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 July 31, 2005 to those at July 31, 2004, the Euro has strengthened against the U.S. dollar, while the British Pound and the Japanese Yen have weakened against the U.S. dollar.
Working capital was approximately $703,300, a ratio of 2.5 at July 31, 2005 as compared with $629,300, a ratio of 2.3 at July 31, 2004. Accounts receivable days sales outstanding were 84 days, as compared to 81 days in fiscal year 2004. Inventory turns, for the four quarters ended July 31, 2005, were 2.9 as compared to 3.1 at July 31, 2004. The effect of foreign exchange increased net inventory and net accounts receivable by $25 and $3,894, respectively, and decreased other current assets by $384, as compared with year-end fiscal 2004. Additionally, foreign exchange increased accounts payable and other current liabilities by $998. Overall, net debt (debt net of cash and cash equivalents), as a percentage of total capitalization (net debt plus equity), was 24.5%. Net debt increased by approximately $30,000 compared with year-end fiscal 2004. The impact of capital leases increased net debt by $9,900, while the impact of foreign exchange rates (primarily on cash) reduced net debt by $2,600 and the fair value adjustment and the termination of our fixed to variable interest rate swaps carried as part of debt decreased net debt by approximately $2,200. As such, the actual cash increase in our net debt was approximately $24,900 in fiscal year 2005. Total gross debt decreased approximately $12,400 as compared with year-end fiscal 2004. The impact of capital leases increased gross debt by $9,900, while the fair value adjustment and the termination of our fixed to variable interest rate swaps carried as part of debt reduced gross debt by approximately $2,200. As such, the actual cash decrease in our gross debt was approximately $20,100 in fiscal year 2005.
Proceeds from stock plans were $62,490 in fiscal year 2005. Capital expenditures were $86,153 in fiscal year 2005. Depreciation and Amortization expense were $83,956 and $6,965, respectively. In fiscal year 2006, capital expenditures are expected to be slightly above the fiscal year 2005 level, while depreciation and amortization expense are expected to total approximately $93,000.
On October 17, 2003, our Board of Directors authorized the expenditure of up to $200,000 to repurchase shares of our common stock. Furthermore, on October 14, 2004, our Board of Directors authorized an additional expenditure of another $200,000 to repurchase shares. During fiscal year 2004 and fiscal year 2005, we repurchased stock of $75,000 and $64,246, respectively. This leaves $260,754 remaining of the $400,000 the Board of Directors authorized for share repurchases at July 31, 2005. In fiscal year 2005, we paid dividends of $47,075. We increased our quarterly dividend to $0.10 per share from the previous level of $0.09 effective as of January 20, 2005. We expect to pay dividends of about $49,600 for the full fiscal year 2006.
At July 31, 2005, we owned 617.5 shares of the common stock of VITEX at an adjusted cost basis of $8.00 per share (original cost less any impairment losses previously recorded). Our shares and cost basis reflect the effect of a 1 for 10 reverse stock split on March 15, 2005. Our investment in VITEX has been recorded at the July 31, 2005 fair market value of $3.09 per share, or $1,908 in the accompanying consolidated balance sheet. During the first quarter of fiscal year 2005, we recorded an impairment charge of $2,875 related to our investment in VITEX as its decline in fair market value was deemed to be other-than-temporary. In August 2005, we sold all of our 617.5 shares for proceeds aggregating $6,783. The resulting gain of $1,806, net of fees and commissions, will be recognized in the first quarter of fiscal year 2006. For more detail regarding our investment in VITEX, refer to the Other Non-Current Assets note accompanying the consolidated financial statements.
On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act provides for a special one-time tax deduction of 85% of certain foreign earnings that are repatriated, as defined in the Act. As of July 31, 2005, we have not provided deferred taxes on $1,036,983 of undistributed foreign subsidiaries’ earnings since substantially all such earnings were expected to be permanently invested in foreign operations. The range of reasonably possible amounts, based upon law, that are being considered for repatriation due to the aforementioned provision is between zero and $500,000. The related potential range of income tax is between zero and $26,250. The extent to which we ultimately take advantage of this provision depends on a number of factors, including the manner in which funds will be utilized and the ability to obtain financing abroad.
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.
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The following is a summary of our contractual commitments as of July 31, 2005:
| | | | Year Ended | | | | | | | |
| | | | 2006 | | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | Thereafter | | | Total | |
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| Long-term debt | | $ | 1,359 | | $ | 28,627 | | $ | 1,408 | | $ | 1,475 | | $ | 191,547 | | $ | 287,104 | | $ | 511,520 | |
| Operating leases | | | 23,281 | | | 15,021 | | | 8,988 | | | 5,901 | | | 3,297 | | | 7,083 | | | 63,571 | |
| Purchase commitments | | | 75,602 | | | 15,747 | | | 9,902 | | | 6,452 | | | 119 | | | — | | | 107,822 | |
| Employment contracts | | | 6,737 | | | 4,166 | | | — | | | — | | | — | | | — | | | 10,903 | |
| Other commitments | | | 1,026 | | | 489 | | | 327 | | | 80 | | | 35 | | | 60 | | | 2,017 | |
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| Total commitments | | $ | 108,005 | | $ | 64,050 | | $ | 20,625 | | $ | 13,908 | | $ | 194,998 | | $ | 294,247 | | $ | 695,833 | |
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Recently Issued Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 (“SFAS No. 151”). SFAS No. 151 amends guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight handling costs and wasted material requiring that such items be recognized as current-period charges. In addition, SFAS No. 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will become effective for fiscal years beginning after June 15, 2005. We do not believe adoption of SFAS No. 151 will have a material impact on our consolidated financial statements.
On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act provides for a special one-time tax deduction of 85% of certain foreign earnings that are repatriated, as defined in the Act. In December 2004, the FASB issued FASB Staff Position No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (“FSP FAS 109-2”). FSP FAS 109-2 allows companies additional time to evaluate the effect of the Act as to whether unrepatriated foreign earnings continue to qualify for the SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”) exception regarding non-recognition of deferred tax liabilities and requires explanatory disclosures from those who need the additional time. As of July 31, 2005, we have not provided deferred taxes on the undistributed earnings of foreign subsidiaries since substantially all such earnings were expected to be permanently invested in foreign operations. The extent to which we will ultimately take advantage of this provision depends on a number of factors, including the manner in which the funds will be utilized and the ability to obtain financing abroad. The range of reasonably possible amounts, based upon the law, that are being considered for repatriation due to the aforementioned provision is between zero and $500,000. The related potential range of income tax is between zero and $26,250.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (“FSP FAS 109-1”). FSP FAS 109-1 clarifies that the qualified production activities deduction should be treated as a special deduction as described in SFAS No. 109. The impact of the deduction will be reported in the period in which the deduction is claimed. We are in the process of assessing the effect of FSP FAS 109-1 on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29 (“SFAS No. 153”). SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchange transactions in fiscal periods beginning after June 15, 2005. We do not believe adoption of SFAS No. 153 will have a material impact on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123, Share-Based Payment (“SFAS No. 123(R)”), which supercedes SFAS No. 123 and APB No. 25. SFAS No. 123(R) addresses the accounting for shared-based payment transactions (excluding employee stock-ownership plans) in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123(R) requires the company to recognize the grant-date fair-value of equity-based compensation issued to employees in the income statement. SFAS No. 123(R) eliminates a company’s ability to account for share-based compensation transactions using the intrinsic value method of accounting in APB No. 25, which had been permitted in SFAS No. 123 as originally issued. SFAS No. 123(R) will become effective for fiscal years beginning after June 15, 2005. Additionally, in March 2005, the Securities and Exchange Commission Staff issued Staff Accounting Bulletin No.
