | |||||||||||
| Net earnings | $ | 73.2 | $ | 118.0 | $ | 146.6 | $ | 51.5 | $ | 93.6 | ||||||
| Earnings per share: | ||||||||||||||||
Basic | 0.60 | 0.96 | 1.18 | 0.41 | 0.75 | |||||||||||
Diluted | 0.59 | 0.95 | 1.18 | 0.41 | 0.75 | |||||||||||
| Pro forma diluted earnings per share: (a) | 0.82 | 1.08 | 1.26 | 0.94 | 0.94 | |||||||||||
| Dividends declared per share | 0.52 | 0.68 | 0.66 | 0.64 | 0.61 | |||||||||||
| Capital expenditures | 69.9 | 77.8 | 66.5 | 71.2 | 85.1 | |||||||||||
| Depreciation and amortization | 74.0 | 71.5 | 72.0 | 74.8 | 73.1 | |||||||||||
| YEAR-END POSITION: | ||||||||||||||||
| Working capital | $ | 477.8 | $ | 465.1 | $ | 329.7 | $ | 199.3 | $ | 201.8 | ||||||
| Property, plant and equipment, net | 605.1 | 503.0 | 503.8 | 507.0 | 520.6 | |||||||||||
| Total assets | 2,027.2 | 1,548.5 | 1,507.3 | 1,488.3 | 1,363.2 | |||||||||||
| Long-term debt | 619.7 | 359.1 | 223.9 | 116.8 | 111.5 | |||||||||||
| Total liabilities | 1,207.5 | 778.5 | 746.0 | 757.6 | 597.6 | |||||||||||
| Stockholders’ equity | 819.7 | 770.0 | 761.3 | 730.7 | 765.6 | |||||||||||
| (a) | Pro forma earnings per share for fiscal years 2002, 2001, 2000, 1999 and 1998 ignores the restructuring and other charges described in notes (b) through (f) below and includes a pro forma adjustment to increase earnings (after pro forma tax effect) by $3.0, $2.7, $2.5 and $2.0 million, respectively (2 cents per share in fiscal years 2001, 2000 and 1999 and 1 cent per share in 1998), due to the adoption of SFAS 142, “Goodwill and Other Intangible Assets.” |
| (b) | Includes Restructuring and other charges of $32.8 million (including a $6.0 million one-time purchase accounting adjustment contained in cost of sales) or 23 cents per share (after pro forma tax effect). |
| (c) | Includes Restructuring and other charges of $17.2 million or 11 cents per share (after pro forma tax effect). |
| (d) | Includes Restructuring and other charges, net, of $12.0 million (including $3.4 million contained in cost of sales) or 6 cents per share (after pro forma tax effect). |
| (e) | Includes Restructuring and other charges of $89.4 million (including $24.7 million contained in cost of sales) or 51 cents per share (after pro forma tax effect). |
| (f) | Includes a one-time charge of $27.0 million or 22 cents per share (after pro forma tax effect) to write-off in process research and development related to the Rochem acquisition, offset by $7.8 million or 4 cents per share (after pro forma tax effect) of other income, net. |
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion together with Pall’s Consolidated Financial Statements and Notes thereto and other financial information included elsewhere in this Form 10-K report. The discussions under the subheadings “Review of Market Segment and Geographies” below are in local currency unless indicated otherwise. As used below, “½%” indicates that we have rounded the relevant data up or down to the nearest one-half percentage point.
Acquisition and Related Matters
On April 24, 2002, we acquired FSG for total cash consideration of $360 million, subject to a post closing adjustment of the purchase price based on the net assets acquired as of April 27, 2002. The amount of the consideration was determined by our Board of Directors after review of the FSG business and its potential impact on our operations.
FSG is a pioneer and global leader in the design, manufacture and sale of filtration products for the separation and purification of liquids and gases. FSG primarily serves the food & beverage, fuels & chemicals, machinery & equipment and microelectronics markets as well as the biotech and pharmaceutical industries. With a diversified portfolio of filter media, FSG provides end-users with an array of filter elements, housings and systems with high technology and superior performance. FSG complements our global franchise with outstanding branded products and technology, enabling us to provide the fullest range of integrated filtration products and services. This acquisition also broadens our exposure to the growth and stability of the food and beverage sector and enhances our ability to better serve our customers.
The acquisition was initially funded with a 364-day variable rate (LIBOR plus 57.5 basis points) credit facility. On August 1, 2002, we issued $280 million of 10-year bonds at an annual interest rate of 6%. The proceeds were utilized to repay a portion of the interim acquisition credit facility. The remainder of the acquisition credit facility was financed on October 18, 2002, with a $100 million bank term loan at a rate based on LIBOR plus 100 basis points.
As a result of the additional borrowing to fund the acquisition, waivers of certain non-financial covenants were obtained and the funded debt covenant of our existing senior revolving credit facility and private placement debt was amended. Additionally, as a result of the increased debt level, Standard & Poors lowered our credit rating to single ‘A’ minus from single ‘A’. The expected annual increase in interest expense as a result of the revised credit rating approximates $.7 million.
FSG’s balance sheet has been consolidated with our balance sheet as of August 3, 2002 and its earnings for the fourth quarter of fiscal 2002 have been included in our consolidated operating results for the twelve months ended August 3, 2002.
The acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141. SFAS No. 141 requires that the total cost of the acquisition be allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the date of acquisition. As such, the cost of the acquisition has been allocated in the accompanying consolidated balance sheet at August 3, 2002, with the exception of in-process research and development and patented and unpatented technology; the valuations of these items have not progressed to a stage where there is sufficient information to value them. The finalization of these valuations will affect future earnings as in-process research and development will be immediately charged to earnings and finite-lived amortizable intangible assets will be amortized over their estimated useful lives. The August 3, 2002 consolidated balance sheet reflec ts the preliminary allocation of the purchase price and goodwill of $207.1 million. At the date of acquisition, management began formulating integration plans, which contemplate the closure of redundant facilities and the sale of certain businesses. In addition, the synergies created by joining the two organizations have resulted in employee terminations. The condensed consolidated balance sheet at August 3, 2002 reflects liabilities for such items; however, we will continue to finalize and announce other integration plans during fiscal 2003. The finalization of these integration plans concerning FSG’s facilities and employees, as well as the technology valuations will be reported in future periods as increases and decreases to goodwill and to the assets acquired and liabilities assumed. The financial statement impact of integration plans that concern Pall facilities and employees will be reflected in earnings.
For more detail regarding the FSG acquisition, please refer to the Acquisitions Note in the notes accompanying the consolidated financial statements.
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Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may differ from estimates. The following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results, and that require judgment. See also the notes accompanying the consolidated financial statements, which contain additional information regarding our accounting policies.
Purchase Accounting
The acquisition of FSG described above required us to use the purchase method in accordance with SFAS No. 141.
Determining the fair value of certain assets and liabilities acquired is judgmental in nature and often involves the use of significant estimates and assumptions. As provided by SFAS No. 141, the Company has one year following the acquisition to finalize estimates of the fair value of assets and liabilities acquired. To assist in this process, the Company obtained appraisals from an independent valuation firm.
As discussed above, valuations for all but the acquired technology are complete. There are various methods used to estimate the value of tangible and intangible assets acquired, such as discounted cash flow and market multiple approaches. Some of the more significant estimates and assumptions inherent in the two approaches include: projected future cash flows (including timing); discount rate reflecting the risk inherent in the future cash flows; perpetual growth rate; determination of appropriate market comparables; and the determination of whether a premium or a discount should be applied to comparables. There are also judgments made to determine the expected useful lives assigned to each class of assets and liabilities acquired.
Revenue Recognition
Revenue is recognized when title and risk of loss have transferred to the customer and when contractual terms have been fulfilled. Long-term contracts are accounted for under the percentage of completion method based upon the ratio of costs incurred to date compared with estimated total costs to complete them. The cumulative impact of revisions to total estimated costs is reflected in the period of the change, including anticipated losses.
Allowance for Doubtful Accounts
We evaluate our ability to collect outstanding receivables and provide allowances when collection becomes doubtful. In performing this evaluation, significant estimates are involved, including an analysis of specific risks on a customer-by-customer basis. Based upon this information, management reserves an amount believed to be uncollectible. If the historical data we use to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected.
Inventories
Inventories are valued at the lower of cost (principally on the first-in, first-out method) or market. The Company records adjustments to the carrying value of inventory based upon assumptions about historic usage, future demand and market conditions. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future conditions, customer inventory levels or competitive conditions differ from our expectations.
Pension Plans
The company sponsors pension plans in various forms covering substantially all employees who meet eligibility requirements. Several statistical and other factors that attempt to anticipate future events are used in calculating the expense and liability related to the plans. These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases as determined by the Company, within certain guidelines. In addition, the Company’s actuarial consultants also use subjective factors, such as withdrawal and mortality rates, to estimate these factors. The actuarial assumptions used by the Company may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of
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the participants. These differences may have a significant effect on the amount of pension expense recorded by the Company.
Accrued Expenses
The Company estimates certain material expenses in an effort to record those expenses in the period incurred. The most material accrued estimates relate to environmental proceedings and insurance-related expenses, including self-insurance. Environmental accruals are recorded based upon historical costs incurred and estimates for future costs of remediation and on-going legal expenses. Workers’ compensation and general liability insurance accruals are recorded based on insurance claims processed including applied loss development factors. Employee medical insurance accruals are recorded based on medical claims processed as well as historical medical claims experience for claims incurred but not yet reported. Differences in estimates and assumptions could result in an accrual requirement materially different from the calculated accrual.
Income Taxes
Significant judgment is required in determining our worldwide income tax expense provision. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and cost reimbursement arrangements among related entities, the process of identifying items of revenue and expense that qualify for preferential tax treatment and segregation of foreign and domestic income and expense to avoid double taxation. Although we believe that our estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and net income in the period in which such a determination is made.
We record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, there is no assurance that the valuation allowance would not need to be increased to cover additional deferred tax assets that may not be realizable. Any increase in the valuation allowance could have a material adverse impact on our income tax provision and net income in the period in which such determination is made.
We provide for United States income taxes on the earnings of foreign subsidiaries unless they are considered permanently invested outside the United States. At August 3, 2002, the cumulative earnings upon which United States income taxes have not been provided are approximately $327 million. If these earnings were repatriated to the United States, they would generate foreign tax credits that could reduce the Federal tax liability associated with the foreign dividend; however, a determination of any residual U.S. tax on such repatriation is not practicable.
Results of Operations 2002 Compared with 2001
Review of Consolidated Results
Sales for fiscal 2002 were $1,290.8 million as compared with $1,235.4 million in fiscal 2001. Exchange rates reduced reported sales for the year by $7.7 million, or ½%, primarily due to the weakness of the Yen and to a lesser extent the Argentine Peso, partly offset by the strengthening of the Euro. In local currency (i.e., had exchange rates not changed period over period), sales increased 5% year over year. Pricing was flat as compared with fiscal 2001. FSG, which was acquired at the end of the third quarter of fiscal 2002, contributed $72.9 million to sales for the year. Excluding FSG, sales in local currency declined 1%. We were pleased with our top line performance in light of the difficult environment we have been operating in all year. Our full year sales reflected an approximate $45 million reduction on a reported basis in Microelectronics (excluding the impact of FSG), the effect of pricing reductions for blood filters in the first three quarters fiscal 2002, as well as the effect of the downturn in the commercial aerospace market and the malaise in the U.S. industrial markets. We have ended this fiscal year on an upbeat note and in the fourth quarter we achieved record sales with and without FSG. For a detailed discussion of sales, refer to “Review of Market Segments and Geographies.”
Cost of sales, as a percentage of sales, increased 2.5% to 50.3% (before a one-time purchase accounting adjustment of $6 million, discussed below) from 47.8% last year. The increase in cost of sales reflects the reduced pricing related to multiple long-term contracts with large blood center customers, most of which took effect in the fourth quarter of fiscal 2001; inventory write-downs in Asia, and the effect of a change in product mix. Additionally,
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the acquisition of FSG, which historically operated at lower gross margins than Pall, had the effect of increasing cost of sales by .6% in fiscal 2002.
Selling, general and administrative expenses as a percentage of sales increased 1.4% to 34.1% from 32.7% in fiscal 2001. The year over year comparison of selling, general and administrative expenses as a percentage of sales was negatively impacted by a $2.5 million property tax refund that reduced last year’s expenses and by $3.1 million in costs incurred in the current year to integrate FSG. Excluding these factors, selling, general and administrative expenses as a percentage of sales would have increased .9%, reflecting severance payments unrelated to acquisitions, and inflationary increases in certain costs such as salaries, pension expense and insurance. FSG added $21.8 million to selling, general and administrative expenses in the year.
We have identified $30 million in annualized cost synergies (of which we expect to realize $15 million in fiscal year 2003 and $15 million in fiscal year 2004) as a result of our integration of FSG and we are continuing to evaluate other potential cost savings. In fiscal 2003, we expect an increase in pension costs of approximately $4 million in light of the current rates of return and discount rates. In addition, we expect an increase in insurance premiums of approximately $3.5 million. We will continue efforts to hold down controllable costs to offset the impact of these increased costs.
Research and Development (“R&D”) expenses declined to 4.2% of sales from 4.5% in fiscal 2001, reflecting our efforts to hold down controllable costs. FSG added $1.7 million to R&D expenses in the year. The fourth quarter of fiscal 2002 included our final R&D payment to V.I. Technologies (“VITEX”) as a result of the modification of our partnership agreement to eliminate shared research costs. We have worked successfully with VITEX on the development of pathogen-reduced red blood cells and have brought this technology to pivotal Phase III clinical trials. In fiscal 2002, we incurred $6 million in R&D costs as a result of this agreement. Going forward, we will share in VITEX’s success through royalties on sales as well as stock ownership in the company, but will not have further responsibility for R&D. Our products are assured access to the VITEX platform wherever it is commercialized. In t he coming months, we expect to fund a final $4 million milestone payment for equity, provided VITEX enrolls the first patient in the Phase III clinical trials on or before December 31, 2002. Reference is also made to the Other Current and Non-Current Assets Note in the notes accompanying the consolidated financial statements.
In fiscal years 2002 and 2001, we recorded restructuring, other charges and adjustments of $32.8 million and $17.2 million, respectively. The fiscal 2002 charges reflect severance costs related to the FSG acquisition, a one-time purchase accounting adjustment of $6 million included in cost of sales, an addition of $7 million to a previously established environmental remediation reserve and a $15 million write-down of two strategic investments. The fiscal 2001 restructuring charge primarily related to a reduction in workforce as part of our continued cost control efforts. The details of the fiscal 2002 and fiscal 2001 charges can be found in the Restructuring and Other Charges Note in the notes accompanying the consolidated financial statements. We expect to recover the costs of the restructuring-related charges within two years from the date of each charge.
