Sales in our Fuels & Chemicals sub-market grew 82½% and 61% for the quarter and six months, respectively. Strategic partnerships are creating excellent growth opportunities and a key growth driver continues to be clean fuels and synthetic fuels initiatives based on environmental driven regulations. Sales in our Power Generation sub-market were also strong, increasing 22½% and 16½% for the quarter and six months, respectively. Power Generation sales growth was particularly strong in Europe and Asia, although we have seen some weakening in the Western Hemisphere and European OEM turbine market.
Aerospace sales grew 13% in the quarter compared to last year, reflecting strong Military and Commercial sales. Military sales grew 18% in the quarter with all geographies contributing to this gain. Growth in Europe was particularly strong. We expect this trend to continue for the balance of the year. Commercial sales grew 7% as we are seeing some strengthening in this market. We still see risk on Commercial Aerospace business as airline bankruptcies or war could negatively impact this portion of the business. By geography, the growth in Commercial Aerospace sales was driven by the Western Hemisphere and to a lesser extent Europe. In the quarter, Military sales comprised approximately 53% of total Aerospace sales as compared to 51% in the second quarter of last year. For the six-month period, Aerospace sales grew 4½% compared to last year reflecting strong Military sales. Commercial Aerospace sales were up slightly for the six-month period. As in the quarter, growth in Military Aerospace was fueled by Europe with the other geographies contributing to this gain as well.
Microelectronics sales grew 55% and 51½% in the quarter and six months, respectively, as compared with last year. On a pro-forma basis, sales increased 24½% and 18% for the quarter and six months, respectively. This is the third consecutive quarter of double-digit sales growth, despite the fact that the semiconductor OEM market remains weak globally and its near term outlook is uncertain. The growth in sales was fueled by the user side of the business. We are also growing in the photolithography market. All geographies reported double-digit sales growth for the quarter and six-month periods.
The consolidated operating profit as a percentage of sales for the quarter increased to 16.2% from 14.4% last year. For the six-month period operating profit was 14.8% as compared to 15.1% for the same period last year.
In Life Sciences, overall operating profit declined to 17.9% from 19.8% reflecting a decline in operating profit margins in the BioPharmaceuticals segment partly offset by an improvement in Medical. For the six-month period, operating profit declined to 16.5% from 18.1% last year reflecting the same trend that was evident in the quarter.
Within Life Sciences, Medical operating profit for the quarter improved sequentially to 16% from 7.8% in the first quarter and was up compared to the 15.9% achieved in the second quarter of last year. Operating profit for the six-months improved to 12.5% from 11.6% last year. The improvements in operating profit reflect manufacturing based cost reduction programs, synergies realized as a result of the reorganization of the critical care and blood businesses (refer to Note 4 for discussion of actions taken in the first six months of fiscal 2003) and the elimination of our R&D cost sharing with VITEX. Additionally, the elimination of most distributor commission payments, which is expected to result in an annual savings of $3,000, positively impacted operating profit. Operating profit in BioPharmaceuticals decreased to 19.6% in the quarter from 23.9% last year. For the six-month period, operating profit declined to 20% as compared to 25% last year. The decrease in margins was primarily related to a change in product mix. FSG’s sales, which carry a lower gross margin, also contributed to the decline. Overall we expect BioPharmaceuticals margins to fluctuate within a range of 20%-25% based on the sales mix.
Overall operating profit in Industrial improved to 15% in the quarter from 9.1% last year. For the six months, operating profit improved to 13.6% from 12.3%. General Industrial operating profit in the quarter improved to 10.1% from 7.2% last year attributable to a change in product mix. For the six months, General Industrial operating profit declined to 9.4% from 10.1% primarily due to the addition of FSG products, which carry lower margins. Aerospace operating profit improved to 27.7% from 18.7% last year primarily due to strong sales in the quarter. For the six-month period operating profit improved to 25.6% from 24.5%. Microelectronics operating profit improved to 17.7% in the quarter and 15.5% for the six-month period from break-even for the same periods last year driven by strong sales growth.
