Overall operating profit margins in Industrial declined to 16.3% from 17.9% and to 14.5% from 15.2% in the quarter and nine months, respectively. General Industrial operating profit improved to 14% from 13.1% last year, while operating profit dollars increased by $4,625 or 23½%. For the nine months operating profit was 10.7%, on par with last year. Operating profit dollars increased by $5,911 or 13% reflecting the increase in sales. Aerospace operating profit declined to 20.3% from 32%, while operating profit dollars decreased $7,713 or 47%, reflecting lower military sales in the quarter as discussed above. For the nine months, operating profit declined to 23.8% from 28% last year, while operating profit dollars decreased by $6,915 or 18½%. Microelectronics operating profit increased to 20.4% from 18% last year, while operating profit dollars increased $3,886, or 50%. For the nine months operating profit increased to 18.3% from 16.4% last year, while operating profit dollars grew $7,027, or 35½%. The increase in Microelectronics operating profit margin and dollars for the quarter and nine months reflects the strong growth in sales as discussed above.
The tables below present sales for the quarter and nine months to unaffiliated customers by geography including the effect of exchange rates for comparative purposes.
By geography, sales in the Western Hemisphere increased 4% and 3½% for the quarter and nine months, respectively. Exchange rates increased sales by $616 and $2,852, primarily related to the strengthening of the Canadian Dollar, resulting in reported sales growth of 4½% and 4% in the quarter and nine months, respectively. Operating profit in the quarter was 15.3% of sales as compared with 15.4% last year. Operating profit dollars increased $1,966, or 6% reflecting the increase in sales. For the nine-month period, operating profit margin declined to 13% of sales from 13.3% last year reflecting a change in product mix. Operating profit dollars were up $2,033 or 2½% for the nine months.
In Europe, sales declined 4½% and 3½% in the quarter and nine months, respectively, compared with last year. The decline in sales reflects the impact of the non-recurring Aerospace sales related to the Iraqi conflict, which were recorded in fiscal 2003. The strengthening of European currencies added $21,814 and $67,141 in sales resulting in reported sales growth of 7½% and 10½% in the quarter and nine months, respectively. Operating profit in the quarter declined to 16.2% from 18.3% last year, while operating profit dollars declined $1,479, or 4%. For the nine-month period, operating profit declined to 13.8% from 15.5%, while operating profit dollars decreased $1,060, or 1½%. The decrease in operating profit in the quarter and nine months primarily reflects a shift in product mix and the decline in Aerospace sales.
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Sales in Asia increased 18½% and 16½% in the quarter and nine months, respectively. The strengthening of Asian currencies added $7,268 and $20,112 in sales, resulting in reported sales growth of 27½% and 26% in the quarter and nine months, respectively. The increase in sales resulted from strong growth in BioPharmaceuticals, 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 U.S. and European 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 18.4% from 17.4% last year, reflecting the strong sales growth as discussed above. Operating profit dollars increased $4,836, or 35%. For the nine-month period operating profit improved to 17.3% from 14.9%, while operating profit dollars increased $14,678, or 46½%.
Liquidity and Capital Resources
Net cash provided by operating activities for the first nine months of fiscal 2004 was $123,896, a decrease of $9,721 as compared with the first nine months of fiscal 2003. The decrease in cash flow reflects changes in working capital items such as accounts receivable, income tax payable and accrued liabilities partly offset by cash generated from increased earnings.