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107, Share-Based Payment (“SAB No. 107”), which provided additional guidance on certain implementation issues with respect to SFAS No. 123(R). We are currently finalizing our assessment of the impact adoption of SFAS No. 123(R) will have; however, had we adopted SFAS No. 123(R) in prior periods, we believe that the impact of that standard would have approximated the impact of SFAS No. 123 as previously disclosed under the requirements of SFAS No. 123 and SFAS No. 148 in the footnotes to our consolidated financial statements.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS No. 154”), which will require entities that voluntarily make a change in accounting principle to apply that change retrospectively to prior periods’ financial statements, unless this would be impracticable. SFAS No. 154 supersedes Accounting Principles Board Opinion No. 20, Accounting Changes (“APB No. 20”), which previously required that most voluntary changes in accounting principle be recognized by including in the current period’s net income the cumulative effect of changing to the new accounting principle. SFAS No. 154 also makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error. Another significant change in practice under SFAS No. 154 will be that if an entity changes its method of depreciation, amortization, or depletion for long-lived, non-financial assets, the change must be accounted for as a change in accounting estimate. Under APB No. 20, such a change would have been reported as a change in accounting principle. SFAS No. 154 applies to accounting changes and error corrections that are made in fiscal years beginning after December 15, 2005.
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. 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. We estimate that foreign exchange translation added 4 cents to earnings per share in fiscal year 2005.
Most of our products are manufactured in the U.S., including Puerto Rico, Germany 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, the Pound or the Euro thus causing an increase of the product cost to the buying subsidiary, which adversely affects the Company’s consolidated gross margin and net earnings. 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. In fiscal year 2005, the Euro, the Pound and the Yen appreciated by approximately 6%, 4½% and 2½%, respectively, against the U.S. dollar compared with the average exchange rates in effect in fiscal year 2004. Additionally, the Euro appreciated against the Pound by approximately 1%. Due to the difficulty in estimating the economic effect of foreign currency rates, particularly in periods of high volatility of such rates, we do not provide such estimated effects and report only the translation effect to earnings per share disclosed above.
We are also exposed to transaction risk from adverse changes in exchange rates. These short-term transaction exposures are primarily Yen, Euro, Pound, Singapore dollar and Australian dollar 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 as well as the expeditious payment of balances. 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 July 31, 2005, these exposures amounted to approximately $44,529 and were offset by forwards with a notional principal amount of $36,874. If a hypothetical 10% simultaneous adverse change had occurred in exchange rates, net earnings would have decreased by approximately $1,199, or approximately 1 cent per share.
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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 both fixed and variable rate borrowings. We manage the composition of the portfolio, and concurrently interest rate exposure by employing interest rate swaps. Giving effect to interest rate swaps, the Company’s debt portfolio was approximately 40% variable rate at July 31, 2005, down from approximately 60% variable rate at July 31, 2004. The impetus for this change was management’s reevaluation and reassessment of the interest rate environment which led to the early termination of pay variable-receive fixed interest rate swaps, with an aggregate notional amount of $230,000 related to the $280,000 6% private placement senior notes due in 2012. As of July 31, 2005, we had cash flow interest rate swaps (i.e., variable to fixed rate swaps) with notional amounts aggregating $51,726 outstanding. The fair value of our interest rate swaps at July 31, 2005 was a liability of $11. The cash flows on the above mentioned interest rate swaps mirror the cash flows of the hedged underlying debt instruments. We do not enter into interest rate swaps for trading purposes.
For the year ended July 31, 2005, interest expense, net of interest income, was $25,950. A hypothetical 10% increase in market interest rates over the actual fiscal year 2005 average rate would increase net interest expense by $409.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this item are located immediately following the signature pages of this Form 10-K. See Item 15 (a)(1) for a listing of financial statements provided.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In thousands,
except per share data) | | | First Quarter | | | Second
Quarter | | | Third
Quarter | | | Fourth
Quarter | | | Full
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| 2005: | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 414,732 | | $ | 469,473 | | $ | 493,543 | | $ | 524,536 | | $ | 1,902,284 | | |
| Gross profit | | | 199,872 | | | 224,932 | | | 244,989 | | | 253,575 | | | 923,368 | | |
| Restructuring and other charges, net (a) | | | 5,523 | | | 5,438 | | | 4,292 | | | 23,510 | | | 38,763 | | |
| Earnings before income taxes | | | 29,249 | | | 41,676 | | | 56,654 | | | 53,492 | | | 181,071 | | |
| Net earnings | | | 21,699 | | | 32,045 | | | 43,678 | | | 43,394 | | | 140,816 | | |
| Earnings per share: | | | | | | | | | | | | | | | | | |
| Basic | | | 0.17 | | | 0.26 | | | 0.35 | | | 0.35 | | | 1.13 | | |
| Diluted | | | 0.17 | | | 0.26 | | | 0.35 | | | 0.34 | | | 1.12 | | |
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| 2004: | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 374,286 | | $ | 428,085 | | $ | 463,921 | | $ | 504,455 | | $ | 1,770,747 | | |
| Gross profit | | | 180,065 | | | 206,869 | | | 230,287 | | | 254,407 | | | 871,628 | | |
| Restructuring and other charges, net (a) | | | (3,703 | ) | | 13,668 | | | 681 | | | 1,831 | | | 12,477 | | |
| Earnings before income taxes | | | 33,001 | | | 30,687 | | | 61,130 | | | 73,014 | | | 197,832 | | |
| Net earnings | | | 24,668 | | | 24,856 | | | 46,514 | | | 55,535 | | | 151,573 | | |
| Earnings per share: | | | | | | | | | | | | | | | | | |
| Basic | | | 0.20 | | | 0.20 | | | 0.37 | | | 0.44 | | | 1.21 | | |
| Diluted | | | 0.19 | | | 0.20 | | | 0.37 | | | 0.44 | | | 1.20 | | |
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| (a) | Refer to the Restructuring and Other Charges note in the notes accompanying the consolidated financial statements. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
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ITEM 9A. CONTROLS AND PROCEDURES.
DISCLOSURE CONTROLS AND PROCEDURES
For the fiscal year ended July 31, 2005 and prior to the filing date of this Form 10-K, 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 and 15d–15 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.
INTERNAL CONTROL OVER FINANCIAL REPORTING
| (a) | Management’s report on internal control over financial reporting. |
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the company’s internal control over financial reporting was effective as of July 31, 2005. Management’s assessment of the effectiveness of the company’s internal control over financial reporting as of July 31, 2005 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.
| (b) | Attestation report of the registered public accounting firm. |
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Pall Corporation:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Pall Corporation and subsidiaries maintained effective internal control over financial reporting as of July 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Pall Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such
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other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Pall Corporation maintained effective internal control over financial reporting as of July 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Pall Corporation maintained, in all material respects, effective internal control over financial reporting as of July 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Pall Corporation and subsidiaries as of July 31, 2005 and 2004, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the years in the three-year period ended July 31, 2005, and our report dated October 12, 2005 expressed an unqualified opinion on those consolidated financial statements.
Melville, New York
October 12, 2005
| (c) | Changes in internal control over financial reporting. |
There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal fourth quarter ended July 31, 2005, 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.
ITEM 9B. OTHER INFORMATION.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Identification of directors:
Information required by this item is included in the Proxy Statement under the captions Proposal 1 - “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated by reference in this report.
(b) Identification of executive officers:
Information regarding executive officers is contained in Part I, Item 4 of this report, pursuant to General Instruction G of this form.
* * *
The Company has adopted a code of ethics applicable to its Chief Executive Officer, Chief Financial Officer, Controller and other employees with important roles in the financial reporting process, which code was adopted by the Audit Committee of the Board of Directors during its meeting in July 2003, in accordance with the requirements of the Sarbanes Oxley Act of 2002. The code of ethics has been filed as an exhibit to this report and is also available on the Company’s website located at www.pall.com/policies. In addition, the Company will provide to any person, without charge, upon request, a copy of the code of ethics, by addressing your request in writing to the Corporate Compliance and Ethics Officer, Pall Corporation, 2200 Northern Boulevard, East Hills, New York 11548.
The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on the website specified above.