By geography, sales in the Western Hemisphere increased 21% in the quarter and 16½% for the six-month period. Exchange rates, primarily related to the weakening of the Argentine Peso, negatively impacted sales by $1,758 and $4,295 in the quarter and six months, respectively. Operating profit in the quarter improved to 13% from 8.7% last year. For the six-month period, operating profit increased to 12.2% from 10.3% last year. The increase in operating profit in the Western Hemisphere reflects the improvements in margins achieved in our various business segments as noted above.
In Europe, sales increased 36½% and 34½% for the quarter and six months, respectively, compared to last year. The strengthening of European currencies added $22,272 and $31,775 in sales, resulting in reported sales growth of 57½% and 50½% in the quarter and six months, respectively. Operating profit in the quarter declined to 15.8% from 16.1% last year reflecting the lower rate of profit on FSG products. Operating profit for the six-month period declined to 13.9% from 15.3%.
Sales in Asia increased 26% and 17½% in the quarter and six months, respectively. The strengthening of Asian currencies added $3,713 and $4,053 in sales, resulting in reported sales growth of 33% and 21½% in the quarter and six months, respectively. Operating profit declined to 15.5% from 16.1% last year primarily due to lower FSG margins and a change in product mix. For the six-month period, operating profit declined to 13.3% from 16.2% reflecting the same factors cited above.
General corporate expenses were up slightly in the quarter and six-month period reflecting increased pension and insurance costs.
Liquidity and Capital Resources
The Company’s balance sheet is affected by spot exchange rates used to translate local currency amounts into U.S. dollars. In comparing spot exchange rates at February 1, 2003 to those at the end of fiscal 2002, the European currencies (especially the Euro and the British Pound) have strengthened against the U.S. dollar, while the Argentine Peso has weakened. The Yen was flat as compared to the spot rate used at the end of fiscal 2002.
The acquisition of FSG in the third quarter of fiscal 2002 was initially funded via a $360,000 364-day variable rate credit facility. On August 6, 2002, we issued $280,000 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 $100,000 term loan bearing interest based on LIBOR. We received $7,533, representing the fair value of “receive fixed, pay variable” interest rate swaps with an aggregate notional value of $100,000, which we terminated on November 26, 2002. The terminated swaps relate to our $100,000 private placement of 7.83% unsecured senior notes due in 2010. As such, these proceeds will be amortized, as a reduction of interest expense, over the remaining life of the underlying notes. Simultaneously, we entered into new interest rate swaps involving the $280,000, 6% notes due on August 1, 2012. The new swaps require that we make payments at a variable rate based on LIBOR and receive payments at a fixed rate of 6% on notional amounts totaling $230,000.
We have received a commitment from a financial institution to refinance our Yen 3 billion loan (approximately $25,000), which is due on June 18, 2003, until June 18, 2005. The terms of the commitment will require us to make interest payments based on a floating rate based upon Yen LIBOR. As such, the Yen loan is classified as long-term debt in our February 1, 2003 condensed consolidated balance sheet. On March 7, 2003, we entered into a forward dated “receive variable, pay fixed” interest rate swap related to this loan, whereby we would receive payments at a variable rate based upon Yen LIBOR and make payments at a fixed rate of .95% on a notional amount of Yen 3 billion. The swap expires on June 18, 2005. As it is our intent to enter into this loan, this swap will be accounted for as a hedge of a forecasted transaction until June 18, 2003. Accordingly, changes in the fair value of the swap will be reflected in other comprehensive income.
Net cash provided by operating activities for the first six months of fiscal 2003 was $75,097, an increase of $11,495 compared to the same period of fiscal 2002. The increase in cash flow from operations was generated by increased earnings as well as by accounts receivable, partly offset by increased inventory levels and lower levels of accounts payable. Additionally, the first quarter of fiscal 2002 included a rebate payment to a major blood customer. The increase in inventory reflects the effects of foreign exchange (see next paragraph) and increased work-in-process and replenishment of stock for anticipated third quarter shipments.