Free cash flow, which is defined as net cash provided by operating activities less capital expenditures, was $84,083 for the nine months ended April 30, 2004, as compared with $94,314 for the nine months ended May 3, 2003. The decrease in free cash flow reflects the factors mentioned above as well as a slightly higher level of capital expenditures. For the full year fiscal 2004, we expect free cash flow to approximate $180,000, compared to $168,421 in fiscal 2003, reflecting the expected increase in earnings. We believe this measure is important because it is a key element of our planning. We utilize free cash flow, which is a non-GAAP measure, as one way to measure our current and future financial performance. The following table reconciles free cash flow to net cash provided by operating activities:
| | | Nine Months Ended
Apr. 30, 2004 | | Nine Months Ended
May 3, 2003 | | Estimated
Fiscal Year
2004 | | Fiscal Year
2003 | |
| | |
|
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|
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|
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|
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| Net cash provided by operating activities | | $ | 123,896 | | $ | 133,617 | | $ | 250,000 | (a) | $ | 230,591 | |
| Less: capital expenditures | | | 39,813 | | | 39,303 | | | 70,000 | | | 62,170 | |
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| |
|
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|
| |
| Free cash flow | | $ | 84,083 | | $ | 94,314 | | $ | 180,000 | | $ | 168,421 | |
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(a) Estimated net cash provided by operating activities for fiscal year 2004 is based on the mid-point of the earnings per share estimate provided above.
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 April 30, 2004 to those at August 2, 2003, the European currencies and the Yen have strengthened against the U.S. dollar.
Working capital was approximately $632,700, a ratio of 2.6 at April 30, 2004 as compared with $516,900, a ratio of 2.2 at year-end fiscal 2003. Accounts receivable days sales outstanding were 81 days, as compared with 83 days at year-end fiscal 2003. Inventory turns were 3.0 as compared to 2.9 at fiscal year-end 2003. The effect of foreign exchange increased inventory, accounts receivable and other current assets by $11,829, $18,851 and $2,092, respectively, as compared with year-end fiscal 2003. Additionally, foreign exchange increased accounts payable and other current liabilities by $10,410 and income taxes payable by $555.
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 $41,900 compared with year-end fiscal 2003. The impact of foreign exchange rates accounted for $6,800 of the reduction, while the fair value adjustment on our fixed to variable interest rate swaps carried as part of debt increased net debt by approximately $4,300. As such, the actual cash reduction in our net debt was $39,400 in the first nine months of fiscal 2004. Overall, net debt, as a percentage of total capitalization, was 26% as compared with 30.2% at year-end fiscal 2003. Total gross debt increased approximately $900 as compared with year-end fiscal 2003. Foreign exchange rates increased gross debt by $2,000, while the fair value adjustment on our fixed to variable interest rate swaps carried as part of debt increased gross debt by approximately $4,300. As such, the actual cash reduction in our gross debt was approximately $5,400 in the first nine months of fiscal 2004.
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Proceeds from stock plans were $9,786 in the quarter and $41,616 in the nine months. Capital expenditures were $14,652 and $39,813 in the quarter and nine months, respectively. Depreciation expense in the quarter and nine months was $20,340 and $59,996, respectively. Amortization expense in the quarter and nine months was $2,437 and $6,570, respectively. Our goal is to keep capital expenditures below $70,000 in fiscal 2004. Also, depreciation and amortization expense are expected to be approximately $90,000 in fiscal 2004.
On October 17, 2003, our Board of Directors authorized the expenditure of up to $200,000 to repurchase shares of our common stock. During the third quarter of fiscal 2004, we repurchased stock of $45,000. For the nine months, we paid dividends of $33,845 and for the full year we expect to pay dividends of about $45,000.
At April 30, 2004, we owned 6,175 shares of V.I. Technologies, Inc. (“VITEX”) at an adjusted cost basis (original cost less any impairment losses previously recorded) of $1.27 per share, or $7,815. Our investment in VITEX has been recorded at the April 30, 2004 fair market value of $1.14 per share, or $7,039 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 condensed consolidated financial statements.
