Life Sciences sales for the quarter were down 2½% compared with last year. On a pro forma basis to include FSG, sales were down 3½%. Life Sciences represented approximately 40% of our total sales in the quarter as compared to 48% in the first quarter of fiscal 2002.
Within Life Sciences, Medical segment sales were down 15½% in the quarter reflecting timing of blood filter orders from one of our major customers as well as a decrease in the level of blood donations as compared to last year. All geographies reported declines in Medical sales in the quarter.
BioPharmaceuticals sales grew 12% in the quarter or 7% on a pro forma basis compared with last year, reflecting strong growth in our Pharmaceutical sub-market buoyed by BioSciences. In BioSciences, Laboratory sales grew 20% on a pro forma basis as this market has benefited from our distribution agreement with VWR International, which allows our customers easy access to a full range of product and service needs. Additionally, Laboratory sales also have been positively impacted by strong sales of our 96 well plate products from our strategic alliance with Qiagen. Specialty Materials sales were down in the quarter as a result of a few lost accounts and destocking efforts at a few large customers, partly offsetting the Laboratory sales growth. By geography, BioSciences sales growth was driven by strong sales in Europe on both a reported and pro forma basis. Sales in the Western Hemisphere and Asia were down on a pro forma basis.
The Pharmaceutical sub-market grew 15½% in the quarter or 10% on a pro forma basis compared to last year reflecting increased systems sales, particularly in the U.S. biotechnology market. By geography, sales growth was driven by Europe and to a lesser extent the Western Hemisphere. Sales in Asia were down.
Our Industrial business, where the majority of FSG’s sales are reported, accounted for approximately 60% of total sales this quarter as compared to 52% in the first quarter of last year. Industrial sales grew 38% in the quarter fueled by FSG, however, on a pro forma basis sales were down slightly.
General Industrial segment sales, which are the largest portion of our Industrial business, grew 54½%, with all geographies contributing to this gain. On a pro forma basis, sales were down 4½% reflecting double-digit sales increases in Water Processing and Food & Beverage, offset by declines in Fuels & Chemicals and Power Generation. Machinery & Equipment sales were flat on a pro forma basis. The decline in Fuels & Chemicals reflects two large systems sales in Europe and Asia in the first quarter of last year that did not repeat in the current quarter.
Aerospace sales were down 4% compared to last year primarily due to a decline in Military sales. Military sales comprised approximately 50% of total Aerospace sales in both the current and prior years’ first quarters. By geography, Aerospace sales in Europe were flat reflecting a decline in Military sales that was offset by an increase in Commercial Marine Water sales. In the Western Hemisphere, sales were down 4% reflecting a decline in both Commercial and Military Aerospace sales.
Microelectronics sales increased 11½% on a pro forma basis compared with last year. This is the second consecutive quarter of double-digit sales growth, despite continuing difficulties in the semiconductor market. Sales growth was fueled by the materials side of the business, such as photoresist and high purity chemicals. We are also gaining market share in the photolithography market. Orders were also strong in the quarter. By geography, both Europe and Asia posted strong sales growth in the quarter, while the Western Hemisphere was down.
The consolidated operating profit as a percentage of sales for the quarter declined to 13.2% from 15.9% last year. In Life Sciences, overall operating profit declined to 14.9% from 16.3% as an improvement in margins in the Medical segment was offset by a decline in BioPharmaceuticals.
Within Life Sciences, Medical operating profit for the quarter improved to 7.8% from 6.8% last year reflecting improved operating efficiencies in the manufacturing plants and the elimination of our R&D cost sharing with VITEX. Additionally, the elimination of distributor commission payments, which is expected to result in an annual savings of $3 million, positively impacted operating profit. Operating profit in BioPharmaceuticals decreased to 20.5% from 26.2% last year. This was primarily attributable to a decline in Specialty Materials business, which operates at high gross margins.
Overall operating profit in Industrial decreased to 12.1% from 15.4% last year. General Industrial operating profit declined to 8.6% from 13.1% last year, due to change in product mix as well as the addition of FSG products, which carry lower margins. Aerospace operating profit declined to 23% from 30.5% last year primarily due to the overall decreased sales volume, including some large commercial sales in the U.K. in the first quarter of last year that did not repeat this year. Microelectronics operating profit improved to 13.1% from break-even last year driven by strong sales growth in the quarter.
General corporate expenses were essentially flat quarter over quarter reflecting increased pension and insurance costs, offset by a real estate tax refund.
By geography, sales in the Western Hemisphere increased 12%. Exchange rates, primarily related to the weakening of the Argentine Peso, negatively impacted sales by $2.5 million. Operating profit in the quarter was 11.2%, similar to the level achieved last year.
In Europe, sales increased 32½% compared to last year. The strengthening of European currencies added $9.5 million in sales, resulting in reported sales growth of 42½%. Operating profit declined to 11.6% from 14.5% last year reflecting the lower rate of profit on FSG products.