Working capital was approximately $515,000, a ratio of 2.4, at February 1, 2003 as compared to $478,000, a ratio of 2.1 at August 3, 2002. Accounts receivable days sales outstanding was 87 days, as compared to 94 at August 3, 2002, while inventory turns have improved to 2.9 from 2.8. The effect of foreign exchange increased inventory, accounts receivable and other current assets by $15,906, $9,540 and $1,711, respectively, as compared to the end of fiscal 2002. Additionally, foreign exchange increased accounts payable and other current liabilities by $9,977 and income taxes payable by $1,049.
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 $40,905 compared with year-end fiscal 2002. The impact of foreign exchange rates accounted for $4,798 of the reduction, while $5,038 of the reduction was related to a change in the fair value of our interest rate swaps which are carried as part of debt.
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Overall, net debt, as a percentage of total capitalization, was 38.9% as compared to 41.3% at year-end fiscal 2002. Our goal for fiscal 2003 is to reduce net debt by $50,000 to facilitate our return to the debt levels that existed prior to the acquisition as quickly as possible. Therefore, we did not purchase treasury stock during the first six months of fiscal 2003, and $140,000 remained to be expended under the Board of Directors’ January 2000 authorization of $200,000, which expired in January of 2003. 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.
Capital expenditures were $28,235 of which $13,779 was spent in the second quarter. Depreciation expense was $18,892 and $37,973 in the quarter and six months, respectively. Amortization expense was $2,001 and $4,003 for the quarter and six months, respectively. Our goal is to keep capital expenditures at or below $70,000 in fiscal 2003.
As mentioned previously, we modified our partnership agreement with VITEX to eliminate shared research costs. We expect to fund a final $4,000 milestone payment for equity, during the third quarter, contingent on VITEX securing an additional $11,000 in equity financing, on or before September 30, 2003. As of February 1, 2003, VITEX has borrowed $2,500 against the one-year $5,000 line of credit extended to it by the Company and later in the month of February borrowed the remaining $2,500 available under the line of credit.
On March 4, 2003, we acquired the assets, primarily manufacturing equipment and intellectual property, of Whatman Hemasure Inc., a wholly owned subsidiary of Whatman plc (“the seller”) for a purchase price of $5,950. In addition, the agreement contains a non-compete agreement for a period of 7½ years, which precludes the seller from engaging in the blood filter business during that time.
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 February 1, 2003 contains reserves of approximately $16,400,000, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
| | (a) | The Annual Meeting of Shareholders of the Company was held on November 20, 2002. |
| | | |
| | (b) | Not required. Proxies for the meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. There was no solicitation in opposition to management’s director nominees as listed in the proxy statement and all of management’s nominees were elected. |
| | | |
| | (c) | The matters voted upon and the results of the voting were as follows: |
Holders of 107,527,088 shares of common stock voted either in person or by proxy for the election of four directors. The number of votes cast for each nominee were as indicated below:
| | Director | | Total vote for
each director | | Total vote
withheld
each director | |
| |
| |
| |
| |
| | Abraham Appel | | | 103,227,123 | | | 4,299,965 | |
| | Ulric Haynes, Jr. | | | 105,457,995 | | | 2,069,093 | |
| | Jeremy Hayward-Surry | | | 105,053,144 | | | 2,473,944 | |
| | Edwin W. Martin, Jr. | | | 105,458,018 | | | 2,069,070 | |
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 February 1, 2003. |
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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 |
| | |
| March 18, 2003 | /s/ JOHN ADAMOVICH, JR |
| | John Adamovich, Jr |
| | Chief Financial Officer |
| | and Treasurer |
| | |
| March 18, 2003 | /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. |
| March 18, 2003 | |
| | /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. |
| | | | | | |
| March 18, 2003 | |
| | /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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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE