Aerospace sales grew 13½%, reflecting strong Military sales, with all geographies contributing to this gain. The growth in Military sales reflects replenishment of post-war inventories and peacekeeping initiatives as well as expanding military budgets. Commercial sales increased 7% reflecting strong growth in the Marine Water portion of this business (in Europe), while the Aerospace portion of the business was flat as it is still suffering from lower air traffic. By geography, Commercial sales increased in Europe, while sales in the Western Hemisphere and Asia were down. Military sales comprised approximately 50% of total Aerospace sales in the quarter compared with 48% last year. The windfall sales in fiscal year 2003 related to the Iraqi conflict are not likely to repeat this fiscal year and as such, we expect a low single-digit decline in Aerospace sales in fiscal 2004.
Microelectronics sales grew 2½% as compared with last year driven by strong growth in Asia. Sales in the Western Hemisphere and Europe were down. The recovery in this market continues slowly and based on the activity we have seen so far this fiscal year, the business should continue to pick up. We, therefore, expect a mid-single digit increase in sales in fiscal 2004.
The consolidated operating profit as a percentage of sales for the quarter increased to 14.4% from 13.2% last year.
In Life Sciences, overall operating profit improved to 16.4% from 14.9% reflecting improvements in both Medical and Bio Pharmaceuticals operating profit margins.
Within Life Sciences, Medical operating profit improved to 9.9% from 7.8% last year, while operating profit dollars increased by $2,451 or 54%. The improvements in operating profit reflect manufacturing-based cost reduction programs and synergies realized as a result of the reorganization of the critical care and blood businesses (refer to the Restructuring and Other Charges note accompanying the condensed consolidated financial statements for discussion of actions taken in fiscal 2003). Operating profit in BioPharmaceuticals increased to 21.9% from 20.5% last year. Operating profit dollars increased $2,803, or 18½%. The increase in operating profit and margin was primarily related to the increase in sales, particularly high margin Specialty Materials sales in the quarter. Overall we expect BioPharmaceuticals margins to fluctuate within a range of 20% – 25% based on the sales mix.
Overall operating profit margins in Industrial improved to 13% from 12.1% last year. General Industrial operating profit improved slightly to 9.3% from 8.6% last year, while operating profit dollars increased by $2,000 or 18½%. Aerospace operating profit improved to 26.1% from 23%, while operating profit dollars grew $2,885 or 34%, primarily attributable to strong Military sales. Microelectronics operating profit declined to 11.9% from 13.1% last year due to product mix and R&D costs. Operating profit dollars were $4,747 on par with the first quarter of last year.
The table below presents sales to unaffiliated customers by geography including the effect of exchange rates for comparative purposes.
By geography, sales in the Western Hemisphere increased 2%. Exchange rates increased sales by $973, primarily related to the strengthening of the Argentine and Canadian currencies, resulting in reported sales growth of 3%. Operating profit improved to 11.4% of sales from 11.2% last year. Operating profit dollars increased $793, or 4%. 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 3½% compared with last year. The strengthening of European currencies added $19,834 in sales, resulting in reported sales growth of 18½%. Operating profit improved to 12.5% from 11.6% last year, also reflecting the segment operating margin improvements cited above. Operating profit dollars increased $5,046, or 28½%.
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Sales in Asia increased 15%. The strengthening of Asian currencies added $4,491 in sales, resulting in reported sales growth of 23%. The increase in sales resulted from strong growth in General Industrial and Microelectronics sales as cited above. In addition, sales have been favorably impacted by a shift from the way FSG recorded sales through their manufacturing sites to the way Pall records sales through local sales companies. This shift resulted in sales being recorded in Asia that would have been recorded in the Western Hemisphere and Europe under the FSG methodology. Operating profit increased to 14.3% from 10.8% last year, reflecting the segment operating profit improvements cited above as well as strong sales growth. Operating profit dollars increased $4,049, or 62½%.
General corporate expenses increased $3,666 compared with last year, reflecting consulting related to CORE cost reduction programs and Sarbanes-Oxley compliance initiatives.
Liquidity and Capital Resources
Net cash provided by operating activities for the first quarter of fiscal 2004 was $31,542, a decrease of $3,225 as compared with the first quarter of fiscal 2003. The decrease in cash flow reflects changes in working capital items such as accounts receivable, inventory and accrued liabilities partly offset by cash generated from increased earnings.
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 October 31, 2003 to those at August 2, 2003, the European currencies and the Yen have strengthened against the U.S. dollar.