Net interest expense for the year declined $2.3 million compared with fiscal 2001. The reduction in interest expense reflects decreased interest rates, lower average debt levels (during the first three quarters of fiscal 2002) compared with last year, and the benefits from a “receive fixed, pay variable” interest rate swap that we entered into on our $100 million private placement fixed rate debt at the end of the fourth quarter of fiscal 2001. The above positive benefits were partly offset by increased interest expense in the fourth quarter as a result of the interim borrowings to fund the acquisition of FSG.
The underlying effective tax rate for fiscal 2002 was 24% compared with 22% last year. The increase in the underlying effective tax rate reflects a change in the geographic distribution of profits compared with last year. We expect to sustain an underlying tax rate of 24% in fiscal 2003.
Net earnings for the year were $73.2 million, or 59 cents per share, compared with net earnings of $118 million, or 95 cents per share last year. Excluding the restructuring and other charges, net, in each year, and giving effect to the adoption of SFAS No. 142, Goodwill and other Intangible Assets (“SFAS No. 142”) as discussed below, net earnings were $100.9 million, or 82 cents per share, and $133.7 million, or $1.08 per share, in fiscal 2002 and 2001, respectively. FSG contributed 1 cent per share to fiscal 2002 earnings, which includes a 2 cent cost of financing and purchase accounting amortization.
The majority of the decline in net earnings for the year relates to lower sales, principally in our Microelectronics and Aerospace segments, lower gross margins, principally related to reduced pricing for large blood bank customers and a change in product mix. In addition, increased expenses that were related to the integration of FSG, severance costs (non-acquisition related) and the benefit in the prior year of a property tax refund, negatively impacted earnings for the year. Additionally, it is estimated that
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earnings per share decreased approximately 2 cents in the year, due to the negative effect of foreign currency exchange rates.
We implemented SFAS No. 142, in the first quarter of fiscal 2002. The full year effect on fiscal 2001 would have been to increase earnings by $3 million, after pro forma tax effect, or 2 cents per share.
Review of Market Segments and Geographies
The following table presents sales by market segment, including the effect of exchange rates:
| 2002 | 2001 | % Change | Exchange rate difference | % Change in local currency | ||||||||||||||
| Blood | $ | 232,464 | $ | 233,325 | ( | ½) | $ | (885 | ) | — | ||||||||
| BioPharmaceuticals | 372,382 | 342,167 | 9 | (414 | ) | 9 | ||||||||||||
| Total Life Sciences | 604,846 | 575,492 | 5 | (1,299 | ) | 5 | ½ | |||||||||||
| General Industrial | 407,382 | 346,459 | 17 | ½ | (3,414 | ) | 18 | ½ | ||||||||||
| Aerospace | 158,753 | 158,310 | ½ | 753 | — | |||||||||||||
| Microelectronics | 119,839 | 155,162 | (23 | ) | (3,773 | ) | (20 | ) | ||||||||||
| Total Industrial | 685,974 | 659,931 | 4 | (6,434 | ) | 5 | ||||||||||||
| Total | $ | 1,290,820 | $ | 1,235,423 | 4 | ½ | $ | (7,733 | ) | 5 | ||||||||
Life Sciences sales for the year grew 5½% compared with last year. Excluding FSG, sales increased 4½%. Life Sciences represented approximately 47% of our total sales in fiscal 2002 and fiscal 2001. Excluding FSG, Life Sciences would have comprised 49% of total sales in the current year.
Within Life Sciences, Blood segment sales were flat compared with fiscal 2001 as a volume increase of 7% was offset by a price decrease of 7%. The reduction in pricing primarily related to multiple long-term supply agreements with large blood bank customers, the majority of which took effect in the fourth quarter of fiscal 2001. Blood sales were up 5% in the fourth quarter compared with fiscal 2001 reflecting the blood filter volume growth experienced as a result of these long-term contracts. Sales to blood centers continue to comprise approximately three quarters of our worldwide blood filter sales.
By geography, Western Hemisphere Blood sales, which represent about two-thirds of our worldwide Blood sales, were essentially flat year over year as increased Blood Center sales were offset by declines in Hospital and Cardiovascular sales. In Europe, Blood sales declined 3%, as growth in Hospital and Cardiovascular sales were offset by declines in Blood Center sales. Blood sales in Asia increased 6½% year over year, primarily due to strong growth in Blood Center sales in Hong Kong, Korea and Singapore.
BioPharmaceutical sales grew 9% compared with last year, reflecting growth in both our BioSciences and Pharmaceutical sub-markets. FSG accounted for 1½% of the BioPharmaceutical growth year over year. BioSciences, which sells to the laboratory, hospital and OEM markets, grew 8% driven by strong hospital and laboratory sales. Hospital sales grew 12% reflecting strong sales of our Aquasafe products, while sales in the laboratory market grew 9½% reflecting strong sales in the molecular biology arena. Additionally, sales in our laboratory market have benefited from our innovative distribution agreement with VWR International, which allows our customers easy access to a full range of product and service needs. Laboratory sales also have been positively impacted by the launch of our first 96 well plate products from our strategic alliance with Qiagen. By geography, BioSciences sales growth was driven by sales in the Western Hemispher pe. In Asia, sales were up slightly.
The Pharmaceutical sub-market grew 9½% compared with fiscal 2001 reflecting robust sales in the biotechnology sector during the first half of the year. All geographies contributed to this gain; however, Pharmaceutical product sales were particularly strong in Europe and Asia.
Our Industrial business accounted for approximately 53% of total sales this year (51% excluding FSG) and last year. Industrial sales grew 5% compared with last year reflecting the acquisition of FSG, which contributed $67.3 million in sales in the fourth quarter. Excluding FSG, sales for our Industrial business were down 5½% reflecting a sharp decline in Microelectronics sales (see the following discussion regarding Microelectronics segment sales). Excluding Microelectronics, as well as the impact of the FSG acquisition, sales for the balance of our industrial business increased 1%.
General Industrial segment sales, which are the largest portion of our Industrial business, increased 18½% compared with last year fueled by FSG, which contributed $58.1 million in sales in the fourth quarter. Excluding
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FSG, sales were up 2%, despite a backdrop of weakened U.S. and European demand in the cyclical industrial end markets. For the year, solid double-digit growth was achieved in the Power Generation, Food & Beverage and Water Processing product lines both with and without FSG, as these are generally non-cyclical in nature. The Fuels & Chemicals sub-market, which was one of the largest beneficiaries of FSG sales, grew 31½% and excluding FSG, posted low single-digit growth. Sales in Machinery & Equipment, the largest market within General Industrial, declined 2% year over year (down 7%, excluding FSG). The Machinery & Equipment market includes cyclical markets such as pulp & paper, primary metals, machine tools and mobile equipment; as such, sales were negatively impacted by weakened demand throughout fiscal 2002, principally in the U.S.
By geography, General Industrial sales in Asia were up 11½% (up 6%, excluding FSG) reflecting good growth in Fuels & Chemicals and Food & Beverage partly offset by declines in Water Processing and Power Generation. Machinery & Equipment sales in Asia were up slightly, but down 3½% excluding FSG. Sales in Europe increased 23% compared with last year, primarily due to the acquisition of FSG, which contributed $35 million in sales in the fourth quarter. Excluding FSG, General Industrial sales in Europe were up 1%, as moderate growth in Power Generation, Water Processing and Fuels & Chemicals were partly offset by declines in Food & Beverage and Machinery & Equipment. In the Western Hemisphere, sales increased 17% year over year attributable to the acquisition of FSG, which added $19 million in sales in the fourth quarter. Excluding FSG, sales were flat as strong growth in the non-cyclical markets such as P ation, Water Processing and Food & Beverage was offset by a decline in Machinery & Equipment attributable to weakened demand in the U.S. marketplace.
Aerospace sales were flat compared with fiscal 2001 as strong growth in Military sales (up 20%) during the first half of the year was offset by an overall decline in the Commercial side of the business of 14½%, which reflects the continued downturn in the commercial airline industry after the tragic events of September 11. Military sales comprised 50% of total Aerospace sales this year compared with 41% last year. We expect Aerospace to grow in the low single digits in fiscal 2003, with some upside potential when the Commercial market recovers.
By geography, Aerospace sales in Europe were flat as strong Military and Commercial Marine Water sales were offset by a decline in the balance of the Commercial business. In the Western Hemisphere, where approximately 63% of the Commercial Aerospace business is generated, sales were down 2½%, as declines in the Commercial side of the business more than offset strong growth in Military sales. Asia reported strong growth in both Military and Commercial Aerospace sales, although the size of our Aerospace business there is not as significant.
Microelectronics sales declined 20% compared with last year, which includes $9.2 million in sales generated from FSG. Excluding FSG, sales declined approximately $40.7 million or 26%. All geographies reported double-digit declines in Microelectronics sales year over year. In dollars, the Western Hemisphere and Asia were hit the hardest. We are beginning to see signs of a recovery, and on a sequential quarter basis, sales were up 23% from quarter three (excluding FSG). We continue to develop new products and are well positioned to benefit from the next up cycle. Additionally, our acquisition of FSG materially strengthens our position in this marketplace.
The consolidated operating profit as a percentage of sales for the year declined to 16.3% from 19.8% in fiscal 2001. In Life Sciences, overall operating profit declined to 19.8% from 21.5% last year reflecting the impact of reduced pricing related to multiple long-term contracts with large blood center customers, the majority of which took effect in the fourth quarter of fiscal 2001. The benefit of increased volume as a result of these contracts partly offset the negative impact of the reduced pricing.
Within Life Sciences, Blood operating profit for the year declined to 14.1% from 17.2% last year reflecting the price decreases mentioned previously. Operating profit in BioPharmaceutical decreased to 23.4% from 24.4% last year, attributable to a change in product mix.
Overall operating profit in Industrial decreased to 13.2% from 18.4% last year, reflecting the effect of lower sales (excluding the effects of the FSG acquisition) coupled with a change in product mix. General Industrial operating profit declined to 11.1% from 16.7% last year, reflecting decreased Machinery & Equipment sales and a change in product mix. Aerospace operating profit declined to 23.6% from 29.1% last year primarily due to decreased sales volume and a change in product mix. Reflecting the sales volume reduction, Microelectronics operating profit was 6.2% compared with operating profit of 11.2% last year.
General corporate expenses increased $1.9 million year over year reflecting the $2.5 million property tax refund that reduced last year’s expenses and $1.8 million in costs incurred this year to integrate FSG, partly offset by our continued efforts to hold down controllable costs.
By geography, sales in the Western Hemisphere increased 2%. However, excluding the impact of FSG, sales declined 2½%. Exchange rates, primarily related to the weakening of the Argentine Peso, negatively impacted sales for the year by $3.5 million. Operating profit declined to 12.3% from 16.6% last year. The shortfalls in operating
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profit reflect the reduced pricing in the blood bank contracts mentioned above as well as the effects of lower Industrial sales coupled with a change in the Industrial product mix.
In Europe, sales increased 10½%; excluding the impact of FSG, sales were up slightly. The strengthening of European currencies added $7 million in sales in the year, resulting in reported sales growth (excluding FSG) of 3%. Operating profit declined to 15.4% from 17.5% last year reflecting lower sales volumes in several markets.
Sales in Asia increased 3%; excluding the impact of FSG, sales were flat. A weakening of the Yen reduced sales by $11.3 million in the year, resulting in a decline in sales on a reported basis of 4½% (without FSG). Operating profit declined to 15.9% from 18.1% last year primarily due to the effects of the weakening Yen, inventory write-downs in the fourth quarter and the shortfall in Microelectronics sales.
2001 Compared with 2000
Review of Consolidated Results
Sales for fiscal 2001 were $1,235.4 million compared with $1,224.1 million in fiscal 2000. Adverse fluctuations in foreign exchange rates, particularly the Euro and the Yen, reduced sales by $65.7 million or 5½% for the year. In local currency, sales increased 6½% year over year. Pricing changes had an immaterial impact on sales. For a detailed discussion of sales, refer to paragraphs below under “Review of Market Segments and Geographies.”
In fiscal 2001, we adopted the provisions of Emerging Issues Task Force (“EITF”) 00-10, “Accounting for Shipping and Handling Fees.” Accordingly, we reclassified freight costs incurred to deliver products to customers, which were historically included in “Selling, general and administrative expenses” to “Cost of sales.” The amount of freight cost reclassified to cost of sales approximated $7.8 million in each of the years ended July 28, 2001, and July 29, 2000.
Cost of sales, as a percentage of sales, increased 1.9% to 47.8% from 45.9% last year (before restructuring and other charges, net, discussed below). Charges aggregating $7.8 million for blood product inventories in Europe and the Western Hemisphere and to update membrane filtration systems primarily in the BioPharmaceutical market negatively impacted cost of sales year over year. Additionally, last year benefited from some high margin business and from an unfulfilled supply agreement, neither of which repeated this fiscal year. Fiscal 2001 cost of sales, as a percentage of sales, also reflects the negative impact of foreign exchange on sales, as well as the reduced pricing related to a new agreement reached with a major Blood customer in the fourth quarter.
Selling, general and administrative expenses as a percentage of sales increased 0.3% to 32.7% from 32.4% in fiscal 2000. The increase for the year reflects the loss on the sale of an investment of approximately $1 million as well as the effect of exchange rates on the comparison of expenses to sales. Because approximately half of SG&A expenses are incurred in the United States and about 55% of sales occur in foreign locations, the negative impact of exchange rates on sales also negatively impacted the comparison of expenses to sales. A $2.5 million property tax refund in fiscal 2001 partially offset the above.
R&D expenses increased to 4.5% of sales in fiscal 2001 from 4.2% in fiscal 2000 due to the funding of the development of pathogen reduction technology with VITEX.
In fiscal years 2001 and 2000, we recorded Restructuring and other charges, net, of $17.2 million and $12.0 million, respectively, as part of our continued efforts to control costs. The details of the fiscal 2001 and fiscal 2000 charges can be found in the Restructuring and Other Charges Note in the notes accompanying the consolidated financial statements. We expect to recover the costs of the restructuring-related charges within two years from the date of each charge.
Net interest expense increased $2.6 million compared with fiscal 2000. In the first quarter of fiscal 2001, we completed a $100 million private placement of 7.83% fixed rate debt and closed a $200 million unsecured senior revolving credit facility based on floating rate LIBOR. As a result of these transactions, uncommitted lines of credit amounting to $230 million were cancelled. The transactions resulted in more stability in borrowings at a higher interest cost, as the rates paid on the uncommitted lines of credit were lower than the rates paid on the private placement and senior revolving credit facility. The impact of increased interest costs was partially offset by the decrease in our debt, net of cash and short-term investments.