We consider our existing lines of credit, along with the cash generated from operations, to be sufficient for both short term and long term growth. It is management’s intention to refinance any unpaid amounts under the company’s unsecured senior revolving credit facility prior to its expiration in 2005. At April 30, 2004, $134,000 is available under this credit facility.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the period from the end of the Company’s fiscal 2003 (August 2, 2003) to the end of the Company’s third fiscal quarter (April 30, 2004), there was no material change in the market risk information previously reported in Item 7A of the Company’s Annual Report on form 10-K for its fiscal year ended August 2, 2003.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, 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–15(e) 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 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
There were no changes in the Company’s internal control over financial reporting during the Company’s third quarter ended April 30, 2004, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
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PART II. OTHER INFORMATION
(In thousands, except per share data)
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 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 February 2004, the Court instructed the Company to submit its Final Feasibility Study describing how it intends to address an area of groundwater contamination not addressed by the previously approved plan. The Company has submitted its Feasibility Study as instructed. 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 $142 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. On August 9, 2001, the State made a written demand for reimbursement of $227 it has allegedly incurred for groundwater monitoring. Gelman considers this claim barred by the consent judgment.
On May 12, 2004, the City of Ann Arbor filed a lawsuit against Gelman Sciences Inc. d/b/a Pall Life Sciences in Washtenaw County Circuit Court. The City’s suit seeks damages, including the cost of replacing a municipal water supply well allegedly affected by the 1,4-dioxane groundwater contamination, as well as injunctive relief in the form of an order requiring Pall Life Sciences to remediate the soil and groundwater beneath the City. The contaminant levels allegedly detected in the municipal well at issue, however, are well below applicable cleanup standards and the Company will vigorously defend against the claim.
The Company’s balance sheet at April 30, 2004 contains environmental liabilities of $22,057, which relates mainly to the aforementioned cleanup. In the opinion of management, the Company is in substantial compliance with applicable environmental laws and its accruals for environmental remediation are adequate at this time.
Reference is also made to the Contingencies and Commitments note in the notes accompanying the condensed consolidated financial statements.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES.
| Period | | Total Number of Shares
Purchased | | Average Price
Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | |
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February 1, 2004 to
February 28, 2004 | | | 339 | | $ | 26.54 | | | 339 | | $ | 191,004 | |
February 29, 2004 to
March 27, 2004 | | | 1,321 | | $ | 23.46 | | | 1,321 | | $ | 160,009 | |
March 28, 2004 to
April 30, 2004 | | | 218 | | $ | 23.03 | | | 218 | | $ | 155,000 | |
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| Total | | | 1,878 | | $ | 23.97 | | | 1,878 | | | | |
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(1) In October 2003, the Company’s Board of Directors authorized and announced the expenditure of up to $200,000 to repurchase shares of the Company’s common stock. The Company’s shares may be purchased over time, as market and business conditions warrant. There is no time restriction on this authorization. During the third quarter of fiscal 2004, we purchased 1,878 shares in open-market transactions at an aggregate cost of $45,000 with an average price per share of $23.97. Therefore, $155,000 remains to be expended under the current stock repurchase program. The Company did not purchase treasury stock during the first six months of fiscal 2004. Repurchased shares are held in treasury for use in connection with the Company’s stock plans and for general corporate purposes.
During the three and nine month periods ended April 30, 2004, 550 and 2,223 shares, net of shares traded in, were issued for the Company’s stock plans. At April 30, 2004, the Company held 2,940 treasury shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
| | | See the index to exhibits for a list of exhibits filed herewith or incorporated by reference herein. |
| | | On March 4, 2004, 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 second quarter ended January 31, 2004 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 |
| | | |
| June 14, 2004 | /s/ | JOHN ADAMOVICH, JR. |
| | | John Adamovich, Jr. |
| | | Chief Financial Officer |
| | | and Treasurer |
| | | |
| June 14, 2004 | /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. |
| | | |
| 3(ii)* | | By-Laws of the Registrant as amended through 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. |
| | | |
| 10‡† | | Employment agreement dated January 21, 2004 between the Registrant and Eric Krasnoff. |
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| 31.1† | | Certification of Chief Executive Officer furnished pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 31.2† | | Certification of Chief Financial Officer furnished pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 32.1† | | Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
| | | |
| 32.2† | | Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
* Incorporated herein by reference.
† Exhibits filed herewith.
‡ Management contract or compensatory plan or arrangement.
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