Sales in Asia increased 9½% in the quarter. Foreign exchange had a minimal impact on sales in the quarter. Operating profit declined to 10.8% from 16.3% last year primarily due to lower FSG margins and a change in product mix.
Liquidity and Capital Resources
The Company’s balance sheet is affected by spot exchange rates used at the end of the first quarter of fiscal 2003 for translating local currency amounts into U.S. dollars. In comparing spot exchange rates at the end of fiscal 2002, the European and Asian currencies (especially the Euro, the Pound and the Yen) have strengthened against the U.S. dollar, while the Argentine Peso has weakened.
The acquisition of FSG in the third quarter of fiscal 2002 was initially funded via a $360 million 364-day variable rate credit facility. 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.
We plan to refinance our $24 million Yen loan, which is due in 2003, on a long-term basis in the second quarter of fiscal 2003.
Net cash provided by operating activities for the first quarter of fiscal 2003, increased by $18.2 million as compared to the first quarter of fiscal 2002, primarily due to changes in the level of accounts receivable. Additionally, the first quarter of fiscal 2002 included a payment of a rebate to a major Medical customer. Increased inventory levels and lower earnings partly offset the above. The increase in inventory reflects increased systems work-in-process inventory and replenishment of stock for anticipated second quarter shipments. Additionally, Medical inventory levels were higher due to lower than anticipated sales in the first quarter of fiscal 2003.
We did not purchase treasury stock during the first quarter of fiscal 2003, and as a result $140 million remains to be expended under the Board of Directors authorization of $200 million in January 2000. Proceeds from stock plans were $1.1 million in the quarter. Capital expenditures and depreciation and amortization expense were $14.5 million and $20.9 million, respectively. Our goal is to keep capital expenditures at or below $75 million in fiscal 2003.
As mentioned previously, we modified our partnership agreement with VITEX to eliminate shared research 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.
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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 decreased by $2.3 million compared with year-end fiscal 2002. Overall, net debt, as a percentage of total capitalization, was 42% similar to the ratio at year-end fiscal 2002. Our goal for fiscal 2003 is to reduce net debt by $40 million. Our intention is to return to the debt levels that existed prior to the acquisition as quickly as possible.
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.
Recently Issued Accounting Pronouncements
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 this accounting pronouncement is not expected to have a material effect on the Company’s results of operations, cash flows or financial position.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the date the Company carried out its evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In February 1988, an action was filed in the Circuit Court for Washtenaw County, Michigan (“Court”) by the State of Michigan (“State”) against Gelman Sciences Inc. (“Gelman”), a subsidiary acquired by the Company in February 1997. The action sought to compel Gelman to investigate and remediate 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. Subsequently, 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. On August 9, 2001, the State made a written demand for reimbursement of $227,462 plus interest it has allegedly incurred for groundwater monitoring. Gelman considers this claim barred by the consent judgment. The Company’s balance sheet at November 2, 2002 contains reserves of approximately $18,100,000, which 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
| (a) | Exhibits |
| | |
| | See the index to exhibits for a list of exhibits filed herewith. |
| | |
| (b) | Reports on Form 8-K. |
| | |
| | The Company filed no reports on Form 8-K during the three months ended November 2, 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | Pall Corporation |
| | |
| December 17, 2002 | /s/ JOHN ADAMOVICH, JR
John Adamovich, Jr
Chief Financial Officer
and Treasurer |
| | |
| December 17, 2002 | /s/ LISA KOBARG
Lisa Kobarg
Chief Accountant |
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CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Eric Krasnoff, certify that:
| 1. | | I have reviewed this quarterly report on Form 10-Q of Pall Corporation; |
| | |
| 2. | | Based on my knowledge, this quarterly 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 quarterly report; |
| | |
| 3. | | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of Pall Corporation as of, and for, the periods presented in this quarterly report; |
| | |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| | |
| | a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| | |
| | b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
| | |
| | c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| | |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function): |
| | |
| | a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| | |
| | b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| | |
| 6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
December 17, 2002
/s/ ERIC KRASNOFF
Eric Krasnoff
Chief Executive Officer
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CHIEF FINANCIAL OFFICER CERTIFICATION
I, John Adamovich, Jr., certify that:
| 1. | | I have reviewed this quarterly report on Form 10-Q of Pall Corporation; |
| | |
| 2. | | Based on my knowledge, this quarterly 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 quarterly report; |
| | |
| 3. | | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of Pall Corporation as of, and for, the periods presented in this quarterly report; |
| | |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| | |
| | a. | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| | |
| | b. | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
| | |
| | c. | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| | |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function): |
| | |
| | a. | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| | |
| | b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| | |
| 6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
December 17, 2002
/s/ JOHN ADAMOVICH, JR.
John Adamovich, Jr.
Chief Financial Officer
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EXHIBIT INDEX
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, filed as exhibits 3(ii) and 3(iii) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended August 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)* | | 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, filed as Exhibit 4(iii) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended August 3, 2002. |
| | | |
| | | 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. |
| | | |
| 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 |
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