The board of directors has an audit committee, a compensation committee, an executive committee, a nominating committee and a planning and governance committee. The board of directors has adopted a written charter for each of these committees and a corporate governance policy. In addition, the Company has codes of conduct that apply to every employee and its directors. The charters, corporate governance policy and codes of conduct are available on the Company’s website located at www.pall.com or by sending your request in writing to the Corporate Secretary, Pall Corporation, 2200 Northern Boulevard, East Hills, New York 11548.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included in the Proxy Statement under the caption “Compensation and Other Benefits of Senior Management,” and is incorporated by reference in this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this item is included in the Proxy Statement under the captions “Beneficial Ownership of Common Stock and Restricted Stock Units” and “Equity Compensation Plan Information,” and is incorporated by reference in this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included in the Proxy Statement under the captions Proposal 1 - “Election of Directors” and “Indebtedness of Executive Officers and Directors under Stock Option Plans” and is incorporated by reference in this report.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item is included in the Proxy Statement under the caption “Information Concerning Independent Auditors—Disclosure about Fees,” and is incorporated by reference in this report.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Documents filed as part of the Form 10-K:
| (1) | The following items are filed as part of this report: |
| | | Report of Independent Registered Public Accounting Firm |
| | | Consolidated Balance Sheets – July 31, 2005 and July 31, 2004 |
| | | Consolidated Statements of Earnings - years ended July 31, 2005, July 31, 2004 and August 2, 2003 |
| | | Consolidated Statements of Stockholders’ Equity - years ended July 31, 2005, July 31, 2004 and August 2, 2003 |
| | | Consolidated Statements of Cash Flows - years ended July 31, 2005, July 31, 2004 and August 2, 2003 |
| | | Notes to consolidated financial statements |
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| (2) | The following financial statement schedule is filed as part of this report: |
| | | Schedule II – Valuation and Qualifying Accounts |
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| All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or in the notes thereto. |
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| (3) | Exhibits: |
| | | The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this report. |
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| | Exhibit Index |
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Exhibit
Number | Description of Exhibit |
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| 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 through April 13, 2005, filed as exhibit 3(ii) to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2005. |
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| 4(i)* | 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, relating to the Registrant’s 6% Senior Notes due August 1, 2012 filed as Exhibit 4(iii) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended August 3, 2002. |
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| 4(ii)† | Credit Agreement dated July 29, 2005, between Pall Corporation and JPMorgan Chase Bank and the Other Lenders Party Thereto. |
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| | 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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| Exhibit | |
| Number | Description of Exhibit |
| | |
| 10.1*‡ | Employment Agreement dated January 21, 2004, as amended and restated effective July 20, 2005, between the Registrant and Eric Krasnoff, filed as Exhibit 10.5 to the Registrant’s Form 8-K filed on July 25, 2005. |
| | |
| 10.2*‡ | Employment Agreement dated May 1, 2003 between the Registrant and Marcus Wilson, filed as Exhibit 10.2 to the 2003 10-K. |
| | |
| 10.3*‡ | Amendment dated August 20, 2005 to Employment Agreement dated May 1, 2003 between the Registrant and Marcus Wilson, filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on September 2, 2005. |
| | |
| 10.4*‡ | 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. |
| | |
| 10.5*‡ | 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 May 1, 2003 between the Registrant and Andrew Denver, filed as Exhibit 10.7 to the 2003 10-K. |
| | |
| 10.7*‡ | Employment Agreement dated June 6, 2003 between the Registrant and Roberto Perez, filed as Exhibit 10.10 to the 2003 10-K. |
| | |
| 10.8*‡ | Employment Agreement dated August 1, 2004 between the Registrant and James R. Western, Jr., filed as Exhibit 10.11 to the 2004 10-K. |
| | |
| 10.9*‡ | 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. |
| | |
| 10.10*‡ | 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. |
| | |
| 10.11†‡ | Employment Agreement dated June 1, 2004 between the Registrant and Lisa McDermott. |
| | |
| 10.12*‡ | Pall Corporation Supplementary Profit-Sharing Plan as amended effective July 19, 2005, filed as Exhibit 10.3 to the Registrant’s Form 8-K filed on July 25, 2005. |
| | |
| 10.13*‡ | Pall Corporation Profit-Sharing Plan as amended and restated as of July 1, 1998, filed as Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended August 3, 2002. |
| | |
| 10.14*‡ | Pall Corporation Profit-Sharing Plan amended pursuant to provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, filed as Exhibit 10.17 to the 2003 10-K. |
| | |
| 10.15*‡ | Pall Corporation Supplementary Pension Plan as amended effective July 19, 2005, filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on September 2, 2005. |
| | |
| 10.16*‡ | Pall Corporation 2004 Executive Incentive Bonus Plan, as amended effective July 19, 2005, filed as Exhibit 10.2 to the Registrant’s Form 8-K filed on July 25, 2005. |
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| Exhibit | |
| Number | Description of Exhibit |
| | |
| 10.17*‡ | 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. |
| | |
| 10.18*‡ | 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. |
| | |
| 10.19*‡ | 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. |
| | |
| 10.20*‡ | 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. |
| | |
| 10.21*‡ | Pall Corporation 2005 Stock Compensation Plan, as amended effective July 19, 2005, filed as Exhibit 10.3 to the Registrant’s Form 8-K filed on July 25, 2005. |
| | |
| 10.22*‡ | Pall Corporation Stock Option Plan for Non-Employee Directors, as amended effective November 10, 1998, filed as Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1998. |
| | |
| 10.23*‡ | Pall Corporation 2001 Stock Option Plan for Non-Employee Directors, as amended September 17, 2004, filed as Exhibit 10.25 to the 2004 Form 10-K. |
| | |
| 10.24*‡ | Pall Corporation Management Stock Purchase Plan as amended effective July 19, 2005, filed as Exhibit 10.3 to the Registrant’s Form 8-K filed on July 25, 2005. |
| | |
| 10.25*‡ | Pall Corporation Employee Stock Purchase Plan as amended effective October 17, 2003, filed as Exhibit 10.27 to the 2003 10-K. |
| | |
| 10.26*‡ | 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. |
| | |
| 10.27*‡ | 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. |
| | |
| 14* | Pall Corporation Code of Ethics applicable to its Chief Executive Officer, Chief Financial Officer, Controller and other employees with important roles in the financial reporting process, filed as Exhibit 99.1 to the 2004 10-K. |
| | |
| 21† | Subsidiaries of the Registrant. |
| | |
| 23† | Consent of Independent Registered Public Accounting Firm. |
| | |
| 31.1† | Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| 31.2† | Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| 32.1† | Certification of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| 32.2† | Certification of Chief Financial Officer furnished 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. |