Due to the continued movement of manufacturing to lower tax jurisdictions such as Puerto Rico and Ireland, the geographic mix of our taxable income has reduced our underlying effective tax rate from 23% in fiscal 2000 to 22% in fiscal 2001.
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Net earnings were $118 million, or 95 cents per share in fiscal 2001, compared with net earnings of $146.6 million, or $1.18 per share last year. Excluding the restructuring and other charges, net, in both years, net earnings amounted to $130.7 million, or $1.06 per share, and $154.4 million, or $1.24 per share, in fiscal 2001 and 2000, respectively. Reported net earnings for fiscal 2001 and 2000 include charges equating to 11 cents per share and 6 cents per share (after pro forma tax effect), respectively. It is estimated that earnings per share in fiscal 2001 decreased about 13 to 16 cents due to the negative effect of foreign currency exchange rates.
Review of Market Segments and Geographies
The following table presents sales by market segment, including the effect of exchange rates:
| 2001 | 2000 | % Change | Exchange rate difference | % Change in local currency | |||||||||||||
| Blood | $ | 233,325 | $ | 224,753 | 4 | $ | (7,695 | ) | 7 | ||||||||
| BioPharmaceuticals | 342,167 | 346,515 | (1 | ½) | (19,928 | ) | 4 | ½ | |||||||||
| Total Life Sciences | 575,492 | 571,268 | ½ | (27,623 | ) | 5 | ½ | ||||||||||
| General Industrial | 346,459 | 356,413 | (3 | ) | (24,008 | ) | 4 | ||||||||||
| Aerospace | 158,310 | 144,969 | 9 | (5,173 | ) | 13 | |||||||||||
| Microelectronics | 155,162 | 151,451 | 2 | ½ | (8,933 | ) | 8 | ½ | |||||||||
| Total Industrial | 659,931 | 652,833 | 1 | (38,114 | ) | 7 | |||||||||||
| Total | $ | 1,235,423 | $ | 1,224,101 | 1 | $ | (65,737 | ) | 6 | ½ | |||||||
Blood sales grew by 7% in local currency year over year. In fiscal 2001, we continued to see the shift in sales from hospitals to blood centers. Reflecting this shift, local currency sales to hospitals declined 10% compared with fiscal 2000, while sales to blood centers increased 14%. Globally, sales to blood centers represent 71% of total fiscal 2001 Blood sales, up from 66% in 2000. Cardiovascular sales increased 22½% in local currency, also contributing to the growth in the Blood segment over the prior year. Total unit sales increased by approximately 20% year over year. The gap between the increase in blood filter dollar sales and unit sales reflects the continued shift away from higher priced systems to sterile dockable filters, a trend we began to see in the fourth quarter of fiscal 2000, as well as the signing of a major long-term supply agreement entered into with a large blood bank customer effective May 1, 2001.
Pursuant to the long-term supply agreement, the customer is required to purchase a certain percentage of its annual requirements (hereinafter the “annual contract minimum percentage”) from us at set prices each year. The customer is to receive an additional discount for purchases that exceed the annual contract minimum percentage and is to pay us a premium for amounts purchased that are below the annual contract minimum percentage.
By geography, strong growth in Blood sales in the Western Hemisphere and moderate growth in Asia were partially offset by decreased sales in Europe, particularly the United Kingdom, reflecting the strong market in the United States as well as a difficult comparison to last year as customers were stocking up in Europe. The Western Hemisphere represents about two-thirds of the global Blood business where the shift in blood filter sales from hospitals to blood centers was particularly evident as sales to hospitals declined 16½% while sales to blood centers increased 25½%.
BioPharmaceutical sales grew 4½% in local currency reflecting increases in the Pharmaceutical and BioSciences sub-markets of 8% and 1%, respectively. Sales grew well in all geographies with the exception of the Western Hemisphere, where sales declined 4½% compared with fiscal 2000, primarily related to a reduction in sales to certain OEM customers.
General Industrial sales increased 4% in local currency fueled by growth of 20%, 10½% and 4% in the Water Processing, Fuels & Chemicals and Machinery & Equipment sub-markets, respectively. The above increases were offset by a 12½% decline in the Power Generation sub-market as fiscal 2000 reflected a large sale to a power plant in Taiwan. Sales in the Food & Beverage sub-market were flat. Sales grew well in all geographies with the exception of the Western Hemisphere, where sales declined 9½% reflecting the impact of the slowing U.S. economy in the Industrial arena as well as the large sale to a power plant in fiscal 2000, mentioned above.
Aerospace experienced strong growth year over year, with local currency sales increasing 13%. The Commercial and Military sub-markets experienced double digit increases of 14½% and 12%, respectively, while Marine sales grew by 7½%. Growth was strong in all geographies, led by Asia, where local currency sales increased 25½%.
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Microelectronics was the powerhouse of our growth early this year and last year; however, sales in the fourth quarter declined 29% due to the downturn in the semiconductor industry, resulting in overall growth for the year of 8½%. The downturn in the Microelectronics industry hit the hardest in the Western Hemisphere where sales declined 59% in the fourth quarter resulting in a decline of 11% for the year. Although both Asia and Europe experienced high double-digit growth earlier in the year, sales in the fourth quarter declined 10½% and 8%, resulting in overall growth for the year of 24% and 7%, respectively.
The consolidated operating profit as a percentage of sales for fiscal 2001 declined to 19.8% compared with 22.5% for 2000. In Life Sciences, operating profit declined to 21.5% from 27.7% last year. The reduced profit reflects start-up costs of new medical manufacturing facilities in Mexico and Italy, the Blood products inventory provisions, costs to upgrade certain membrane filtration systems in the BioPharmaceutical market, increased R&D for the development of pathogen reduction, reduced pricing related to a new agreement reached with major blood bank customers in the fourth quarter, reduced high margin sales in BioSciences, as well as amounts recognized in fiscal 2000 from an unfulfilled supply agreement that did not repeat in fiscal 2001.
Within Life Sciences, Blood operating profit for the year declined to 17.2% from 21.3% last year, reflecting the price decreases related to start-up costs for new manufacturing facilities, blood inventory provisions, increased R&D costs and reduced pricing related to contracts with major blood bank customers as mentioned above. Operating profit in BioPharmaceutical decreased to 24.4% from 31.8% last year, attributable to costs to upgrade certain membrane filtration systems, reduced high margin sales in BioSciences as well as amounts recognized in fiscal 2000 from an unfulfilled supply agreement that did not repeat in fiscal 2001 as mentioned above.
Operating profit in Industrial increased to 18.4% from 17.9% last year, attributable to the growth in Aerospace coupled with improved Industrial systems margins. Within Industrial, General Industrial operating profit increased to 16.7% from 15.1% last year attributable to improved margins on systems business. Aerospace operating profit improved to 29.1% from 28.3% in fiscal 2000 reflecting the strong sales growth in both Commercial and Military business. Microelectronics operating profit was 11.2% compared with operating profit of 14.5% last year. The loss of some high margin Microelectronics sales in the Western Hemisphere negatively impacted the operating profit margin year over year.
General corporate expenses were flat compared with last year as increased compensation related costs, the loss on the sale of an investment in the second quarter and increased Corporate R&D expenditures were offset by a $2.5 million property tax refund.
By geography, Western Hemisphere sales increased 1½% compared with last year, while operating profit declined to 16.6% from 21.6% last year. Contributing to the profit decline were the blood products inventory provisions, costs to upgrade certain membrane filtration systems in the BioPharmaceutical market, R&D costs related to the development of pathogen reduction with our partner, V.I. Technologies, Inc., costs for a new blood set manufacturing facility in Mexico, the loss of high margin BioPharmaceutical and Microelectronics sales, as well as price reductions in the blood filter product line. Additionally, fiscal 2000 included amounts recognized from an unfulfilled supply agreement that did not repeat in fiscal 2001.
Local currency sales for Europe increased 7% compared with prior year. On a reported basis, sales declined 3½% reflecting the impact of the weakened Euro, which decreased Europe’s sales by $44.5 million. Operating profit in Europe declined to 17.5% from 19% last year reflecting the weak Euro, the blood products inventory provision, as well as costs to ramp up the blood systems plant in Italy bought in the third quarter of last year.
Asia’s local currency sales increased 17½% compared with fiscal 2000 driven by strong sales in Japan and Korea. A weakening of the Yen late in the second quarter of 2001 caused the reported sales increases to be less than the local currency increase by $20.9 million, or 9½%. Operating profit in Asia improved to 18.1% from 16.1% last year due to strong sales volume, particularly in Microelectronics, Fuels & Chemicals and BioPharmaceutical.
Liquidity and Capital Resources
The Company’s balance sheet is affected by spot exchange rates used at the end of fiscal 2002 for translating local currency amounts into U.S. dollars. In comparing spot exchange rates at the end of fiscal 2001, the European and Asian currencies (especially the Euro, the Pound and the Yen) have strengthened against the U.S. dollar.
The acquisition of FSG in the third quarter of fiscal 2002 was initially funded via a $360 million 364-day variable rate (LIBOR plus 57.5 basis points) credit facility of which $10 million was repaid in the fourth quarter. On August 6, 2002, we issued $280 million of 10-year bonds at an annual interest rate of 6%. The proceeds were utilized to repay a portion of the interim acquisition credit facility. Additionally, on October 18, 2002, we refinanced the remainder of the acquisition credit facility with a $100 million term loan bearing interest based on LIBOR. As
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permitted by U.S. generally accepted accounting principles, the consolidated balance sheet at August 3, 2002 reflects the remaining $350 million of the interim acquisition facility as long-term debt (except for $15 million that matures in fiscal 2003), whereas the consolidated statement of cash flows reflects this amount within notes payable.
Compared with fiscal 2001, net cash provided by operating activities decreased by $46.6 million, primarily due to the decrease in earnings as well as the payment of a rebate to a major blood bank customer in the first quarter of fiscal 2002, partly offset by the effect of lower inventory levels. The decline in inventory reflects improved inventory turnover resulting from improvements in supply chain management.
We purchased approximately $10 million of treasury stock during fiscal 2002, all of which was purchased in the first quarter, leaving $140 million of the $200 million the Board of Directors authorized for share repurchases in January 2000. Offsetting the cash outlays to purchase stock were proceeds from stock plans of $20.9 million for the year. Capital expenditures and depreciation and amortization expense were $69.9 million and $74 million, respectively. FSG accounted for approximately $1.7 million and $3.1 million of the total capital expenditures, and depreciation and amortization, respectively. Our goal is to keep capital expenditures at or below $80 million in fiscal 2003.
As mentioned previously, we modified our partnership agreement with VITEX to eliminate shared research costs. As such, the fourth quarter of fiscal 2002 included our last payment of shared R&D costs. We will fund a final $4 million milestone payment for equity, provided they enroll their first patient in the Phase III clinical trials on or before December 31, 2002.
When operating the business day-to-day, excluding acquisitions but including funding capital expenditures and buying back common stock, our guideline is to keep net debt (debt net of cash, cash equivalents and short-term investments) at 25% to 30% of total capitalization (net debt plus equity). Net debt increased by $338 million compared with year-end fiscal 2001, attributable to the debt incurred to purchase FSG. Overall, net debt, as a percentage of total capitalization, was 41% compared with 24% at year-end fiscal 2001. Our intention is to return to the levels that existed prior to the acquisition as quickly as possible.
We reduced our quarterly dividend to $0.09 from the previous $0.17 level. The reduction in the quarterly dividend brings our dividend payout ratio to a level consistent with industry averages. The approximately $40 million in cash we will conserve annually may be used for future investments, debt reduction or other more tax-efficient means of creating value for our shareholders. The dividend action does not reflect a fundamental change in our earnings or asset quality outlook for the future.
We consider our existing lines of credit, along with the cash generated from operations, to be sufficient for future growth. It is management’s intention to refinance any unpaid amounts under the unsecured senior revolving credit facility when it expires in 2005.
The following is a summary of our contractual commitments as of August 3, 2002:
| Year Ended | |||||||||||||||||||||||
| 2003 | 2004 | 2005 | 2006 | 2007 | Thereafter | Total | |||||||||||||||||
| Long-term debt | $ | 61,344 | $ | 41,912 | $ | 174,068 | $ | 15,682 | $ | 341 | $ | 387,702 | $ | 681,049 | |||||||||
| Operating leases | 16,100 | 11,400 | 6,700 | 3,900 | 2,200 | 1,700 | 42,000 | ||||||||||||||||
| Employment contracts | 5,727 | 5,426 | – | – | – | – | 11,153 | ||||||||||||||||
| Total commitments | $ | 83,171 | $ | 58,738 | $ | 180,768 | $ | 19,582 | $ | 2,541 | $ | 389,402 | $ | 734,202 | |||||||||
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Recently Issued Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”) which supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of and is effective for fiscal years beginning after December 15, 2001. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and is effective for exit or disposal activities initiated after December 31, 2002. The implementation of these accounting pronouncements is not expected to have a material effect on the Company’s results of operations, cash flows or financial position.
Forward-Looking Statements
The matters discussed in this Annual Report on Form 10-K may contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on current Company expectations and are subject to risks and uncertainties, which could cause actual results to differ materially. Such risks and uncertainties include, but are not limited to: fluctuations in foreign currency exchange rates; regulatory approval and market acceptance of new technologies; changes in product mix and product pricing and in interest rates and cost of raw materials; the Company’s success in enforcing its patents and protecting its proprietary products and manufacturing techniques and in integrating the operations of FSG into the Company’s existing business; global and regional economic conditions and legislative, regulatory and political developments; and domestic and international competition in the Company’s global markets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Our primary market risks relate to adverse changes in foreign currency exchange rates and interest rates. Our acquisition of FSG at the end of the third quarter of fiscal 2002 has not materially changed our market risks. The sensitivity analyses presented below assume simultaneous shifts in each respective rate, and quantify the impact on our earnings and cash flows. The changes used for these analyses reflect our view of changes that are reasonably possible over a one-year period. Actual changes that differ from the changes used for these analyses could yield materially different results.
Foreign Currency
Our reporting currency is the U.S. dollar. Because we operate through subsidiaries or branches in over thirty countries around the world, our earnings are exposed to translation risk when the financial statements of the subsidiaries or branches, as stated in their functional currencies, are translated into the U.S. dollar.
Most of our products are manufactured in the U.S., including Puerto Rico, and the United Kingdom, and then sold into many countries. The primary foreign currency exposures relate to adverse changes in the relationships of the U.S. dollar to the British Pound (“the Pound”), the Japanese Yen (“the Yen”) and the Euro, as well as adverse changes in the relationship of the Pound to the Euro. Exposure exists when the functional currency of the buying subsidiaries weakens against the U.S. dollar or the Pound, thus causing an increase of the product cost to the buying subsidiary, which adversely affects the Company’s consolidated gross margin and net income. The effect of foreign exchange is partially mitigated because of the significant level of manufacturing done in Europe. The deterioration of the Yen against the U.S. dollar has a greater proportional adverse effect on our earnings because the majority of Japan’s purchases are sourced from the U.S. During fiscal 2002, the adverse change in the relationships of these exchange rates decreased net income by an estimated 2 cents per share when compared with the exchange rates in effect during fiscal 2001. In fiscal year 2002, the Euro and the Pound appreciated by approximately 3% and 1%, respectively, against the U.S. dollar compared with the exchange rates in effect in fiscal 2001, while the Yen depreciated by approximately 7%. Additionally, the Euro appreciated against the Pound by approximately 2%.
We are also exposed to transaction risk from adverse changes in exchange rates. These short-term transaction exposures are primarily Yen-denominated receivables held in the U.S. and Euro-denominated receivables held in the United Kingdom. These short-term exposures to changing foreign currency exchange rates are managed by purchasing forward foreign exchange contracts (“forwards”) to offset the earnings and cash flow impact of non-functional currency denominated receivables and payables. In addition, we enter into loans denominated in foreign currencies to offset the earnings and cash flow impact of nonfunctional currency-denominated receivables. We do not enter into forwards for trading purposes. At August 3, 2002, these exposures amounted to approximately $18.7 million and were offset by forwards with a notional principal amount of $4.7 million. If a hypothetical 10%
19
simultaneous adverse change had occurred in exchange rates, net earnings would have decreased by approximately $1.2 million, or approximately 1 cent per share.
Interest Rates
We are exposed to changes in interest rates, primarily due to our financing and cash management activities, which include long and short-term debt as well as cash and certain short-term, highly liquid investments considered to be cash equivalents.
Our debt portfolio is comprised of a combination of fixed rate and floating rate borrowings. During times of relatively stable interest rates, we view our primary interest rate risk to be potential near term decreases in earnings and cash flows due to increases in variable interest rates. Therefore, we have historically hedged these exposures by entering into “receive variable, pay fixed” interest rate swap agreements and also by natural hedges (such as keeping excess funds invested in interest bearing securities that earn interest at floating rates). However, due to the recent decreases in interest rates made by the Federal Reserve, we entered into a “receive fixed, pay variable” interest rate swap on our $100 million private placement 7.83% fixed rate debt in August 2001. The cash flows on the above mentioned interest rate swaps typically mirror the cash flows of the underlying debt instruments and are, therefore, considered to be effective hedges. We do not enter into interest rate swaps for trading purposes.
As of August 3, 2002, we had interest rate swaps with notional amounts of $164 million outstanding. The fair value of our interest rate swaps at August 3, 2002 was $5.3 million. For the year ended August 3, 2002, interest expense, net of interest income, was $14.3 million, of which $8.8 million was incurred on un-hedged variable rate net debt. A hypothetical 10% increase in market interest rates over the actual fiscal 2002 average rate would have had an immaterial impact on net interest expense and net earnings.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
| (In thousands, except per share data) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | ||||||||||
| 2002(a): | |||||||||||||||
| Net sales | $ | 274,119 | $ | 285,435 | $ | 302,377 | $ | 428,889 | $ | 1,290,820 | |||||
| Gross profit | 139,049 | 140,041 | 156,895 | 199,946 | 635,931 | ||||||||||
| Earnings before income taxes | 24,865 | 23,606 | 33,901 | 17,603 | 99,975 | ||||||||||
| Net earnings | 19,392 | 18,415 | 26,443 | 8,984 | 73,234 | ||||||||||
| Earnings per share: | |||||||||||||||
| Basic | 0.16 | 0.15 | 0.22 | 0.07 | 0.60 | ||||||||||
| Diluted | 0.16 | 0.15 | 0.21 | 0.07 | 0.59 | ||||||||||
| 2001(b): | |||||||||||||||
| Net sales | $ | 278,151 | $ | 304,697 | $ | 321,057 | $ | 331,518 | $ | 1,235,423 | |||||
| Gross profit | 148,394 | 159,534 | 167,202 | 169,147 | 644,277 | ||||||||||
| Earnings before income taxes | 33,221 | 37,922 | 47,250 | 31,927 | 150,320 | ||||||||||
| Net earnings | 25,580 | 29,911 | 36,855 | 25,664 | 118,010 | ||||||||||
| Earnings per share: | |||||||||||||||
| Basic | 0.21 | 0.24 | 0.30 | 0.21 | 0.96 | ||||||||||
| Diluted | 0.21 | 0.24 | 0.30 | 0.21 | 0.95 | ||||||||||
| (a) | The fourth quarter and full year (i) cost of sales includes a $6,014 one-time purchase accounting adjustment which decreased gross profits and (ii) restructuring and other charges of $26,822 ($14,495 relating to the write-down of investments, additions to previously established environmental reserves of $7,000 and restructuring costs, primarily related to the FSG acquisition, of $5,327). | |
| Excluding the one-time purchase accounting adjustment in cost of sales and restructuring and other charges, net earnings (and earnings per share) after pro forma tax effect for the fourth quarter and the full year were $36,663 (30 cents per share) and $100,913 (82 cents per share), respectively. | ||
| (b) | The fourth quarter and full year amounts include severance charges of $7,318, additions to environmental reserves of $8,200, as well as other charges of $1,700. | |
| Excluding these restructuring and other charges, net earnings (and earnings per share) after pro forma tax effect for the fourth quarter and the year were $38,387 (31 cents per share) and $130,733 ($1.06 per share), respectively. In addition, earnings, after pro forma tax effect, would increase by $695, $740, $781 and $756 in the first through fourth quarters of fiscal 2001, respectively and $2,972 for the year due to the adoption of SFAS No. 142. As such, earnings per share, after pro forma tax effect, would increase by 1 cent per share in the second and fourth quarters and 2 cents for the year. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
| (a) | Identification of directors: |
Reference is made to “Election of Directors” on page 3 of the Proxy Statement.
None of the persons listed in the section of the Proxy Statement referred to in the preceding paragraph has been involved in those legal proceedings required to be disclosed by Item 401(f) of Regulation S–K during the past five years.
| (b) | Identification of executive officers: |
| Name | Age* | Position Held | First Appointed |
| Eric Krasnoff** | 50 | Chairman and Chief Executive Officer | 1986 |
| Jeremy Hayward-Surry** | 59 | President | 1989 |
| Donald B. Stevens | 57 | Executive Vice President | 1996 |
| Marcus Wilson | 47 | Executive Vice President | 1998 |
| John Adamovich, Jr. | 49 | Group Vice President, Treasurer, and Chief Financial Officer | 1998 |
| Samuel T. Wortham | 55 | Group Vice President | 1990 |
| Steven Chisolm | 44 | Senior Vice President | 1998 |
| Andrew Denver | 54 | Senior Vice President | 2002 |
| Charles Grimm | 62 | Senior Vice President | 1998 |
| Heinz Ulrich Hensgen | 50 | Senior Vice President | 2000 |
| Riichi Inoue | 54 | Senior Vice President | 2001 |
| Neil MacDonald | 52 | Senior Vice President | 2000 |
| John Miller | 57 | Senior Vice President | 2000 |
| Reed Sarver | 43 | Senior Vice President | 2001 |
| Gregory Scheessele | 42 | Senior Vice President | 2002 |
| * | Age as of October 16, 2002. | |
| ** | Messrs. Krasnoff and Hayward-Surry are directors of the Company and members of the Board’s Executive Committee. |
For more than the past five years, the principal occupation of each person listed above has been their employ by the registrant, except for Messrs. Adamovich and Denver.
Mr. Adamovich joined the Company in January 1998. Previously, Mr. Adamovich was partner-in-charge of Professional Practice in the Long Island office of KPMG LLP. While at that firm, he served as engagement partner for its audits of the Company’s financial statements for each of the years in the seven-year period ending July 29, 1995.
Before joining the Company in April 2002, Mr. Denver served as President for the Filtration and Separations Group of US Filter since 1997 and as President and Chief Operating Officer of Memtec Ltd. from 1988 until 1997.
Executive officers are elected by the Board of Directors annually, to serve until the next annual organizational meeting of the Board.
None of the above persons has been involved in those legal proceedings required to be disclosed by Item 401(f) of Regulation S-K, during the past five years.
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ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Equity Compensation Plan Information
The following table sets forth certain information regarding the Company’s equity compensation plans as of August 3, 2002.
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted average exercise price of outstanding options, warrants and rights (b) | Number of options remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | ||||||
| Equity compensation plans approved by security holders | 7,956,453 | (1) | $ | 20.51 | 5,131,796 | (2) | |||
| Equity compensation plans not approved by security holders | None | Not applicable | Not applicable |
| (1) | Consists of 7,370,206 shares issuable upon exercise of outstanding options and 586,247 shares issuable upon conversion of outstanding restricted or deferred units under the Company’s Management Stock Purchase Plan. Does not include 17,093 shares issuable upon exercise of options assumed by the Company in connection with its acquisition of Gelman Sciences Inc. in 1997. Such options have a weighted exercise price of $13.12 per share. | |
| (2) | Consists of 4,159,988 shares available for future option grants, 413,753 shares available for future restricted unit awards under the Management Stock Purchase Plan and 558,055 shares remaining available for issuance under the Employee Stock Purchase Plan but not yet allocated. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to “Indebtedness of Officers and Directors under Stock Option Plans” beginning on page 11 of the Proxy Statement.
Disclosure of information relating to delinquent filers required by Item 405 of Regulation S-K is set forth on page 21 of the Proxy Statement.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
| (a) | Documents filed as part of the Form 10-K: |
| (1) | The following financial statements are filed as part of this report | |||||
| Independent Auditors’ Report | ||||||
| Consolidated Balance Sheets - August 3, 2002 and July 28, 2001 | ||||||
| Consolidated Statements of Earnings - years ended August 3, 2002, July 28, 2001 and July 29, 2000 | ||||||
| Consolidated Statements of Stockholders’ Equity - years ended August 3, 2002, July 28, 2001 and July 29, 2000 | ||||||
| Consolidated Statements of Cash Flows - years ended August 3, 2002, July 28, 2001 and July 29, 2000 | ||||||
| Notes to Consolidated Financial Statements | ||||||
| (2) | The following financial statement schedules are filed as part of this report Schedule II - Valuation and Qualifying Accounts | |||||
| (3) | Exhibits: |
| Exhibit Number | Description of Exhibit | |
| 2(i)* | Stock Purchase Agreement dated February 14, 2002, by and between the Registrant and United States Filter Corporation, filed as Exhibit 2 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 26, 2002. | |
| 2(ii)* | Amendment dated April 24, 2002, to Stock Purchase Agreement dated February 14, 2002, by and between the Registrant and United States Filter Corporation, filed as Exhibit 2.2 to the Registrant’s Current Report on Form 8-K bearing cover date of April 24, 2002. | |
| 3(i)* | Restated Certificate of Incorporation of the Registrant as amended through November 23, 1993, filed as Exhibit 3(i) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended July 30, 1994. | |
| 3(ii)† | By-Laws of the Registrant as amended on October 3, 2002. | |
| 3(iii)† | Section 7.02 to the By-Laws of the Registrant as amended on October 3, 2002. | |
| 4(i)* | Credit Agreement dated as of August 30, 2000 by and among the Registrant and Fleet Bank, National Association as Administrative Agent, The Chase Manhattan Bank as Syndication Agent, Wachovia Bank, N.A. as Documentation Agent and The Lenders Party Thereto, filed as Exhibit 4 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 28, 2000. | |
| 4(ii)* | Credit Agreement dated as of April 24, 2002, between the Registrant, UBS AG, Stamford Branch, as Administrative Agent, UBS Warburg LLC, as Arranger, Fleet National Bank, as Syndication Agent, and The Lenders Party Thereto, filed as Exhibit 2.3 to the Registrant’s Current Report on Form 8-K bearing cover date of April 24, 2002. |
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| Exhibit Number | Description of Exhibit | |
| 4(iii)† | Indenture dated as of August 1, 2002, by and among Pall Corporation as Issuer, the Guarantors named therein, as Guarantors, and The Bank of New York, as Trustee. | |
| The exhibits filed herewith do not include other instruments with respect to long-term debt of the Registrant and its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant agrees, pursuant to Item 601(b) (4) (iii) of Regulation S-K, that it will furnish a copy of any such instrument to the Securities and Exchange Commission upon request. | ||
| 10.1*‡ | Employment Agreement dated December 18, 2001, between the Registrant and Eric Krasnoff, filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 26, 2002. | |
| 10.2*‡ | Employment Agreement dated December 18, 2001, between the Registrant and Jeremy Hayward-Surry, filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 26, 2002. | |
| 10.3*‡ | Employment Agreement dated November 15, 2001, between the Registrant and Donald B. Stevens, filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 26, 2002. | |
| 10.4*‡ | Employment Agreement dated November 15, 2001, between the Registrant and John Adamovich, filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 26, 2002. | |
| 10.5*‡ | Employment Agreement dated November 15, 2001, between the Registrant and Steven Chisolm, filed as Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 26, 2002. | |
| 10.6*‡ | Employment Agreement dated November 15, 2001, between the Registrant and Charles Grimm, filed as Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 26, 2002. | |
| 10.7*‡ | Employment Agreement dated November 15, 2001, between the Registrant and Samuel Wortham, filed as Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 26, 2002. | |
| 10.8*‡ | Employment Agreement dated November 15, 2001, between the Registrant and John Miller, filed as Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 26, 2002. | |
| 10.9*‡ | Employment Agreement dated November 15, 2001, between the Registrant and Reed Sarver, filed as Exhibit 10.10 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 26, 2002. | |
| 10.10*‡ | Employment Agreement dated April 8, 2002, between the Registrant and Gregory Scheessele, filed as Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002. | |
| 10.11*‡ | Service Agreement dated March 1, 2002, between Pall Europe Limited and Marcus Albert Wilson, filed as Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002. |
25
| Exhibit Number | Description of Exhibit | |
| 10.12*‡ | Service Agreement dated March 1, 2002, between Pall Europe Limited and Neil MacDonald, filed as Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002. | |
| 10.13*‡ | Service Contract dated February 26, 2001, between Pall Deutschland GmbH Holding and Heinz Ulrich Hensgen, filed as Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended July 28, 2001. | |
| 10.14*‡ | Pall Corporation Supplementary Profit-Sharing Plan as amended and restated December 4, 2000, effective as of January 1, 1999, filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 27, 2001. | |
| 10.15*†‡ | Pall Corporation Profit-Sharing Plan as amended and restated as of July 1, 1998. | |
| 10.16*‡ | Pall Corporation Supplementary Pension Plan as amended and restated on July 11, 2000, and July 17, 2001, filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 27, 2001. | |
| 10.17*‡ | Pall Corporation Executive Incentive Bonus Plan, filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 27, 2001. | |
| 10.18*‡ | Pall Corporation 1988 Stock Option Plan, as amended through October 8, 1991, filed as Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended August 3, 1991. | |
| 10.19*‡ | Pall Corporation 1991 Stock Option Plan, as amended effective April 17, 2002, filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002. | |
| 10.20*‡ | Pall Corporation 1993 Stock Option Plan, as amended effective April 17, 2002, filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002. | |
| 10.21*‡ | Pall Corporation 1995 Stock Option Plan, as amended effective April 17, 2002, filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002. | |
| 10.22*‡ | Pall Corporation 1998 Stock Option Plan, as amended effective April 17, 2002, filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002. | |
| 10.23*‡ | Pall Corporation Stock Option Plan for Non-Employee Directors, as amended effective November 19, 1998, filed as Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1998. | |
| 10.24*‡ | Pall Corporation 2001 Stock Option Plan for Non-Employee Directors, filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 27, 2001. | |
| 10.25†‡ | Pall Corporation Management Stock Purchase Plan, as amended July 16, 2002. | |
| 10.26*‡ | Pall Corporation Employee Stock Purchase Plan, filed as Exhibit 10.11 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 26, 2002. | |
| 10.27*‡ | Principal Rules of the Pall Supplementary Pension Scheme, filed as Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended July 29, 1995. |
26
| Exhibit Number | Description of Exhibit | |
| 10.28*‡ | Pall Deutschland GmbH Holding, Concept Of An Additional Pension Plan For Senior Executives, filed as Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended August 3, 1996. | |
| 21† | Subsidiaries of Pall Corporation. | |
| 23† | Consent of Independent Auditors. | |
| 99.1† | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. | |
| 99.2† | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
| * | Incorporated herein by reference. | |
| † | Exhibits filed herewith | |
| ‡ | Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. |
(b) Reports on Form 8-K:
The Company filed the following reports on Form 8-K during the fourth quarter ended August 3, 2002:
Current report on Form 8-K dated May 8, 2002, with respect to Item 2, Acquisition or Disposition of Assets and Item 7, Financial Statements. This Form 8-K was necessitated by the Company’s acquisition of FSG, the group of companies acquired on April 24, 2002. Financial statements of FSG were to be filed by amendment.
Amendment No. 1 to Form 8-K on July 3, 2002, containing in Item 7, unaudited financial statements of FSG as of December 31, 2001 and unaudited pro forma combined statements of earnings for Pall Corporation and FSG for the year ended July 28, 2001, and the nine months ended April 27, 2002.
Current report on Form 8-K dated July 30, 2002, with respect to Item 5, Other Events. The registrant announced the proposed private placement of approximately $250 million of unsecured senior notes, subject to market and other conditions. The net proceeds of the offering were used toward the repayment of borrowings under a $360 million interim credit facility, which was used to finance the Company’s acquisition of FSG.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Pall Corporation | |
| October 25, 2002 | By: /s/ JEREMY HAYWARD-SURRY |
Jeremy Hayward-Surry, President |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| /s/ ERIC KRASNOFF | Chairman of the Board and | October 25, 2002 |
| Eric Krasnoff | Chief Executive Officer | |
| /s/ JEREMY HAYWARD-SURRY | President and Director | October 25, 2002 |
| Jeremy Hayward-Surry | ||
| /s/ JOHN ADAMOVICH, JR. | Chief Financial Officer | October 25, 2002 |
| John Adamovich, Jr. | and Treasurer | |
| /s/ LISA KOBARG | Chief Corporate | October 25, 2002 |
| Lisa Kobarg | Accountant | |
| /s/ ABRAHAM APPEL | Director | October 25, 2002 |
| Abraham Appel | ||
| /s/ DANIEL J. CARROLL, JR. | Director | October 25, 2002 |
| Daniel J. Carroll, Jr. | ||
| /s/ JOHN H. F. HASKELL, JR. | Director | October 25, 2002 |
| John H. F. Haskell, Jr. | ||
| /s/ ULRIC S. HAYNES, JR. | Director | October 25, 2002 |
| Ulric S. Haynes, Jr. | ||
| /s/ EDWIN W. MARTIN | Director | October 25, 2002 |
| Edwin W. Martin | ||
| /s/ KATHARINE L. PLOURDE | Director | October 25, 2002 |
| Katharine L. Plourde | ||
| /s/ HEYWOOD SHELLEY | Director | October 25, 2002 |
| Heywood Shelley | ||
| /s/ EDWARD L. SNYDER | Director | October 25, 2002 |
| Edward L. Snyder | ||
| /s/ EDWARD TRAVAGLIANTI | Director | October 25, 2002 |
| Edward Travaglianti | ||
| /s/ JAMES D. WATSON | Director | October 25, 2002 |
| James D. Watson |
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CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Eric Krasnoff, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Pall Corporation and subsidiaries; | |
| 2. | Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of Pall Corporation and subsidiaries as of, and for, the periods presented in this Annual Report. | |
October 25, 2002.
/s/ ERIC KRASNOFF
Eric Krasnoff
Chief Executive Officer
29
CHIEF FINANCIAL OFFICER CERTIFICATION
I, John Adamovich Jr., certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Pall Corporation and subsidiaries; | |
| 2. | Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of Pall Corporation and subsidiaries as of, and for, the periods presented in this Annual Report. |
October 25, 2002
/s/ JOHN ADAMOVICH, JR.
John Adamovich, Jr.
Chief Financial Officer
30
INDEPENDENT AUDITORS’ REPORT
Board of Directors
Pall Corporation:
We have audited the accompanying consolidated balance sheets of Pall Corporation and subsidiaries as of August 3, 2002, and July 28, 2001, and the related consolidated statements of earnings, stockholders’ equity and cash flows for each of the years in the three-year period ended August 3, 2002. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial statement schedule. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pall Corporation and subsidiaries as of August 3, 2002, and July 28, 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended August 3, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
KPMG LLP
Melville, New York
September 5, 2002
31
PALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| August 3, 2002 | July 28, 2001 | |||||
| ASSETS | ||||||
| Current assets: | ||||||
| Cash and cash equivalents | $ | 105,224 | $ | 54,927 | ||
Short-term investments | 40,200 | 146,600 | ||||
| Accounts receivable, net of allowances for doubtful accounts of $12,906 and $7,197, respectively | 415,853 | 309,171 | ||||
Inventories | 256,910 | 209,499 | ||||
Other current assets | 97,795 | 58,791 | ||||
Total current assets | 915,982 | 778,988 | ||||
| Property, plant and equipment, net | 605,095 | 503,016 | ||||
| Goodwill | 262,973 | 54,044 | ||||
Intangible assets, net of accumulated amortization of $30,038 and $25,052, respectively | 39,948 | 37,682 | ||||
| Other assets | 203,224 | 174,780 | ||||
Total assets | $ | 2,027,222 | $ | 1,548,510 | ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Current liabilities: | ||||||
Notes payable | $ | 42,202 | $ | 57,089 | ||
Accounts payable | 106,294 | 56,249 | ||||
Accrued liabilities | 175,742 | 126,592 | ||||
Income taxes | 41,549 | 27,531 | ||||
Current portion of long-term debt | 61,344 | 25,582 | ||||
Dividends payable | 11,040 | 20,806 | ||||
Total current liabilities | 438,171 | 313,849 | ||||
| Long-term debt, net of current portion | 619,705 | 359,094 | ||||
| Deferred income taxes | 38,261 | 20,300 | ||||
| Other non-current liabilities | 111,365 | 85,225 | ||||
Total liabilities | 1,207,502 | 778,468 | ||||
| Stockholders’ equity: | ||||||
Common stock, par value $.10 per share; 500,000 shares authorized; 127,958 shares issued | 12,796 | 12,796 | ||||
Capital in excess of par value | 110,745 | 108,164 | ||||
Retained earnings | 832,308 | 825,247 | ||||
Treasury stock, at cost (2002 - 5,166 shares, 2001 - 5,575 shares) | (110,799 | ) | (120,431 | ) | ||
Stock option loans | (3,259 | ) | (4,635 | ) | ||
Accumulated other comprehensive loss: | ||||||
Foreign currency translation | (17,429 | ) | (49,947 | ) | ||
Minimum pension liability | (3,079 | ) | (1,799 | ) | ||
Unrealized investment (losses) gains | (236 | ) | 1,704 | |||
Unrealized losses on derivatives | (1,327 | ) | (1,057 | ) | ||
| (22,071 | ) | (51,099 | ) | |||
| Total stockholders’ equity | 819,720 | 770,042 | ||||
| Total liabilities and stockholders’ equity | $ | 2,027,222 | $ | 1,548,510 | ||
See accompanying notes to consolidated financial statements.
32
PALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
| Years Ended | |||||||||
| August 3, 2002 | July 28, 2001 | July 29, 2000 | |||||||
| Net sales | $ | 1,290,820 | $ | 1,235,423 | $ | 1,224,101 | |||
| Cost of sales | 654,889 | 591,146 | 565,496 | ||||||
| Gross profit | 635,931 | 644,277 | 658,605 | ||||||
| Selling, general and administrative expenses | 440,025 | 404,025 | 396,124 | ||||||
| Research and development | 54,778 | 56,041 | 51,434 | ||||||
| Restructuring and other charges, net | 26,822 | 17,248 | 8,566 | ||||||
| Interest expense, net | 14,331 | 16,643 | 14,077 | ||||||
| Earnings before income taxes | 99,975 | 150,320 | 188,404 | ||||||
| Provision for income taxes | 26,741 | 32,310 | 41,768 | ||||||
| Net earnings | $ | 73,234 | $ | 118,010 | $ | 146,636 | |||
| Earnings per share: | |||||||||
Basic | $ | 0.60 | $ | 0.96 | $ | 1.18 | |||
Diluted | $ | 0.59 | $ | 0.95 | $ | 1.18 | |||
| Average shares outstanding: | |||||||||
| Basic | 122,353 | 122,580 | 123,810 | ||||||
Diluted | 123,532 | 123,735 | 124,709 | ||||||
See accompanying notes to consolidated financial statements.
33
PALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
| Years Ended July 29, 2000, July 28, 2001 and August 3, 2002 | Common Stock | Capital in Excess of Par Value | Retained Earnings | Treasury Stock | Stock Option Loans | Accumulated Other Comprehensive Loss | Total | Comprehensive Income | |||||||||||||||||
| Balance at July 31, 1999 | $ | 12,796 | $ | 96,811 | $ | 729,052 | $ | (82,283 | $ | (7,216 | ) | $ | (18,496 | ) | $ | 730,664 | |||||||||
| Comprehensive income: | |||||||||||||||||||||||||
Net earnings | 146,636 | 146,636 | $ | 146,636 | |||||||||||||||||||||
Other comprehensive (loss) income: | |||||||||||||||||||||||||
Translation adjustment | (21,201 | ) | (21,201 | ) | (21,201 | ) | |||||||||||||||||||
Minimum pension liability | 666 | 666 | 666 | ||||||||||||||||||||||
| Change in unrealized accumulated investment gains | 324 | 324 | 324 | ||||||||||||||||||||||
| Comprehensive income | $ | 126,425 | |||||||||||||||||||||||
| Dividends declared | (81,179 | ) | (81,179 | ) | |||||||||||||||||||||
| Issuance of 354 shares for stock plans | 16 | (1,018 | ) | 7,637 | 6,635 | ||||||||||||||||||||
| Restricted stock units related to the MSPP | 5,059 | 5,059 | |||||||||||||||||||||||
| Proceeds from the sale of put options | 2,049 | 2,049 | |||||||||||||||||||||||
| Purchase of 1,446 shares | (29,979 | ) | (29,979 | ) | |||||||||||||||||||||
| Stock option loans | 1,632 | 1,632 | |||||||||||||||||||||||
| Balance at July 29, 2000 | 12,796 | 103,935 | 793,491 | (104,625 | ) | (5,584 | ) | (38,707 | ) | 761,306 | |||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||
Net earnings | 118,010 | 118,010 | $ | 118,010 | |||||||||||||||||||||
Other comprehensive (loss) income: | |||||||||||||||||||||||||
Translation adjustment | (16,597 | ) | (16,597 | ) | (16,597 | ) | |||||||||||||||||||
Minimum pension liability | (528 | ) | (528 | ) | (528 | ) | |||||||||||||||||||
| Change in unrealized accumulated investment gains | 5,790 | 5,790 | 5,790 | ||||||||||||||||||||||
Unrealized loss on derivatives | (1,057 | ) | (1,057 | ) | (1,057 | ) | |||||||||||||||||||
| Comprehensive income | $ | 105,618 | |||||||||||||||||||||||
| Dividends declared | (82,901 | ) | (82,901 | ) | |||||||||||||||||||||
| Issuance of 1,360 shares for stock plans | 476 | (3,353 | ) | 29,170 | 26,293 | ||||||||||||||||||||
| Restricted stock units related to the MSPP | 3,753 | 3,753 | |||||||||||||||||||||||
| Purchase of 2,095 shares | (44,976 | ) | (44,976 | ) | |||||||||||||||||||||
| Stock option loans | 949 | 949 | |||||||||||||||||||||||
| Balance at July 28, 2001 | 12,796 | 108,164 | 825,247 | (120,431 | ) | (4,635 | ) | (51,099 | ) | 770,042 | |||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||
Net earnings | 73,234 | 73,234 | $ | 73,234 | |||||||||||||||||||||
Other comprehensive (loss) income: | |||||||||||||||||||||||||
Translation adjustment | 32,518 | 32,518 | 32,518 | ||||||||||||||||||||||
Minimum pension liability | (1,280 | ) | (1,280 | ) | (1,280 | ) | |||||||||||||||||||
| Change in unrealized accumulated investment losses | (1,940 | ) | (1,940 | ) | (1,940 | ) | |||||||||||||||||||
Unrealized loss on derivatives | (270 | ) | (270 | ) | (270 | ) | |||||||||||||||||||
| Comprehensive income | $ | 102,262 | |||||||||||||||||||||||
| Dividends declared | (63,999 | ) | (63,999 | ) | |||||||||||||||||||||
| Issuance of 913 shares for stock plans | 122 | (2,174 | ) | 19,631 | 17,579 | ||||||||||||||||||||
| Restricted stock units related to the MSPP | 2,459 | 2,459 | |||||||||||||||||||||||
| Purchase of 504 shares | (9,999 | ) | (9,999 | ) | |||||||||||||||||||||
| Stock option loans | 1,376 | 1,376 | |||||||||||||||||||||||
| Balance at August 3, 2002 | $ | 12,796 | $ | 110,745 | $ | 832,308 | $ | (110,799 | ) | $ | (3,259 | ) | $ | (22,071 | ) | $ | 819,720 | ||||||||
See accompanying notes to consolidated financial statements.
34
PALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| August 3, 2002 | Years ended July 28, 2001 | July 29, 2000 | ||||||||
| Operating activities: | ||||||||||
| Net earnings | $ | 73,234 | $ | 118,010 | $ | 146,636 | ||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||
Restructuring and other charges, net | 32,836 | 17,248 | 11,987 | |||||||
Depreciation and amortization of property, plant and equipment | 68,371 | 62,706 | 63,380 | |||||||
Amortization of intangibles | 5,632 | 8,784 | 8,581 | |||||||
Deferred income taxes | (4,191 | ) | (3,474 | ) | 2,698 | |||||
Provisions for doubtful accounts | 3,221 | 2,491 | 2,468 | |||||||
Loss on sale of investments | — | 1,039 | — | |||||||
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: | ||||||||||
Accounts receivable | (27,627 | ) | 11,033 | (29,228 | ) | |||||
Inventories | 13,813 | (14,604 | ) | (10,794 | ) | |||||
Other assets | (2,434 | ) | (1,308 | ) | (14,804 | ) | ||||
Accounts payable | 28,311 | (9,657 | ) | 6,762 | ||||||
Accrued expenses | (19,892 | ) | 12,774 | 13,596 | ||||||
Income taxes payable | (8,556 | ) | (2,097 | ) | 11,393 | |||||
Other liabilities | (7,977 | ) | (1,623 | ) | 4,248 | |||||
| Net cash provided by operating activities | 154,741 | 201,322 | 216,923 | |||||||
| Investing activities: | ||||||||||
| Acquisitions of businesses, net of disposals and cash acquired | (347,507 | ) | (1,691 | ) | (15,380 | ) | ||||
| Investments and licenses | (1,564 | ) | (5,000 | ) | (3,248 | ) | ||||
| Capital expenditures | (69,921 | ) | (77,834 | ) | (66,493 | ) | ||||
| Disposals of fixed assets | 5,593 | 4,034 | 3,109 | |||||||
| Short-term investments | 106,400 | (85,900 | ) | (10,200 | ) | |||||
| Proceeds from sale of investments | — | 2,271 | — | |||||||
| Benefits protection trust | (1,562 | ) | (4,127 | ) | (91 | ) | ||||
| Net cash used by investing activities | (308,561 | ) | (168,247 | ) | (92,303 | ) | ||||
| Financing activities: | ||||||||||
| Notes payable | 328,722 | (220,198 | ) | (8,900 | ) | |||||
| Long-term borrowings | 5,826 | 333,537 | 15,631 | |||||||
| Repayments of long-term debt | (73,969 | ) | (74,214 | ) | (39,576 | ) | ||||
| Net proceeds from stock plans | 20,938 | 30,981 | 13,150 | |||||||
| Purchase of treasury stock | (9,999 | ) | (44,976 | ) | (29,979 | ) | ||||
| Proceeds from the sale of put options | — | — | 2,049 | |||||||
| Dividends paid | (73,359 | ) | (82,148 | ) | (80,574 | ) | ||||
| Net cash provided (used) by financing activities | 198,159 | (57,018 | ) | (128,199 | ) | |||||
| Cash flow for year | 44,339 | (23,943 | ) | (3,579 | ) | |||||
| Cash and cash equivalents at beginning of year | 54,927 | 81,008 | 86,677 | |||||||
| Effect of exchange rate changes on cash | 5,958 | (2,138 | ) | (2,090 | ) | |||||
| Cash and cash equivalents at end of year | $ | 105,224 | $ | 54,927 | $ | 81,008 | ||||
| Supplemental disclosures: | ||||||||||
Interest paid | $ | 20,090 | $ | 20,386 | $ | 21,844 | ||||
Income taxes paid (net of refunds) | 37,528 | 26,744 | 26,792 | |||||||
See accompanying notes to consolidated financial statements.
35
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
ACCOUNTING POLICIES AND RELATED MATTERS
The Company
Pall Corporation and its subsidiaries (hereinafter collectively called “the Company” unless the context requires otherwise) manufacture and market filtration and separation products and systems throughout the world to a diverse group of customers within two principal markets – Life Sciences and Industrial.
Presentation and Use of Estimates
Translation of Foreign Currencies
Cash and Cash Equivalents
36
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Short-Term Investments
Inventories
Long-Lived Assets
Revenue Recognition
Stock Plans
37
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Income Taxes
Earnings Per Share
2002 | 2001 | 2000 | ||||||
| Basic shares outstanding | 122,353 | 122,580 | 123,810 | |||||
| Effect of dilutive securities*: | ||||||||
Stock option plans | 646 | 767 | 677 | |||||
Other, principally MSPP | 533 | 388 | 222 | |||||
| Diluted shares outstanding | 123,532 | 123,735 | 124,709 | |||||
| * | Refer to the Stock Plans Note for a description of the Company’s stock plans. |
Derivative Instruments
ACQUISITIONS
2002:
38
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
| Purchase price | $ | 360,000 | ||
| Transaction costs | 6,835 | |||
| Total purchase price | 366,835 | |||
| Cash acquired | 19,671 | |||
| Total purchase price, net of cash acquired | 347,164 | |||
| Current assets | 164,486 | |||
| Property, plant and equipment | 91,578 | |||
| Intangible assets | 6,817 | |||
| Other non-current assets | 3,900 | |||
| Total assets acquired | 266,781 | |||
| Current liabilities | 98,133 | |||
| Non-current liabilities | 28,620 | |||
| Total liabilities assumed | 126,753 | |||
| Goodwill | $ | 207,136 | ||
| Blood | $ | – | ||
| BioPharmaceuticals | 15,742 | |||
| Life Sciences | 15,742 | |||
| General Industrial | 165,916 | |||
| Aerospace | – | |||
| Microelectronics | 25,478 | |||
| Industrial | 191,394 | |||
| Total | $ | 207,136 | ||
39
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
2002 | 2001 | ||||||
| Net sales | $ | 1,484,142 | $ | 1,510,808 | |||
| Net earnings | 80,495 | 114,265 | |||||
| Diluted earnings per share | .66 | .92 | |||||
2000:
40
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
RESTRUCTURING AND OTHER CHARGES
2002:
Restructuring | Other Charges and Adjustments | Total Charged To Earnings | Adjustments to Goodwill * | Total | ||||||||||||
| Severance (a) | $ | 4,134 | $ | – | $ | 4,134 | $ | 5,980 | $ | 10,114 | ||||||
| Impairment of investments (b) | – | 14,495 | 14,495 | – | 14,495 | |||||||||||
| Environmental remediation (c) | – | 7,000 | 7,000 | – | 7,000 | |||||||||||
| Fixed asset write-offs (a) | 514 | – | 514 | 196 | 710 | |||||||||||
| Office closures (a) | 12 | – | 12 | 785 | 797 | |||||||||||
| Other (a) | 667 | – | 667 | 35 | 702 | |||||||||||
| Subtotal | 5,327 | 21,495 | 26,822 | 6,996 | 33,818 | |||||||||||
| Purchase accounting adjustment (d) | – | 6,014 | 6,014 | – | 6,014 | |||||||||||
| Total | $ | 5,327 | $ | 27,509 | $ | 32,836 | $ | 6,996 | $ | 39,832 | ||||||
| Cash | $ | 4,813 | $ | 7,000 | $ | 11,813 | $ | 6,800 | $ | 18,613 | ||||||
| Non-cash | 514 | 20,509 | 21,023 | 196 | 21,219 | |||||||||||
| Total | $ | 5,327 | $ | 27,509 | $ | 32,836 | $ | 6,996 | $ | 39,832 | ||||||
| * | Reflects restructuring activities related to FSG employees and facilities (refer to Acquisitions Note for discussion of purchase accounting). | |
| (a) | At the date of the FSG acquisition, management began formulating integration plans and identifying synergistic opportunities. During the fourth quarter of fiscal 2002, the Company announced and implemented plans to begin to eliminate redundant employees and facilities. These included, among other actions: | |
| i. | the consolidation of FSG’s U.S. Industrial route to market through distributors, consistent with Pall’s U.S. Industrial route to market, resulting in the closure of certain FSG sales offices and the termination of FSG sales employees; | |
| ii. | the elimination of redundant Corporate functions, and | |
| iii. | the reduction of redundant geographic management and facilities. | |
| (b) | The Company recorded a charge of $14,495 primarily for the other-than-temporary diminution of the value of its strategic investment in V.I. Technologies, Inc. (“VITEX”). |
| (c) | The Company increased its reserve for future environmental remediation costs by $7,000 as another aquifer was found with contamination at its Ann Arbor, Michigan facility (Refer to the Contingencies and Commitments Note for further discussion). |
41
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
| (d) | Included in cost of sales is a purchase accounting adjustment of $6,014. The inventory acquired in the FSG acquisition was written-up to fair value in accordance with SFAS No.141 in the FSG opening balance sheet. This one-time write-up reduced gross profit in the fourth quarter of 2002 concurrent with the sale of the underlying inventory in the quarter. |
2001:
2000:
INVENTORIES
2002 | 2001 | ||||||
| Raw materials and components | $ | 90,807 | $ | 78,487 | |||
| Work-in-process | 40,323 | 22,104 | |||||
| Finished goods | 125,780 | 108,908 | |||||
| Total inventory | $ | 256,910 | $ | 209,499 | |||
42
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
PROPERTY, PLANT AND EQUIPMENT
2002 | 2001 | ||||||
| Land | $ | 38,539 | $ | 28,982 | |||
| Buildings and improvements | 382,230 | 326,290 | |||||
| Machinery and equipment | 631,822 | 562,140 | |||||
| Furniture and fixtures | 72,583 | 62,836 | |||||
| 1,125,174 | 980,248 | ||||||
| Less: Accumulated depreciation and amortization | 520,079 | 477,232 | |||||
| Property, plant and equipment, net | $ | 605,095 | $ | 503,016 | |||
GOODWILL AND INTANGIBLE ASSETS
2002 | 2001 | ||||||
| Blood | $ | 19,512 | $ | 18,349 | |||
| BioPharmaceuticals | 31,423 | 15,302 | |||||
| Life Sciences | 50,935 | 33,651 | |||||
| General Industrial | 180,356 | 14,234 | |||||
| Aerospace | 6,038 | 6,032 | |||||
| Microelectronics | 25,644 | 127 | |||||
| Industrial | 212,038 | 20,393 | |||||
| Total | $ | 262,973 | $ | 54,044 | |||
2002 | 2001 | ||||||
| Patents, net | $ | 33,761 | $ | 33,972 | |||
| Trademarks and other, net | 6,187 | 3,710 | |||||
| Total | $ | 39,948 | $ | 37,682 | |||
43
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
OTHER CURRENT AND NON-CURRENT ASSETS
2002 | 2001 | ||||||
| Prepaid expenses | $ | 25,851 | $ | 20,591 | |||
| Deferred income taxes | 38,831 | 22,194 | |||||
| Other receivables | 33,113 | 16,006 | |||||
| Total | $ | 97,795 | $ | 58,791 | |||
2002 | 2001 | ||||||
| Investments (a) | $ | 20,155 | $ | 37,522 | |||
| Benefits protection trust (b) | 28,730 | 28,802 | |||||
| Prepaid pension expenses (c) | 28,290 | 29,184 | |||||
| Intangible pension assets (d) | 7,357 | 6,378 | |||||
| Deferred income taxes | 65,470 | 43,018 | |||||
| Other | 53,222 | 29,876 | |||||
| Total | $ | 203,224 | $ | 174,780 | |||
| (a) | Investments represent the fair value of certain companies the Company has invested in to form strategic alliances which will enable the Company to broaden its portfolio of products. In fiscal 1998, the Company entered into agreements with VITEX, a leading developer of a broad portfolio of blood products and systems using its proprietary viral reduction technologies. Under the terms of the 1998 agreement, through August 3, 2002, and July 28, 2001, the Company made initial and milestone-driven equity payments to VITEX (at the then-current market price of VITEX common shares) aggregating $16,000, representing a 9.9% interest in VITEX common shares. The companies agreed to share the costs to develop VITEX’s pathogen reduction technology for red blood cells and platelets. Upon product commercialization, the 1998 agreement contemplated equity payments totaling $26,000. The Company received exclusive worldwide marketing and distribution rights to pathogen reduction systems developed under this 1998 agreement. | |||
| In August 2002, the 1998 agreement was modified. As part of this modification, the Company relinquished its worldwide marketing and distribution rights in return for a cap on its financial commitments to the program and a royalty per unit sold following commercialization. The Company will fund the upcoming $4,000 equity milestone provided the first patient is enrolled in the Phase III clinical trials by December 31, 2002, and its equity position in VITEX will be capped at $20,000. No further development costs are required. In addition, the Company will extend a one-year $5,000 revolving credit facility to VITEX. During the next twelve months, VITEX will assume sole responsibility for establishing additional partnership agreements designed to broaden geographic distribution capability. At the end of the one-year period, the Company will have the option to revert to its exclusive marketing and distribution rights in any territories not covered by new partnerships, in return for foregoing its potential royalty and committing to a future stream of R&D payments. | ||||
| In the fourth quarter of fiscal 2002, the Company recorded a charge of $14,495, primarily for the impairment of the value of the investment in VITEX. The Company previously recognized unrealized gains and losses related to this investment in the other comprehensive income component of equity. Unrealized gains recorded in other comprehensive income were $7,770 and $429 in fiscal years 2001 and 2000, respectively. | ||||