Working capital was approximately $558,200, a ratio of 2.5 at October 31, 2003 as compared with $516,900, a ratio of 2.2 at year-end fiscal 2003. Accounts receivable days sales outstanding were 93 days, as compared with 83 days at year-end fiscal 2003. Inventory turns of 2.9 remain unchanged from fiscal year-end 2003. The effect of foreign exchange increased inventory, accounts receivable and other current assets by $8,121, $12,645 and $1,200, respectively, as compared with year-end fiscal 2003. Additionally, foreign exchange increased accounts payable and other current liabilities by $6,757 and income taxes payable by $1,166.
When operating the business day-to-day, excluding acquisitions but including funding capital expenditures and buying back common stock, our current intention 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 approximately $13,900 compared with year-end fiscal 2003. The impact of foreign exchange rates accounted for $2,500 of the reduction, while the fair value adjustment on our fixed to variable interest rate swaps carried as part of debt increased debt by approximately $8,600. As such, the actual cash reduction in our net debt was $20,000 in the first quarter of fiscal 2004. Overall, net debt, as a percentage of total capitalization, was 28.4% as compared with 30.2% at year-end fiscal 2003. Total gross debt decreased approximately $2,600 or about 1% as compared with year-end fiscal 2003. Our goal for fiscal 2004 is to reduce net debt by $75,000.
Proceeds from stock plans were $10,073 in the quarter. Capital expenditures were $10,521 in the quarter. Depreciation and amortization expense were $19,490 and $2,067, respectively. Our goal is to keep capital expenditures below $70,000 in fiscal 2004. Also, depreciation and amortization expense are expected to be approximately $82,000 and $7,000, respectively in fiscal 2004.
We own 6,400 of V.I. Technologies, Inc. (“VITEX”) shares at an adjusted cost basis (original cost less any impairment losses previously recorded) of $1.27 per share, or $8,101. Our investment in VITEX has been recorded at the October 31, 2003 fair market value of $2.09 per share, or $13,376 in the accompanying Condensed Consolidated Balance Sheet. For more detail regarding our investment in VITEX, refer to the Other Non-Current Assets note accompanying the consolidated financial statements.
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 prior to its expiration in 2005.
Recently Issued Accounting Pronouncements
Financial Accounting Standards Board (“FASB”) Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN No. 46”), was issued in January 2003. FIN No. 46 requires that if an entity is the primary beneficiary of a variable interest entity, the assets, liabilities and results of operations of the variable interest entity should be included in the Consolidated Financial Statements of the entity. The provisions of FIN No. 46 are effective immediately for all arrangements entered into after January 31, 2003. For those arrangements entered into prior to February 1, 2003, the provisions of FIN No. 46 were required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. However, in October 2003, the FASB deferred the effective date of FIN No. 46 to the end of the interim or annual period ending after December 15, 2003 for those arrangements entered into prior to February 1, 2003. The Company is in the process of assessing the effect of FIN No. 46 and does not expect its adoption to have a material effect on the Company’s results of operations, cash flows or financial position.
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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 were no changes in the Company’s internal control over financial reporting during the Company’s fiscal first quarter ended October 31, 2003 or in other factors that could significantly affect the Company’s internal control over financial reporting.
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. Following an evidentiary hearing 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. In correspondence dated June 5, 2001, the State asserted 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. Those data have been submitted to the Court, but no ruling has been issued. 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 Company’s balance sheet at October 31, 2003 contains environmental reserves of approximately $13,166,926, 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
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| | | See the index to exhibits for a list of exhibits filed herewith. |
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| | | On August 21, 2003 the Company filed Form 8-K under Item 8. Change in fiscal year. |
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| | | On September 8, 2003 the Company filed Form 8-K under Item 12. Results of Operations and Financial Condition. A press release announcing operating results and financial condition for the fourth quarter and fiscal year ended August 2, 2003 was furnished as exhibit 99.1. |
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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 15, 2003 | /s/ | JOHN ADAMOVICH, JR |
| | | John Adamovich, Jr
Chief Financial Officer
and Treasurer |
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| | | |
| December 15, 2003 | /s/ | LISA MCDERMOTT |
| | | Lisa McDermott
Chief Accountant |
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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. |
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| 3(ii)* | By-Laws of the Registrant as amended on July 15, 2003, filed as exhibit 3(ii) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended August 2, 2003. |
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| 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. |
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| 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. |
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| 31.1† | Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
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| 31.2† | Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
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| 32.1† | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
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| 32.2† | Certification of Chief Financial Officer 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 Securities Exchange Act of 1934
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934