| | |
| † | Exhibit filed herewith |
| | |
| ‡ | Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K. |
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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 14, 2005 | By: | /s/ MARCUS WILSON |
| | | Marcus Wilson, President and Chief Financial Officer |
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 | | |
| Eric Krasnoff | Chairman of the Board and Chief Executive Officer | October 14, 2005 |
| | | |
| /s/ MARCUS WILSON | | |
| Marcus Wilson | President, Chief Financial Officer and Director | October 14, 2005 |
| | | |
| /s/ LISA MCDERMOTT | | |
| Lisa McDermott | Vice President – Finance and Chief Accounting Officer | October 14, 2005 |
| | | |
| /s/ ABRAHAM APPEL | | |
| Abraham Appel | Director | October 14, 2005 |
| | | |
| /s/ DANIEL J. CARROLL, JR. | | |
| Daniel J. Carroll, Jr. | Director | October 14, 2005 |
| | | |
| /s/ JOHN H. F. HASKELL, JR. | | |
| John H. F. Haskell, Jr. | Director | October 14, 2005 |
| | | |
| /s/ ULRIC S. HAYNES, JR. | | |
| Ulric S. Haynes, Jr. | Director | October 14, 2005 |
| | | |
| /s/ EDWIN W. MARTIN | | |
| Edwin W. Martin | Director | October 14, 2005 |
| | | |
| /s/ KATHERINE L. PLOURDE | | |
| Katherine L. Plourde | Director | October 14, 2005 |
| | | |
| /s/ HEYWOOD SHELLEY | | |
| Heywood Shelley | Director | October 14, 2005 |
| | | |
| /s/ EDWARD L. SNYDER | | |
| Edward L. Snyder | Director | October 14, 2005 |
| | | |
| /s/ EDWARD TRAVAGLIANTI | | |
| Edward Travaglianti | Director | October 14, 2005 |
| | | |
| /s/ JAMES D. WATSON | | |
| James D. Watson | Director | October 14, 2005 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Pall Corporation:
We have audited the accompanying consolidated balance sheets of Pall Corporation and subsidiaries as of July 31, 2005 and 2004, and the related consolidated statements of earnings, stockholders’ equity and cash flows for each of the years in the three-year period ended July 31, 2005. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 July 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 2005, in conformity with U.S. generally accepted accounting principles. 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.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Pall Corporation and subsidiaries internal control over financial reporting as of July 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 12, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
Melville, New York
October 12, 2005
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PALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| | | | | July 31, 2005 | | | July 31, 2004 | |
| | | |
|
| |
|
| |
| | ASSETS | | | | | | | |
| Current assets: | | | | | | | |
| | Cash and cash equivalents | | $ | 164,928 | | $ | 207,277 | |
| | Accounts receivable | | | 493,650 | | | 468,905 | |
| | Inventories | | | 365,929 | | | 302,861 | |
| | Other current assets | | | 135,885 | | | 133,116 | |
| | | |
|
| |
|
| |
| | Total current assets | | | 1,160,392 | | | 1,112,159 | |
| Property, plant and equipment, net | | | 608,758 | | | 600,383 | |
| Goodwill | | | 252,904 | | | 239,660 | |
| Intangible assets | | | 50,004 | | | 44,129 | |
| Other non-current assets | | | 193,243 | | | 186,396 | |
| | | |
|
| |
|
| |
| | Total assets | | $ | 2,265,301 | | $ | 2,182,727 | |
| | | |
|
| |
|
| |
| | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
| Current liabilities: | | | | | | | |
| | Notes payable | | $ | 24,299 | | $ | 28,968 | |
| | Accounts payable | | | 142,839 | | | 117,707 | |
| | Accrued liabilities | | | 217,280 | | | 209,523 | |
| | Income taxes | | | 58,928 | | | 84,986 | |
| | Current portion of long-term debt | | | 1,359 | | | 30,514 | |
| | Dividends payable | | | 12,434 | | | 11,162 | |
| | | |
|
| |
|
| |
| | Total current liabilities | | | 457,139 | | | 482,860 | |
| Long-term debt, net of current portion | | | 510,161 | | | 488,686 | |
| Deferred income taxes | | | 10,321 | | | 16,005 | |
| Other non-current liabilities | | | 147,703 | | | 140,737 | |
| | | |
|
| |
|
| |
| | Total liabilities | | | 1,125,324 | | | 1,128,288 | |
| | | |
|
| |
|
| |
| 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 | | | 121,934 | | | 115,489 | |
| | Retained earnings | | | 1,066,848 | | | 984,117 | |
| | Treasury stock, at cost (2005 – 3,616 shares, 2004 – 3,937 shares) | | | (90,878 | ) | | (92,047 | ) |
| | Stock option loans | | | (1,808 | ) | | (2,308 | ) |
| | Accumulated other comprehensive income (loss): | | | | | | | |
| | Foreign currency translation | | | 80,412 | | | 77,585 | |
| | Minimum pension liability | | | (49,353 | ) | | (37,559 | ) |
| | Unrealized investment gains (losses) | | | 33 | | | (3,275 | ) |
| | Unrealized losses on derivatives | | | (7 | ) | | (359 | ) |
| | | |
|
| |
|
| |
| | | | | 31,085 | | | 36,392 | |
| | | |
|
| |
|
| |
| Total stockholders’ equity | | | 1,139,977 | | | 1,054,439 | |
| | | |
|
| |
|
| |
| Total liabilities and stockholders’ equity | | $ | 2,265,301 | | $ | 2,182,727 | |
| | | |
|
| |
|
| |
See accompanying notes to consolidated financial statements.
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PALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
| | | | Years Ended | | |
| | | | July 31, 2005 | | | July 31, 2004 | | | August 2, 2003 | | |
| | |
|
| |
|
| |
|
| | |
| Net sales | | $ | 1,902,284 | | $ | 1,770,747 | | $ | 1,613,635 | | |
| Cost of sales | | | 978,916 | | | 899,119 | | | 810,039 | | |
| | |
|
| |
|
| |
|
| | |
| Gross profit | | | 923,368 | | | 871,628 | | | 803,596 | | |
| | | | | | | | | | | | |
| Selling, general and administrative expenses | | | 621,401 | | | 583,539 | | | 536,194 | | |
| Research and development | | | 56,183 | | | 57,279 | | | 52,204 | | |
| Restructuring and other charges, net | | | 38,763 | | | 12,477 | | | 47,524 | | |
| Interest expense, net | | | 25,950 | | | 20,501 | | | 24,438 | | |
| | |
|
| |
|
| |
|
| | |
| Earnings before income taxes | | | 181,071 | | | 197,832 | | | 143,236 | | |
| Provision for income taxes | | | 40,255 | | | 46,259 | | | 40,034 | | |
| | |
|
| |
|
| |
|
| | |
| Net earnings | | $ | 140,816 | | $ | 151,573 | | $ | 103,202 | | |
| | |
|
| |
|
| |
|
| | |
| Earnings per share: | | | | | | | | | | | |
| Basic | | $ | 1.13 | | $ | 1.21 | | $ | 0.84 | | |
| Diluted | | $ | 1.12 | | $ | 1.20 | | $ | 0.83 | | |
| Average shares outstanding: | | | | | | | | | | | |
| Basic | | | 124,645 | | | 125,685 | | | 123,275 | | |
| Diluted | | | 125,598 | | | 126,737 | | | 124,214 | | |
See accompanying notes to consolidated financial statements.
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PALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Years Ended August 2, 2003, July 31,
2004 and July 31, 2005 | | | Common Stock | | | Capital
in Excess
of Par
Value | | | Retained Earnings | | | Treasury
Stock | | | Stock
Option Loans | | | Accumulated
Other
Comprehensive
Loss | | | Total | | | Comprehensive Income | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Balance at August 4, 2002 | | $ | 12,796 | | $ | 110,745 | | $ | 832,308 | | $ | (110,799 | ) | $ | (3,259 | ) | $ | (22,071 | ) | $ | 819,720 | | | | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net earnings | | | | | | | | | 103,202 | | | | | | | | | | | | 103,202 | | $ | 103,202 | |
| | Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Translation adjustment | | | | | | | | | | | | | | | | | | 46,335 | | | 46,335 | | | 46,335 | |
| | | Minimum pension liability | | | | | | | | | | | | | | | | | | (29,975 | ) | | (29,975 | ) | | (29,975 | ) |
| | | Unrealized investment gains | | | | | | | | | | | | | | | | | | 4,671 | | | 4,671 | | | 4,671 | |
| | | Unrealized gain on derivatives | | | | | | | | | | | | | | | | | | 627 | | | 627 | | | 627 | |
| | | | | | | | | | | | | | | | | | | | | | | |
|
| |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | $ | 124,860 | |
| | | | | | | | | | | | | | | | | | | | | | | |
|
| |
| Dividends declared | | | | | | | | | (44,678 | ) | | | | | | | | | | | (44,678 | ) | | | |