44
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
| (b) | The benefits protection trust was established for the purpose of satisfying certain unfunded pension obligations in the event of a change of control of the Company. The August 3, 2002, and July 28, 2001, balance sheets reflect related liabilities in the amounts of $32,406 and $31,459, respectively. The trust primarily holds investments in U.S. government obligations, debt obligations of corporations and financial institutions with high credit ratings and equity mutual fund shares. The Company considers investments held in the trust to be available-for-sale securities. Contractual maturity dates range from 2002 to 2028. |
| Pertinent information related to the trust for fiscal years 2002, 2001 and 2000 follows: |
2002 | 2001 | 2000 | ||||||||
| Annual contributions | $ | 1,562 | $ | 4,127 | $ | 91 | ||||
| Purchases/reinvestments | 6,303 | 32,333 | 13,974 | |||||||
| Proceeds from sales/maturities | 7,689 | 34,143 | 13,089 | |||||||
| Net gains (losses) recognized | 126 | 428 | (222 | ) | ||||||
| (c) | Prepaid pension expenses represent the non-current amounts arising from the excess of cumulative employer contributions over accrued net pension expenses. |
| (d) | Intangible pension assets represent the unfunded accumulated benefit obligations to the extent of unrecognized prior service costs. |
NOTES PAYABLE AND LONG-TERM DEBT
| 2002 | 2001 | ||||||
| Note payable (a) | $ | 350,000 | $ | – | |||
| Private placement senior notes, due in 2010 (b) | 100,000 | 100,000 | |||||
| Senior revolving credit facility, due in 2005 (b) | 153,100 | 190,000 | |||||
| 1.0% - 2.6% bank loans in Japan, due through 2004 | 25,480 | 33,513 | |||||
| Yen denominated loan, due in 2003 (c) | 24,900 | 23,988 | |||||
| Bank loan, due through October 2002 (d) | 2,000 | 12,000 | |||||
| Bank loan, due through March 2003 (e) | 7,500 | 17,500 | |||||
| Other | 18,069 | 7,675 | |||||
| Total long-term debt | 681,049 | 384,676 | |||||
| Less: current portion | 61,344 | 25,582 | |||||
| Long-term debt, net of current portion | $ | 619,705 | $ | 359,094 | |||
| (a) | The purchase price for FSG of $360,000 was financed with the proceeds of a 364-day LIBOR based variable rate credit facility. The unpaid balance of $350,000 at August 3, 2002, has been classified as long-term debt in the consolidated balance sheet (except for $15,000 which matures in fiscal 2003) as it was refinanced on a long-term basis with the proceeds of the senior notes and term loan discussed below. | ||
| On August 6, 2002, the Company completed an offering of $280,000 of 6% senior notes due on August 1, 2012. The notes are unsecured and unsubordinated obligations of the company and rank pari passu to its other outstanding unsecured and unsubordinated indebtedness. On October 18, 2002, the Company entered into a $100,000 LIBOR based variable rate bank loan, which matures in quarterly installments of $5,000 starting in January 2003 through October 2007. | |||
45
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
| As a result of the additional borrowing to fund the acquisition, waivers of certain non-financial covenants were obtained and the funded debt covenant of our existing senior revolving credit facility and private placement debt was amended. | |
| (b) | On August 29, 2000, the Company completed a $100,000 private placement of 7.83% unsecured senior notes due in 2010. In addition, on August 30, 2000, the Company closed a $200,000 unsecured senior revolving credit facility, of which $150,000 expires in 2005 and $50,000 renews annually. Borrowings under this facility bear interest at a variable rate based upon LIBOR. The agreements contain various covenants, including financial covenants pertaining to interest coverage, funded debt and minimum net worth. Effective August 2001, the Company entered into “receive fixed, pay variable” interest rate swaps related to the private placement debt, whereby the Company receives payments at a fixed rate of 7.83% and makes payments at a variable rate based on LIBOR on a notional amount of $100,000. These swaps expire in August 2010. Effective February 2001, the Company entered into a “receive variable, pay fixed” interest rate swap related to certain borrowings under the senior revolving credit facility, whereby the Company receives payments at a variable rate based on LIBOR and makes payments at an effective rate of 5.74% on a notional amount of $25,000. The swap expires in February 2004. |
| (c) | In June 2001, the Company closed a Yen 3 billion loan due in 2003, which bears interest at a floating rate based upon Yen LIBOR. The Company entered into a “receive variable, pay fixed” interest rate swap related to this loan, whereby the Company receives payments at a variable rate based on Yen LIBOR and makes payments at a fixed rate of 1% on a notional amount of Yen 3 billion. The swap expires in June 2003. |
| (d) | In October 1997, the Company entered into a “receive variable, pay fixed” interest rate swap related to this LIBOR based variable rate bank loan whereby the Company receives payments at a variable rate based on LIBOR and makes payments at a fixed rate of 6.31% with an original notional amount of $40,000 that amortizes in concert with the underlying bank loan. The swap expires in October 2002. |
| (e) | In April 1998, the Company entered into a “receive variable, pay fixed” interest rate swap related to this LIBOR based variable rate bank loan whereby the Company receives payments at a variable rate based on LIBOR and makes payments at a fixed rate of 5.99% with an original notional amount of $50,000 that amortizes in concert with the underlying bank loan. The swap expires in March 2003. |
46
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
INCOME TAXES
| 2002 | 2001 | 2000 | ||||||||
| Domestic operations, including Puerto Rico | $ | 4,464 | $ | 52,047 | $ | 84,838 | ||||
| Foreign operations | 95,511 | 98,273 | 103,566 | |||||||
| Total | $ | 99,975 | $ | 150,320 | $ | 188,404 | ||||
| 2002 | 2001 | 2000 | ||||||||
| Current: | ||||||||||
Federal and Puerto Rico | $ | 2,883 | $ | 2,870 | $ | 7,852 | ||||
Foreign | 28,049 | 32,914 | 31,218 | |||||||
| Total | 30,932 | 35,784 | 39,070 | |||||||
| Deferred: | (4,305 | ) | (2,798 | ) | 960 | |||||
Federal and Puerto Rico | ||||||||||
Foreign | 114 | (676 | ) | 1,738 | ||||||
| Total | (4,191 | ) | (3,474 | ) | 2,698 | |||||
| Total income tax expense | $ | 26,741 | $ | 32,310 | $ | 41,768 | ||||
| % of Pretax Earnings | ||||||||||
| 2002 | 2001 | 2000 | ||||||||
| Computed “expected” tax expense | 35.0 | % | 35.0 | % | 35.0 | % | ||||
| Tax benefit of Puerto Rico operations | (13.6 | ) | (11.5 | ) | (11.3 | ) | ||||
| Federal tax credits and other effects | (1.2 | ) | (0.7 | ) | (0.3 | ) | ||||
| Change in valuation allowance | 5.0 | – | 1.0 | |||||||
Foreign income and withholding taxes, net of U.S. foreign tax credits | 1.2 | (1.5 | ) | (2.4 | ) | |||||
State income taxes, net of Federal income tax benefit | 0.3 | 0.2 | 0.2 | |||||||
| Total and effective tax rate | 26.7 | % | 21.5 | % | 22.2 | % | ||||
47
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
2002 | 2001 | ||||||
| Deferred tax asset: Tax loss and tax credit carry-forwards | $ | 87,820 | $ | 37,907 | |||
Inventories | 16,349 | 11,501 | |||||
Compensation and benefits | 31,499 | 25,684 | |||||
Environmental | 6,893 | 6,059 | |||||
Accrued expenses | 16,101 | 5,120 | |||||
Other | 15,791 | 7,313 | |||||
| Gross deferred tax asset | 174,453 | 93,584 | |||||
Valuation allowance | (52,123 | ) | (3,252 | ) | |||
| Total deferred tax asset | 122,330 | 90,332 | |||||
| Deferred tax liability: Plant and equipment | (36,640 | ) | (32,610 | ) | |||
Pension assets | (9,536 | ) | (7,745 | ) | |||
Other | (12,965 | ) | (5,065 | ) | |||
| Total deferred tax liability | (59,141 | ) | (45,420 | ) | |||
| Net deferred tax asset | $ | 63,189 | $ | 44,912 | |||
ACCRUED AND OTHER NON-CURRENT LIABILITIES
| 2002 | 2001 | ||||||
| Compensation and benefits | $ | 80,798 | $ | 62,003 | |||
| Environmental remediation | 8,368 | 5,643 | |||||
| Deferred taxes | 2,851 | – | |||||
| Other | 83,725 | 58,946 | |||||
| Total | $ | 175,742 | $ | 126,592 | |||
48
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued)
(In thousands, except per share data)
| 2002 | 2001 | ||||||
| Pension | $ | 85,719 | $ | 57,941 | |||
| Environmental | 11,193 | 12,436 | |||||
| Other | 14,453 | 14,848 | |||||
| Total | $ | 111,365 | $ | 85,225 | |||
COMMON STOCK
Shareholder Rights Plan
Stock Repurchase Programs
49
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
STOCK PLANS
Stock Purchase Plans
Stock Option Plans
50
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Changes in the options outstanding during fiscal years 2000, 2001 and 2002 are summarized in the following table:
| Number of Options | Price Range | Weighted Average Price | Options Exercisable | ||||||||||
| Balance - July 31, 1999 Fiscal 2000: | 8,309 | $ | 2.60-27.25 | $ | 20.29 | 2,395 | |||||||
Options granted | 148 | 17.84-23.50 | 22.38 | ||||||||||
Options exercised | (224 | ) | 2.64-21.50 | 18.90 | |||||||||
Options terminated | (309 | ) | 2.81-24.25 | 19.87 | |||||||||
| Balance - July 29, 2000 Fiscal 2001: | 7,924 | 2.60-27.25 | 20.39 | 4,091 | |||||||||
Options granted | 3,605 | 19.72-23.89 | 22.08 | ||||||||||
Options exercised | (1,186 | ) | 2.64-24.25 | 19.10 | |||||||||
Options terminated | (2,248 | ) | 17.38-27.25 | 23.84 | |||||||||
| Balance - July 28, 2001 Fiscal 2002: | 8,095 | 2.60-26.75 | 20.38 | 2,314 | |||||||||
Options granted | 334 | 16.78-24.27 | 20.50 | ||||||||||
Options exercised | (679 | ) | 2.60-23.50 | 19.45 | |||||||||
Options terminated | (363 | ) | 16.10-26.75 | 20.90 | |||||||||
| Balance - August 3, 2002 | 7,387 | $ | 4.47-24.56 | $ | 20.50 | 3,796 | |||||||
| Options outstanding | Options exercisable | |||||||||||||||
| Exercise Price Range | Number Outstanding | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | Number of Options Exercisable | Weighted Average Exercise Price | |||||||||||
| $ 4.47-11.50 | 8 | $ | 7.71 | 1.5 | 8 | $ | 7.71 | |||||||||
| $11.51-17.50 | 1,553 | 17.37 | 1.8 | 1,044 | 17.37 | |||||||||||
| $17.51-21.00 | 2,072 | 19.83 | 1.5 | 1,716 | 19.88 | |||||||||||
| $21.01-24.56 | 3,754 | 22.19 | 8.1 | 1,028 | 22.21 | |||||||||||
| 7,387 | $ | 20.50 | 5.0 | 3,796 | $ | 19.80 | ||||||||||
2002 | 2001 | 2000 | ||||||||
| Average fair value of options granted | $ | 8.36 | $ | 6.75 | $ | 7.00 | ||||
| Valuation assumptions: | ||||||||||
Expected dividend yield | 2.0 | % | 3.6 | % | 3.2 | % | ||||
Expected volatility | 33.0 | % | 33.0 | % | 35.0 | % | ||||
Expected life (years) | 10 | 10 | 5 | |||||||
Risk-free interest rate | 5.1 | % | 4.8 | % | 6.6 | % | ||||
| Pro forma effect: | ||||||||||
Reduction in net earnings | $ | 10,962 | $ | 6,506 | $ | 9,017 | ||||
Reduction in earnings per share, basic and diluted | $ | 0.09 | $ | 0.05 | $ | 0.07 | ||||
51
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
INCENTIVE COMPENSATION PLAN
PENSION AND PROFIT SHARING PLANS AND ARRANGEMENTS
Pension Plans
| U.S. Plans | Foreign Plans | ||||||||||||
| 2002 | 2001 | 2002 | 2001 | ||||||||||
| Change in benefit obligation: | |||||||||||||
| Benefit obligation - beginning of year | $ | 118,778 | $ | 110,053 | $ | 125,425 | $ | 107,304 | |||||
| Acquisitions | – | – | 24,035 | – | |||||||||
| Service cost | 5,214 | 4,914 | 6,643 | 5,342 | |||||||||
| Interest cost | 8,312 | 8,091 | 7,479 | 5,826 | |||||||||
| Plan participant contributions | – | – | 1,393 | 1,454 | |||||||||
| Plan amendments | 250 | 1,126 | 227 | 92 | |||||||||
| Actuarial (gain) loss | (1,443 | ) | 3,806 | 1,094 | 16,759 | ||||||||
| Total benefits paid | (9,377 | ) | (9,212 | ) | (4,830 | ) | (3,776 | ) | |||||
| Effect of exchange rates | – | – | 13,724 | (7,576 | ) | ||||||||
| Benefit obligation - end of year | 121,734 | 118,778 | 175,190 | 125,425 | |||||||||
| Change in plan assets: | |||||||||||||
| Fair value of plan assets - beginning of year | 71,464 | 76,288 | 115,878 | 134,771 | |||||||||
| Acquisitions | – | – | 1,292 | – | |||||||||
| Actual return on plan assets | (5,371 | ) | 126 | (19,753 | ) | (13,461 | ) | ||||||
| Company contributions | 4,137 | 4,262 | 5,097 | 4,814 | |||||||||
| Plan participant contributions | – | – | 1,393 | 1,454 | |||||||||
| Benefits paid from plan assets | (9,377 | ) | (9,212 | ) | (4,830 | ) | (3,776 | ) | |||||