| Issuance of 1,892 shares for stock plans and pension funding | | | | | | | | | (6,142 | ) | | 40,601 | | | | | | | | | 34,459 | | | | |
| Restricted stock units related to stock plans | | | | | | (1,129 | ) | | | | | | | | | | | | | | (1,129 | ) | | | |
| Stock option loans | | | | | | | | | | | | | | | 1,304 | | | | | | 1,304 | | | | |
| | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at August 2, 2003 | | | 12,796 | | | 109,616 | | | 884,690 | | | (70,198 | ) | | (1,955 | ) | | (413 | ) | | 934,536 | | | | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net earnings | | | | | | | | | 151,573 | | | | | | | | | | | | 151,573 | | | 151,573 | |
| | Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Translation adjustment | | | | | | | | | | | | | | | | | | 48,679 | | | 48,679 | | | 48,679 | |
| | | Minimum pension liability | | | | | | | | | | | | | | | | | | (4,505 | ) | | (4,505 | ) | | (4,505 | ) |
| | | Unrealized investment losses | | | | | | | | | | | | | | | | | | (7,710 | ) | | (7,710 | ) | | (7,710 | ) |
| | | Unrealized gain on derivatives | | | | | | | | | | | | | | | | | | 341 | | | 341 | | | 341 | |
| | | | | | | | | | | | | | | | | | | | | | | |
|
| |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | $ | 188,378 | |
| | | | | | | | | | | | | | | | | | | | | | | |
|
| |
| Dividends declared | | | | | | | | | (45,247 | ) | | | | | | | | | | | (45,247 | ) | | | |
| Issuance of 2,438 shares for stock plans | | | | | | 4,848 | | | (6,899 | ) | | 53,151 | | | | | | | | | 51,100 | | | | |
| Restricted stock units related to stock plans | | | | | | 1,025 | | | | | | | | | | | | | | | 1,025 | | | | |
| Purchase of 3,099 shares | | | | | | | | | | | | (75,000 | ) | | | | | | | | (75,000 | ) | | | |
| Stock option loans | | | | | | | | | | | | | | | (353 | ) | | | | | (353 | ) | | | |
| | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at July 31, 2004 | | | 12,796 | | | 115,489 | | | 984,117 | | | (92,047 | ) | | (2,308 | ) | | 36,392 | | | 1,054,439 | | | | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net earnings | | | | | | | | | 140,816 | | | | | | | | | | | | 140,816 | | | 140,816 | |
| | Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Translation adjustment | | | | | | | | | | | | | | | | | | 2,827 | | | 2,827 | | | 2,827 | |
| | | Minimum pension liability | | | | | | | | | | | | | | | | | | (11,794 | ) | | (11,794 | ) | | (11,794 | ) |
| | | Unrealized investment losses | | | | | | | | | | | | | | | | | | 3,308 | | | 3,308 | | | 3,308 | |
| | | Unrealized gain on derivatives | | | | | | | | | | | | | | | | | | 352 | | | 352 | | | 352 | |
| | | | | | | | | | | | | | | | | | | | | | | |
|
| |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | $ | 135,509 | |
| | | | | | | | | | | | | | | | | | | | | | | |
|
| |
| Dividends declared | | | | | | | | | (48,585 | ) | | | | | | | | | | | (48,585 | ) | | | |
| Issuance of 2,756 shares for stock plans | | | | | | 5,404 | | | (9,500 | ) | | 65,415 | | | | | | | | | 61,319 | | | | |
| Restricted stock units related to stock plans | | | | | | 1,041 | | | | | | | | | | | | | | | 1,041 | | | | |
| Purchase of 2,435 shares | | | | | | | | | | | | (64,246 | ) | | | | | | | | (64,246 | ) | | | |
| Stock option loans | | | | | | | | | | | | | | | 500 | | | | | | 500 | | | | |
| | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | | | |
| Balance at July 31, 2005 | | $ | 12,796 | | $ | 121,934 | | $ | 1,066,848 | | $ | (90,878 | ) | $ | (1,808 | ) | $ | 31,085 | | $ | 1,139,977 | | | | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | | | |
See accompanying notes to consolidated financial statements.
38
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PALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | Years Ended | |
| | | July 31, 2005 | | July 31, 2004 | | August 2, 2003 | |
| | |
|
| |
|
| |
|
| |
| Operating activities: | | | | | | | | | | |
| Net earnings | | $ | 140,816 | | $ | 151,573 | | $ | 103,202 | |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | |
| Restructuring and other charges, net | | | 38,763 | | | 12,477 | | | 47,524 | |
| Depreciation and amortization of long-lived assets | | | 90,921 | | | 88,935 | | | 83,939 | |
| Amortization of net proceeds from terminated interest rate swaps | | | (1,711 | ) | | (2,552 | ) | | (1,004 | ) |
| Deferred income taxes | | | (1,898 | ) | | (18,666 | ) | | (10,337 | ) |
| Provisions for doubtful accounts | | | 3,979 | | | 3,217 | | | 3,103 | |
| Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: | | | | | | | | | | |
| Accounts receivable | | | (24,800 | ) | | (26,765 | ) | | 14,132 | |
| Inventories | | | (54,604 | ) | | (15,817 | ) | | (5,725 | ) |
| Other assets | | | (9,547 | ) | | 23,623 | | | (6,759 | ) |
| Accounts payable and accrued expenses | | | 8,203 | | | (10,416 | ) | | (10,406 | ) |
| Income taxes receivable/payable | | | (23,531 | ) | | (10,386 | ) | | 6,129 | |
| Other liabilities | | | (4,983 | ) | | (3,277 | ) | | 6,555 | |
| | |
|
| |
|
| |
|
| |
| Net cash provided by operating activities | | | 161,608 | | | 191,946 | | | 230,353 | |
| | |
|
| |
|
| |
|
| |
| Investing activities: | | | | | | | | | | |
| Acquisitions of businesses, net of disposals and cash acquired | | | (30,879 | ) | | (2,005 | ) | | (14,113 | ) |
| Advances to and investments in strategic alliances | | | — | | | (2,125 | ) | | (6,541 | ) |
| Proceeds from sale of strategic investments | | | 915 | | | 21,344 | | | — | |
| Capital expenditures | | | (86,153 | ) | | (61,262 | ) | | (62,170 | ) |
| Disposals of fixed assets | | | 5,127 | | | 4,115 | | | 11,714 | |
| Proceeds from sale of retirement benefit assets | | | 19,173 | | | 22,668 | | | 34,306 | |
| Purchases of retirement benefit assets | | | (19,392 | ) | | (30,307 | ) | | (40,878 | ) |
| Other | | | (3,354 | ) | | (3,679 | ) | | (3,265 | ) |
| | |
|
| |
|
| |
|
| |
| Net cash used by investing activities | | | (114,563 | ) | | (51,251 | ) | | (80,947 | ) |
| | |
|
| |
|
| |
|
| |
| Financing activities: | | | | | | | | | | |
| Notes payable | | | (4,842 | ) | | 8,181 | | | (375,399 | ) |
| Long-term borrowings | | | 315,349 | | | 40,014 | | | 510,192 | |
| Repayments of long-term debt | | | (330,412 | ) | | (70,159 | ) | | (294,890 | ) |
| Net proceeds from stock plans | | | 62,490 | | | 51,772 | | | 30,133 | |
| Purchase of treasury stock | | | (64,246 | ) | | (75,000 | ) | | — | |
| Make whole payment to redeem senior notes | | | (14,702 | ) | | — | | | — | |
| Payments/proceeds related to terminated interest rate swaps | | | (10,044 | ) | | — | | | 21,000 | |
| Dividends paid | | | (47,075 | ) | | (45,097 | ) | | (44,376 | ) |
| | |
|
| |
|
| |
|
| |
| Net cash used by financing activities | | | (93,482 | ) | | (90,289 | ) | | (153,340 | ) |
| | |
|
| |
|
| |
|
| |
| Cash flow for year | | | (46,437 | ) | | 50,406 | | | (3,934 | ) |
| Cash and cash equivalents at beginning of year | | | 207,277 | | | 149,753 | | | 145,424 | |
| Effect of exchange rate changes on cash | | | 4,088 | | | 7,118 | | | 8,263 | |
| | |
|
| |
|
| |
|
| |
| Cash and cash equivalents at end of year | | $ | 164,928 | | $ | 207,277 | | $ | 149,753 | |
| | |
|
| |
|
| |
|
| |
| Supplemental disclosures: | | | | | | | | | | |
| Interest paid | | $ | 26,158 | | $ | 17,527 | | $ | 26,742 | |
| Income taxes paid (net of refunds) | | | 75,215 | | | 56,549 | | | 35,900 | |
| Non-cash investing and financing activities: | | | | | | | | | | |
| Pension obligations funded by 210 shares of treasury stock | | | — | | | — | | | 4,288 | |
| Capital lease entered into for new building | | | 7,272 | | | 4,438 | | | — | |
See accompanying notes to consolidated financial statements.
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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.
The Company’s fiscal year ends on July 31, and the Company’s fiscal quarters end on October 31, January 31 and April 30. Prior to fiscal year 2004, the Company’s fiscal year ended on the Saturday closest to July 31, except that the Company’s foreign subsidiaries were on a July 31 fiscal year. The years ended July 31, 2005, July 31, 2004, and August 2, 2003, each comprise 52 weeks.
Presentation and Use of Estimates
The financial statements of the Company are presented on a consolidated basis with its subsidiaries, substantially all of which are wholly owned. All significant intercompany balances and transactions have been eliminated in consolidation.
Financial statements of foreign subsidiaries have been translated into U.S. dollars at exchange rates as follows: (i) balance sheet accounts at year-end rates, except equity accounts which are translated at historic rates, and (ii) income statement accounts at weighted average rates. Translation gains and losses are reflected in stockholders’ equity, while transaction gains and losses, which result from the settlement of foreign denominated receivables and payables at rates that differ from rates in effect at the transaction date, are reflected in income. Transaction losses, net, in fiscal years 2005, 2004 and 2003 amounted to $2,796, $1,727 and $1,363, respectively.
To prepare the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, management is required to make assumptions that may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates are used for, but not limited to, inventory valuation; provisions for doubtful accounts; asset impairment; depreciable lives of fixed assets and useful lives of patents and amortizable intangibles; fair value of financial instruments; income tax assets and liabilities; pension valuations; restructuring and other charges; valuation of assets acquired and liabilities assumed in business combinations; revenue recognition and liabilities for items such as environmental remediation. The Company is subject to uncertainties such as the impact of future events, economic, environmental and political factors, and changes in the business climate; therefore, actual results may differ from those estimates. When no estimate in a given range is deemed to be better than any other when estimating contingent liabilities, the low end of the range is accrued. Accordingly, the accounting estimates used in the preparation of the Company’s consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Changes in estimates are made when circumstances warrant. Such changes and refinements in estimation methodologies are reflected in reported results of operations; if material, the effects of changes in estimates are disclosed in the notes to the consolidated financial statements.
Certain prior year amounts have been reclassified in the Company’s balance sheet, statements of cash flow and market segment information to conform to the current year presentation.
Cash and Cash Equivalents
All financial instruments purchased with a maturity of three months or less, other than amounts held in the benefits protection trust, are considered cash equivalents. Cash equivalents are held until maturity.
Inventories
Inventories are valued at the lower of cost (principally on the first-in, first-out method) or market.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Investments
Investments (which represent an equity interest of less than 20% and have readily determinable market values) are considered available-for-sale securities; as such, these investments are carried at fair value in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS No. 115”). Unrealized gains and losses on these securities are reported as a separate component of stockholders’ equity until realized from sale or when unrealized losses are deemed to be other than temporary. Other than temporary losses are recognized in earnings when management determines that the recoverability of the cost of the investment is unlikely. The Company considers numerous factors, on a case-by-case basis, in evaluating whether the decline in market value of an available-for-sale security below cost is other than temporary. Such factors include, but are not limited to, (i) the length of time and the extent to which the market value has been less than cost; (ii) the financial condition and the near-term prospects of the issuer of the investment; and (iii) whether the Company’s intent to retain the investment for the period of time is sufficient to allow for any anticipated recovery in market value. Investments are included in “Other non-current assets” in the Consolidated Balance Sheets.
Acquisition Accounting
Acquisitions are accounted for using the purchase method of accounting in accordance with SFAS No. 141, Business Combinations (“SFAS No. 141”). SFAS No. 141 requires that the total cost of an acquisition be allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the date of acquisition. The allocation of the purchase price is dependent upon certain valuations and other studies.
Long-Lived Assets
The Company accounts for its goodwill and intangible assets in accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). As such, goodwill is not amortized and is assessed for impairment at least annually and whenever events or circumstances indicate impairment might have occurred. The Company evaluates the recoverability of goodwill using a two-step impairment test approach at the reporting unit level. In the first step, the overall fair value for the reporting unit is compared to its book value including goodwill. In the case that the overall fair value of the reporting unit is less than the book value, a second step is performed which compares the implied fair value of the reporting unit’s goodwill to the book value of the goodwill. The implied fair value for the goodwill is determined based on the difference between the overall fair value of the reporting unit and the fair value of the net identifiable assets. If the implied fair value of the goodwill is less than the book value, the difference is recognized as an impairment. No adjustments resulted from this assessment.
The Company’s amortizable intangible assets, which are composed almost entirely of patented and unpatented technology and trademarks, are subject to amortization for periods ranging up to 20 years, principally on a straight-line basis. Property, plant and equipment are stated at cost. Depreciation of plant and equipment is provided over the estimated useful lives of the respective assets, ranging up to 50 years and 10 years, respectively, principally on the straight-line basis.
The Company periodically reviews its depreciable and amortizable long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.
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. The cumulative impact of revisions to total estimated costs is reflected in the period of the change, including anticipated losses.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Stock Plans
Stock plans are accounted for using Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and related interpretations. Under APB No. 25, compensation expense would be recorded if, on the date of grant, the market price of the underlying stock exceeded its exercise price. During the three years ended July 31, 2005, the Company has not issued stock options with an exercise price below the date of grant market price. As permitted by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (“SFAS No. 148”), the Company has retained the accounting prescribed by APB No. 25 and presents the SFAS No. 123 information in the notes to its consolidated financial statements. Refer to the Stock Plans note for a description of the Company’s stock plans.
The following table illustrates the effect on net earnings and earnings per share if the Company had accounted for its stock based compensation plans under the fair value method of accounting under SFAS No. 123, as amended by SFAS No. 148:
| | | | | 2005 | | | 2004 | | | 2003 | |
| | | |
|
| |
|
| |
|
| |
| | Net earnings, as reported | | $ | 140,816 | | $ | 151,573 | | $ | 103,202 | |
| | Pro forma stock compensation
expense, net of tax benefit | | | 11,667 | | | 11,608 | | | 13,658 | |
| | | |
|
| |
|
| |
|
| |
| | Pro forma net earnings | | $ | 129,149 | | $ | 139,965 | | $ | 89,544 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
| | Earnings per share: | | | | | | | | | | |
| | Basic–as reported | | $ | 1.13 | | $ | 1.21 | | $ | .84 | |
| | Basic–pro forma | | $ | 1.04 | | $ | 1.11 | | $ | .73 | |
| | Diluted–as reported | | $ | 1.12 | | $ | 1.20 | | $ | .83 | |
| | Diluted–pro forma | | $ | 1.03 | | $ | 1.10 | | $ | .72 | |
The pro forma stock compensation expense, net of tax benefit, is primarily related to stock option awards. The fair value of stock-based compensation awards granted is calculated using the Black-Scholes option-pricing model. The following weighted average assumptions were used in estimating the fair value of stock-based compensation awards:
| | | | | | 2005 | | | 2004 | | | 2003 | |
| | | | |
|
| |
|
| |
|
| |
| | Average fair value of stock-based
compensation awards granted | | $ | 7.93 | | $ | 8.30 | | $ | 6.75 | |
| | Valuation assumptions: | | | | | | | | | | |
| | | Expected dividend yield | | | 1.8 | % | | 1.7 | % | | 1.9 | % |
| | | Expected volatility | | | 30.0 | % | | 36.8 | % | | 33.0 | % |
| | | Expected life (years) | | | 5 | | | 5 | | | 10 | |
| | | Risk-free interest rate | | | 3.9 | % | | 4.4 | % | | 4.1 | % |
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as facts and circumstances change, assessment and remediation efforts progress or as additional technical or legal information becomes available. Costs of future expenditures for environmental remediation obligations are not discounted to their present value and are expected to be disbursed over an extended period of time. Accruals for environmental liabilities are included in “Accrued liabilities” and “Other non-current liabilities” in the Consolidated Balance Sheets.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Income Taxes
Pall Corporation and its domestic subsidiaries file a consolidated Federal income tax return.
Taxes on income are provided using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse.
For further discussion, refer to the Income Taxes note.
Earnings Per Share
The Consolidated Statements of Earnings present basic and diluted earnings per share. Basic earnings per share is determined by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share considers the potential effect of dilution on basic earnings per share assuming potentially dilutive securities that meet certain criteria, such as stock options, were outstanding since issuance. The treasury stock method is used to determine the dilutive effect of potentially dilutive securities. Employee stock options and restricted stock units of 212, 166 and 4,748 for fiscal 2005, 2004 and 2003, respectively, were not included in the computation of diluted shares because their effect would have been antidilutive.