| Effect of exchange rates | – | – | 9,469 | (7,924 | ) | ||||||||
| Fair value of plan assets - end of year | 60,853 | 71,464 | 108,546 | 115,878 | |||||||||
| Funded status: | (60,881 | ) | (47,314 | ) | (66,644 | ) | (9,547 | ) | |||||
| Unrecognized actuarial loss | 11,203 | 88 | 54,698 | 21,614 | |||||||||
| Unrecognized prior service cost | 7,315 | 7,800 | 1,396 | 1,231 | |||||||||
| Unrecognized transition asset | (434 | ) | (870 | ) | (8 | ) | (477 | ) | |||||
| Net amount recognized | $ | (42,797 | ) | $ | (40,296 | ) | $ | (10,558 | ) | $ | 12,821 |
| |
52
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
| U.S. Plans | Foreign Plans | ||||||||||||
| 2002 | 2001 | 2002 | 2001 | ||||||||||
| Amount recognized in the balance sheet consists of: | |||||||||||||
Prepaid benefit | $ | – | $ | – | $ | 33,764 | $ | 29,184 | |||||
Accrued benefit liability | (53,374 | ) | (47,942 | ) | (45,929 | ) | (17,929 | ) | |||||
Intangible asset | 6,697 | 5,595 | 660 | 783 | |||||||||
Accumulated other comprehensive income | 3,880 | 2,051 | 947 | 783 | |||||||||
| Net amount recognized | $ | (42,797 | ) | $ | (40,296 | ) | $ | (10,558 | ) | $ | 12,821 | ||
| Plans with accumulated benefit obligations in excess Of plan assets consists of the following: | |||||||||||||
Accumulated benefit obligation | $ | 107,611 | $ | 42,435 | $ | 42,775 | $ | 15,466 | |||||
Projected benefit obligation | 121,733 | 48,967 | 46,139 | 17,923 | |||||||||
Plan assets at fair value | 60,854 | 10,120 | 1,228 | – | |||||||||
Net periodic benefit cost for the Company’s defined benefit pension plans includes the following components:
| U.S. Plans | Foreign Plans | ||||||||||||||||||
| 2002 | 2001 | 2000 | 2002 | 2001 | 2000 | ||||||||||||||
| Service cost | $ | 5,214 | $ | 4,914 | $ | 4,551 | $ | 6,643 | $ | 5,342 | $ | 6,172 | |||||||
| Interest cost | 8,312 | 8,091 | 7,755 | 7,479 | 5,826 | 5,958 | |||||||||||||
| Expected return on plan assets | (7,346 | ) | (7,267 | ) | (6,871 | ) | (8,789 | ) | (8,497 | ) | (8,573 | ) | |||||||
| Amortization of prior service cost | 735 | 698 | 813 | 169 | 174 | 141 | |||||||||||||
| Amortization of net transition asset | (436 | ) | (266 | ) | (266 | ) | (438 | ) | (538 | ) | (537 | ) | |||||||
| Recognized actuarial loss (gain) | 160 | (136 | ) | 213 | 297 | (137 | ) | (15 | ) | ||||||||||
| Net periodic benefit cost | $ | 6,639 | $ | 6,034 | $ | 6,195 | $ | 5,361 | $ | 2,170 | $ | 3,146 | |||||||
The following table provides the weighted-average assumptions used to determine plan liabilities and expense:
| U.S. Plans | Foreign Plans | ||||||||||||||||||
| 2002 | 2001 | 2000 | 2002 | 2001 | 2000 | ||||||||||||||
| Weighted average discount rate | 7.25 | % | 7.50 | % | 7.75 | % | 2.00-6.25 | % | 2.50-6.50 | % | 2.50-6.50 | % | |||||||
| Expected long-term rate of return on plan assets | 9.00 | % | 10.00 | % | 10.00 | % | .75-7.00 | % | 3.00-7.00 | % | 4.50-7.00 | % | |||||||
| Rate of compensation increase | 4.00 | % | 4.75 | % | 4.75 | % | 2.50-4.00 | % | 3.00-4.00 | % | 3.00 | % | |||||||
Profit Sharing Plan
53
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
OTHER COMPREHENSIVE INCOME
Pretax Amount | Tax Effect | Net Amount | ||||||||
| Fiscal 2000: | ||||||||||
| Unrealized translation adjustment | $ | (20,835 | ) | $ | (366 | ) | $ | (21,201 | ) | |
| Minimum pension liability adjustment | 1,010 | (344 | ) | 666 | ||||||
| Change in unrealized accumulated investment gains | 499 | (175 | ) | 324 | ||||||
| Other comprehensive loss | $ | (19,326 | ) | $ | (885 | ) | $ | (20,211 | ) | |
| Fiscal 2001: | ||||||||||
| Unrealized translation adjustment | $ | (15,142 | ) | $ | (1,455 | ) | $ | (16,597 | ) | |
| Minimum pension liability adjustment | (864 | ) | 336 | (528 | ) | |||||
| Change in unrealized accumulated investment gains | 8,953 | (3,163 | ) | 5,790 | ||||||
| Unrealized losses on derivatives | (1,627 | ) | 570 | (1,057 | ) | |||||
| Other comprehensive loss | $ | (8,680 | ) | $ | (3,712 | ) | $ | (12,392 | ) | |
| Fiscal 2002: | ||||||||||
| Unrealized translation adjustment | $ | 31,658 | $ | 860 | $ | 32,518 | ||||
| Minimum pension liability adjustment | (1,993 | ) | 713 | (1,280 | ) | |||||
| Change in unrealized accumulated investment losses | (3,039 | ) | 1,099 | (1,940 | ) | |||||
| Unrealized losses on derivatives | (415 | ) | 145 | (270 | ) | |||||
| Other comprehensive income | $ | 26,211 | $ | 2,817 | $ | 29,028 | ||||
2002 | 2001 | 2000 | ||||||||
| Net unrealized (losses) gains arising during the period, net of tax (benefit) expense of $(1,100), $2,866 and $175 in 2002, 2001, and 2000, respectively | $ | (16,435 | ) | $ | 5,239 | $ | 324 | |||
| Net loss included in net earnings for the period, net of tax benefit of $297 in 2001 | – | 551 | – | |||||||
| Adjustment for unrealized loss included in net earnings due to impairment in 2002 | 14,495 | – | – | |||||||
| Other comprehensive (loss) income | $ | (1,940 | ) | $ | 5,790 | $ | 324 | |||
54
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
CONTINGENCIES AND COMMITMENTS
55
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
FINANCIAL INSTRUMENTS AND RISKS AND UNCERTAINTIES
SEGMENT INFORMATION AND GEOGRAPHIES
56
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Life Sciences:
| Blood: includes sales of disposable blood filtration and cardiovascular filtration products primarily to blood centers and hospitals. | |
| BioPharmaceuticals: includes sales of separation systems and disposable filters primarily to pharmaceutical, biotechnology and laboratory companies. |
Industrial:
| General Industrial: the Company’s most diverse sub-segment, includes sales of filters, coalescers, and separation systems for hydraulic, fuel and lubrication systems on manufacturing equipment across many industries as well as to producers of oil, gas, electricity, chemicals, food and beverages, municipal water, and paper. | |
| Aerospace: includes sales of filtration, fluid monitoring equipment and shipboard water/waste water filtration to the aerospace industry for use on commercial and military aircraft, ships and land-based vehicles. | |
| Microelectronics: includes sales of disposable filtration products to producers of semiconductors, computer terminals, fiber optics, disc drives, thin film rigid discs, and photographic film. |
57
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
MARKET SEGMENT INFORMATION
| 2002 | 2001 | 2000 | ||||||||
| SALES TO UNAFFILIATED CUSTOMERS: | ||||||||||
| Blood | $ | 232,464 | $ | 233,325 | $ | 224,753 | ||||
| BioPharmaceuticals | 372,382 | 342,167 | 346,515 | |||||||
| Life Sciences | 604,846 | 575,492 | 571,268 | |||||||
| General Industrial | 407,382 | 346,459 | 356,413 | |||||||
| Aerospace | 158,753 | 158,310 | 144,969 | |||||||
| Microelectronics | 119,839 | 155,162 | 151,451 | |||||||
| Industrial | 685,974 | 659,931 | 652,833 | |||||||
| Total | $ | 1,290,820 | $ | 1,235,423 | $ | 1,224,101 | ||||
| OPERATING PROFIT: | ||||||||||
| Blood | $ | 32,743 | $ | 40,239 | $ | 47,762 | ||||
| BioPharmaceuticals | 87,023 | 83,535 | 110,297 | |||||||
| Life Sciences | 119,766 | 123,774 | 158,059 | |||||||
| General Industrial | 45,320 | 58,004 | 53,797 | |||||||
| Aerospace | 37,489 | 46,096 | 41,053 | |||||||
| Microelectronics | 7,477 | 17,309 | 21,966 | |||||||
| Industrial | 90,286 | 121,409 | 116,816 | |||||||
Subtotal | 210,052 | 245,183 | 274,875 | |||||||
| Restructuring and other charges, net | (32,836 | ) | (17,248 | ) | (11,987 | ) | ||||
| General corporate expenses | (62,910 | ) | (60,972 | ) | (60,407 | ) | ||||
| Interest expense, net | (14,331 | ) | (16,643 | ) | (14,077 | ) | ||||
| Earnings before income taxes | $ | 99,975 | $ | 150,320 | $ | 188,404 | ||||
| DEPRECIATION AND AMORTIZATION: | ||||||||||
| Blood | $ | 12,593 | $ | 11,531 | $ | 10,323 | ||||
| BioPharmaceuticals | 18,330 | 18,166 | 17,816 | |||||||
| Life Sciences | 30,923 | 29,697 | 28,139 | |||||||
| General Industrial | 22,283 | 17,744 | 19,069 | |||||||
| Aerospace | 4,642 | 4,265 | 4,642 | |||||||
| Microelectronics | 4,743 | 5,144 | 5,429 | |||||||
| Industrial | 31,668 | 27,153 | 29,140 | |||||||
Subtotal | 62,591 | 56,850 | 57,279 | |||||||
| Corporate | 11,412 | 14,640 | 14,682 | |||||||
| Total | $ | 74,003 | $ | 71,490 | $ | 71,961 | ||||
| IDENTIFIABLE ASSETS: | ||||||||||
| Blood | $ | 94,812 | $ | 95,581 | $ | 91,167 | ||||
| BioPharmaceuticals | 166,237 | 129,281 | 138,177 | |||||||
| Shared Life Sciences Assets | 295,225 | 273,734 | 280,331 | |||||||
| Life Sciences | 556,274 | 498,596 | 509,675 | |||||||
| General Industrial | 273,983 | 182,061 | 197,995 | |||||||
| Aerospace | 62,872 | 63,327 | 59,230 | |||||||
| Microelectronics | 74,858 | 48,420 | 54,196 | |||||||
| Shared Industrial Assets | 347,578 | 218,185 | 206,676 | |||||||
| Industrial | 759,291 | 511,993 | 518,097 | |||||||
Subtotal | 1,315,565 | 1,010,589 | 1,027,772 | |||||||
| Corporate | 711,657 | 537,921 | 479,480 | |||||||
| Total | $ | 2,027,222 | $ | 1,548,510 | $ | 1,507,252 | ||||
| CAPITAL EXPENDITURES: | ||||||||||
| Life Sciences | $ | 40,497 | $ | 44,997 | $ | 39,860 | ||||
| Industrial | 26,753 | 29,373 | 24,560 | |||||||
Subtotal | 67,250 | 74,370 | 64,420 | |||||||
| Corporate | 2,671 | 3,464 | 2,073 | |||||||
| Total | $ | 69,921 | $ | 77,834 | $ | 66,493 | ||||
58
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
GEOGRAPHIES
| 2002 | 2001 | 2000 | ||||||||
| SALES TO UNAFFILIATED CUSTOMERS: | ||||||||||
| Western Hemisphere | $ | 584,327 | $ | 575,801 | $ | 568,025 | ||||
| Europe | 472,569 | 421,100 | 435,318 | |||||||
| Asia | 233,924 | 238,522 | 220,758 | |||||||
| Total | $ | 1,290,820 | $ | 1,235,423 | $ | 1,224,101 | ||||
| INTERCOMPANY SALES BETWEEN GEOGRAPHIC AREAS: | ||||||||||
| Western Hemisphere | $ | 123,336 | $ | 128,433 | $ | 135,326 | ||||
| Europe | 61,720 | 55,507 | 49,655 | |||||||
| Asia | 2,266 | 4,845 | 3,427 | |||||||
| Total | $ | 187,322 | $ | 188,785 | $ | 188,408 | ||||
| TOTAL SALES: | ||||||||||
| Western Hemisphere | $ | 707,663 | $ | 704,234 | $ | 703,351 | ||||
| Europe | 534,289 | 476,607 | 484,973 | |||||||
| Asia | 236,190 | 243,367 | 224,185 | |||||||
| Eliminations | (187,322 | ) | (188,785 | ) | (188,408 | ) | ||||
| Total | $ | 1,290,820 | $ | 1,235,423 | $ | 1,224,101 | ||||
| OPERATING PROFIT: | ||||||||||
| Western Hemisphere | $ | 87,376 | $ | 116,571 | $ | 153,190 | ||||
| Europe | 82,258 | 83,555 | 91,964 | |||||||
| Asia | 37,437 | 44,003 | 36,000 | |||||||
| Eliminations | 2,981 | 1,054 | (6,279 | ) | ||||||
Subtotal | 210,052 | 245,183 | 274,875 | |||||||
| Restructuring and other charges, net | (32,836 | ) | (17,248 | ) | (11,987 | ) | ||||
| General corporate expenses | (62,910 | ) | (60,972 | ) | (60,407 | ) | ||||
| Interest expense, net | (14,331 | ) | (16,643 | ) | (14,077 | ) | ||||
| Earnings before income taxes | $ | 99,975 | $ | 150,320 | $ | 188,404 | ||||
| IDENTIFIABLE ASSETS: | ||||||||||
| Western Hemisphere | $ | 617,619 | $ | 506,289 | $ | 512,004 | ||||
| Europe | 531,161 | 365,711 | 365,354 | |||||||
| Asia | 181,409 | 156,320 | 169,812 | |||||||
| Eliminations | (14,624 | ) | (17,731 | ) | (19,398 | ) | ||||
Subtotal | 1,315,565 | 1,010,589 | 1,027,772 | |||||||
| Corporate | 711,657 | 537,921 | 479,480 | |||||||
| Total | $ | 2,027,222 | $ | 1,548,510 | $ | 1,507,252 | ||||
59
PALL CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands, except per share data)
| Description | Balance at Beginning of Year | Additions to Reserve (a) | Write-offs | Translation Adjustments | Balance at End of Year | |||||||||||
| Allowance for doubtful accounts: | ||||||||||||||||
| Year Ended: | ||||||||||||||||
| August 3, 2002 | $ | 7,197 | $ | 7,936 | $ | (2,630 | ) | $ | 403 | $ | 12,906 | |||||
| July 28, 2001 | $ | 7,832 | $ | 2,491 | $ | (2,974 | ) | $ | (152 | ) | $ | 7,197 | ||||
| July 29, 2000 | $ | 6,623 | $ | 2,468 | $ | (1,077 | ) | $ | (182 | ) | $ | 7,832 | ||||
| Reserve for inventory obsolescence: | ||||||||||||||||
| Year Ended: | ||||||||||||||||
| August 3, 2002 | $ | 16,305 | $ | 20,458 | $ | (364 | ) | $ | 778 | $ | 37,177 | |||||
| July 28, 2001 | $ | 14,043 | $ | 5,032 | $ | (2,333 | ) | $ | (437 | ) | $ | 16,305 | ||||
| July 29, 2000 | $ | 13,317 | $ | 6,766 | (b) | $ | (5,745 | ) | $ | (295 | ) | $ | 14,043 |
| (a) | Includes amounts charged to costs and expenses and reserves recorded upon the acquisition of FSG of $4,269 and $9,927 for the allowance for doubtful accounts and reserve for inventory obsolescence, respectively. | ||
| (b) | Includes $3,421 related to the restructuring and other charges. |
60