The following is a reconciliation between basic shares outstanding and diluted shares outstanding:
| | | | | 2005 | | | 2004 | | | 2003 | |
| | | |
|
| |
|
| |
|
| |
| | Basic shares outstanding | | | 124,645 | | | 125,685 | | | 123,275 | |
| | Effect of dilutive securities (a) | | | 953 | | | 1,052 | | | 939 | |
| | | |
|
| |
|
| |
|
| |
| | Diluted shares outstanding | | | 125,598 | | | 126,737 | | | 124,214 | |
| | | |
|
| |
|
| |
|
| |
(a) Refer to the Stock Plans note for a description of the Company’s stock plans.
Derivative Instruments
The Company accounts for its derivative instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS No. 133”). SFAS No. 133 establishes accounting and reporting standards for derivative instruments as either assets or liabilities in the statement of financial position based on their fair values. Changes in the fair values are reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. Derivative instruments are designated and accounted for as either a hedge of a recognized asset or liability (fair value hedge) or a hedge of a forecasted transaction (cash flow hedge). For derivatives designated as effective cash flow hedges, changes in fair values are recognized in other comprehensive income. Changes in fair values related to fair value hedges as well as the ineffective portion of cash flow hedges are recognized in earnings. Changes in the fair value of the underlying hedged item of a fair value hedge are also recognized in earnings. The Company measures ineffectiveness related to hedged foreign currency exchange rate exposures (forward contracts and cross currency swaps) using spot exchange rates.
ACQUISITIONS
2005:
On November 30, 2004, the Company acquired the BioSepra Process Division (“Biosepra”) from Ciphergen Biosystems, Inc. The purchase price was approximately $32,000, net of cash and debt, subject to a post closing adjustment of the purchase price based upon certain quantitative thresholds as defined in the purchase agreement. The adjustment to the purchase price was finalized on April 11, 2005, resulting in a reduction in the purchase price of approximately $1,100. Biosepra develops, manufactures and markets chromatography sorbents for use in the purification of protein in drug development and production.
On January 21, 2005, the Company acquired the remaining interest in Euroflow (UK) of Stroud, England (“Euroflow”) which it did not already own. The purchase price was $1,466, net of cash. Euroflow manufactures pilot and production scale chromatography columns for the biotechnology industry. The Company has held exclusive global marketing and distribution rights to Euroflow chromatography columns and associated technologies since 2002. In addition, the Company had loans and advances totaling $9,255 outstanding from Euroflow at the date of acquisition.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The acquisitions are being accounted for using the purchase method of accounting in accordance with SFAS No. 141. The allocation of the purchase price is dependent upon certain valuations some of which have not progressed to a stage where there is sufficient information to make such allocations. As such, the cost of the acquisitions has been preliminarily allocated in the accompanying consolidated balance sheet at July 31, 2005. The results of these valuations will result in revisions to the purchase price allocation that may be significant and will be reported in future periods as increases and decreases to the excess cost over net assets acquired and liabilities assumed.
The following table summarizes the preliminary allocation of the purchase prices to the assets acquired and liabilities assumed at the dates of the acquisitions:
| | Purchase price | | $ | 38,349 | |
| | Transaction costs | | | 564 | |
| | | |
|
| |
| | Total purchase price | | | 38,913 | |
| | Cash acquired | | | 7,470 | |
| | | |
|
| |
| | Total purchase price, net of cash acquired | | | 31,443 | |
| | | |
|
| |
| | | | | | |
| | Accounts receivable, net | | | 1,710 | |
| | Inventories | | | 9,886 | |
| | Other current assets | | | 1,658 | |
| | Property plant and equipment, net | | | 6,771 | |
| | Other non-current assets | | | 10,604 | |
| | | |
|
| |
| | Total assets acquired | | | 30,629 | |
| | | |
|
| |
| | | | | | |
| | Accounts payable and other current liabilities | | | 4,564 | |
| | Long-term debt | | | 2,562 | |
| | Due to the Company (from Euroflow) | | | 9,255 | |
| | Other non-current liabilities | | | 630 | |
| | | |
|
| |
| | Total liabilities assumed | | | 17,011 | |
| | | |
|
| |
| | Excess cost over book value of net assets acquired | | $ | 17,825 | |
| | | |
|
| |
Based upon the markets Biosepra and Euroflow serve, the excess of cost over the fair value of the net assets acquired was assigned to the Company’s BioPharmaceutical segment. Any resulting goodwill related to the Biosepra and Euroflow acquisitions will not be tax deductible. Pro forma financial information related to the acquisitions has not been provided, as it is not material to the Company’s results of operations and cash flows.
2003:
On March 4, 2003, the Company acquired the assets, primarily manufacturing equipment and intellectual property, of Whatman Hemasure Inc., a wholly owned subsidiary of Whatman plc (“the seller”) for cash of $5,950.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
RESTRUCTURING AND OTHER CHARGES, NET
The following tables summarize the restructuring related items and other charges/(income) recorded in fiscal years 2005, 2004 and 2003:
| | 2005 | | | Restructuring (1) | | | Other
Charges/
(Income) (2) | | | Total | | |
| |
| |
|
| |
|
| |
|
| | |
| | Early extinguishment of debt, net (a) | | $ | — | | $ | 11,953 | | $ | 11,953 | | |
| | Severance | | | 17,496 | | | — | | | 17,496 | | |
| | Impairment of investments (b) | | | — | | | 3,615 | | | 3,615 | | |
| | Other exit costs | | | 2,928 | | | — | | | 2,928 | | |
| | Loss on sale and impairment of assets | | | 226 | | | — | | | 226 | | |
| | Environmental matters (c) | | | — | | | 2,077 | | | 2,077 | | |
| | Other | | | — | | | 836 | | | 836 | | |
| | | |
|
| |
|
| |
|
| | |
| | | | | 20,650 | | | 18,481 | | | 39,131 | | |
| | Reversal of excess reserves | | | (368 | ) | | — | | | (368 | ) | |
| | | |
|
| |
|
| |
|
| | |
| | | | $ | 20,282 | | $ | 18,481 | | $ | 38,763 | | |
| | | |
|
| |
|
| |
|
| | |
| | | | | | | | | | | | | |
| | Cash | | $ | 19,666 | | $ | 16,716 | | $ | 36,382 | | |
| | Non-cash | | | 616 | | | 1,765 | | | 2,381 | | |
| | | |
|
| |
|
| |
|
| | |
| | | | $ | 20,282 | | $ | 18,481 | | $ | 38,763 | | |
| | | |
|
| |
|
| |
|
| | |
| | | | | | | | | | | | | |
| | 2004 | | | | | | | | | | | |
| |
| | | | | | | | | | | |
| | Environmental matters (c) | | $ | — | | $ | 20,837 | | $ | 20,837 | | |
| | German pension liability (d) | | | — | | | (5,626 | ) | | (5,626 | ) | |
| | Severance | | | 4,117 | | | — | | | 4,117 | | |
| | Other exit costs | | | 538 | | | — | | | 538 | | |
| | Loss/(gain) on sale of assets (b) | | | 63 | | | (7,127 | ) | | (7,064 | ) | |
| | Other | | | — | | | (253 | ) | | (253 | ) | |
| | | |
|
| |
|
| |
|
| | |
| | | | | 4,718 | | | 7,831 | | | 12,549 | | |
| | Reversal of excess reserves | | | (72 | ) | | — | | | (72 | ) | |
| | | |
|
| |
|
| |
|
| | |
| | | | $ | 4,646 | | $ | 7,831 | | $ | 12,477 | | |
| | | |
|
| |
|
| |
|
| | |
| | | | | | | | | | | | | |
| | Cash | | $ | 4,583 | | $ | 14,178 | | $ | 18,761 | | |
| | Non-cash | | | 63 | | | (6,347 | ) | | (6,284 | ) | |
| | | |
|
| |
|
| |
|
| | |
| | | | $ | 4,646 | | $ | 7,831 | | $ | 12,477 | | |
| | | |
|
| |
|
| |
|
| | |
| | 2003 | | | | | | | | | | | |
| |
| | | | | | | | | | | |
| | In-process research and development (e) | | $ | — | | $ | 37,600 | | $ | 37,600 | | |
| | Severance | | | 6,415 | | | — | | | 6,415 | | |
| | Asset write-offs/ impairment | | | 1,122 | | | — | | | 1,122 | | |
| | Other exit costs | | | 2,319 | | | — | | | 2,319 | | |
| | Other | | | — | | | 68 | | | 68 | | |
| | | |
|
| |
|
| |
|
| | |
| | | | $ | 9,856 | | $ | 37,668 | | $ | 47,524 | | |
| | | |
|
| |
|
| |
|
| | |
| | | | | | | | | | | | | |
| | Cash | | $ | 8,734 | | $ | 68 | | $ | 8,802 | | |
| | Non-cash | | | 1,122 | | | 37,600 | | | 38,722 | | |
| | | |
|
| |
|
| |
|
| | |
| | | | $ | 9,856 | | $ | 37,668 | | $ | 47,524 | | |
| | | |
|
| |
|
| |
|
| | |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(1) Restructuring:
On April 24, 2002, the Company acquired the Filtration and Separations Group (“FSG”) and management began formulating integration plans and identifying synergistic opportunities. The study conducted in connection with the FSG integration led to a much broader initiative to examine the overall structure of the Company and the manner in which it conducted business activities with the objective of increasing revenue growth and achieving cost reduction. This resulted in a series of restructuring activities that commenced in fiscal year 2003 with focus on the integration of FSG with the Company, and have been ongoing ever since, culminating in the realignment of the overall business structure (described summarily below and in more detail in the Segment Information and Geographies note), which commenced at the end of fiscal year 2004.
2003:
| • | In connection with the FSG acquisition, during the fourth quarter of fiscal year 2002 and during the first three quarters of fiscal year 2003, the Company announced and implemented plans to eliminate redundant employees and facilities and to consolidate certain manufacturing lines with other Company facilities. In addition, the Company consolidated its routes to market in the United States, Europe and Asia which resulted in the termination of certain sales employees worldwide and, in Asia, payments were made to certain distributors to terminate these relationships. Furthermore, the Company announced and implemented plans to reorganize and streamline its German operations. The plans included the elimination of some functional overlap, changes in routes to market and the rationalization of product lines. Restructuring and other exit costs related to FSG employees and facilities were recorded as adjustments to goodwill in accordance with EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. |
| • | The Company reorganized its Life Sciences business such that the Company’s hospital and medical OEM sub-segments were combined with the former Blood segment resulting in the termination of employees holding positions made redundant by the reorganization and incurrence of severance obligations. |
| • | Furthermore, the Company announced plans to move certain Medical manufacturing from Tipperary, Ireland to Puerto Rico and Tijuana, Mexico. |
2004:
| • | The Company implemented a plan to reorganize and streamline its operations in Japan. The plan, which affected both sales and support personnel, was aimed at increasing productivity to result in a more efficient sales-focused operation in Japan. As a result of these actions, the Company recorded severance liabilities for the termination of certain employees and exit costs related to the relocation of its Japan headquarters. |
| • | The Company continued its plan to streamline manufacturing operations which resulted in headcount reductions in the United Kingdom and Germany as well as the sale of certain manufacturing plants in Germany primarily acquired as part of the FSG acquisition. |
| • | In the fourth quarter of fiscal year 2004, the Company continued its Life Sciences reorganization by implementing a plan to reorganize its Medical and BioSciences management structure in order to better serve its customers in these markets. As a result of the plan, certain management positions were made redundant and the Company recorded severance liabilities for the termination of employees. |
2005:
| • | The Company began to implement its plan to reorganize its business structure into vertically-integrated business units, as discussed further in the Segment Information and Geographies note, and continued its cost reduction initiatives. As a result, the Company recorded severance liabilities for the termination of certain employees worldwide as well as other costs related to the reorganization. |
| • | In the first quarter of fiscal year 2005, the Company completed the sale begun in the fourth quarter of fiscal year 2004 of certain manufacturing plants in Germany acquired as part of the FSG acquisition, which resulted in the recognition of a gain of $387. |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(2) Other Charges/(Income):
| (a) | Early extinguishment of debt, net: |
| | | In the fourth quarter of fiscal year 2005, the Company recorded a charge of $11,953 related to the early extinguishment of its $100,000 private placement 7.83% unsecured senior notes. The charge represents the payment to the note holders under the make-whole provision of the notes reduced by the Company’s carrying value of the notes. |
| | | In fiscal year 2004, the Company recorded a gain on the sale of its investment in Oiltools International of $7,580. In fiscal year 2005, the Company recorded a charge of $2,875 for the other-than-temporary diminution in value of its strategic investment in Panacos Pharmaceuticals, Inc., formerly known as V.I. Technologies, Inc. (“VITEX”). In addition, the Company recorded a charge of $740 for the other-than-temporary diminution of a certain investment in equity securities held by its benefits protection trust. For further discussion of the Company’s investments, refer to the Other Current and Non-Current Assets note. |
| | |
| (c) | Environmental Matters: |
| | | In fiscal year 2004, the Company increased its environmental liabilities by $20,837, principally as a result of a change in the estimated duration and costs of the remediation effort at the Ann Arbor, Michigan facility of the Company’s subsidiary Gelman Sciences. In fiscal year 2005, the Company further increased its environmental remediation reserves by $2,077 related to matters in various facilities. For more detail regarding environmental matters, please refer to the Contingencies and Commitments note. |
| | |
| (d) | German pension liability: |
| | | Reflects an adjustment in fiscal year 2004 to pension liabilities in Germany due to an over accrual of pension expense that occurred during the preceding five-year period, the effect of which was not significant in any period. |
| | |
| (e) | Purchase accounting adjustments: |
| | | During the first quarter of fiscal year 2003, the Company also recorded a charge of $37,600 to write-off in-process research and development acquired in the acquisition of FSG. |
The following table summarizes the activity related to restructuring liabilities that were recorded in fiscal years 2005, 2004 and 2003:
| | | | | Severance | | | Lease
Termination
Liabilities &
Other | | | Total | | |
| | | |
|
| |
|
| |
|
| | |
| | 2005 | | | | | | | | | | | |
| | Original Charge | | $ | 17,496 | | $ | 2,928 | | $ | 20,424 | | |
| | Utilized | | | (8,404 | ) | | (2,739 | ) | | (11,143 | ) | |
| | Other changes (a) | | | (86 | ) | | 4 | | | (82 | ) | |
| | | |
|
| |
|
| |
|
| | |
| | Balance at July 31, 2005 | | $ | 9,006 | | $ | 193 | | $ | 9,199 | | |
| | | |
|
| |
|
| |
|
| | |
| | 2004 | | | | | | | | | | | |
| | Original Charge | | $ | 4,117 | | $ | 538 | | $ | 4,655 | | |
| | Utilized | | | (2,765 | ) | | (538 | ) | | (3,303 | ) | |
| | | |
|
| |
|
| |
|
| | |
| | Balance at July 31, 2004 | | | 1,352 | | | — | | | 1,352 | | |
| | Utilized | | | (1,243 | ) | | — | | | (1,243 | ) | |
| | Reversal of excess reserves (b) | | | (22 | ) | | — | | | (22 | ) | |
| | Other changes (a) | | | (87 | ) | | — | | | (87 | ) | |
| | | |
|
| |
|
| |
|
| | |
| | Balance at July 31, 2005 | | $ | — | | $ | — | | $ | — | | |
| | | |
|
| |
|
| |
|
| | |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
| | | | Severance | | | Lease
Termination
Liabilities &
Other | | | Total | | |
| | |
|
| |
|
| |
|
| | |
| 2003 | | | | | | | | | | | |
| Original Charge (c) | | $ | 13,868 | | $ | 8,897 | | $ | 22,765 | | |
| Utilized | | | (7,211 | ) | | (6,367 | ) | | (13,578 | ) | |
| | |
|
| |
|
| |
|
| | |
| Balance at Aug. 2, 2003 | | | 6,657 | | | 2,530 | | | 9,187 | | |
| Utilized | | | (5,167 | ) | | (1,770 | ) | | (6,937 | ) | |
| Other changes (a) | | | (428 | ) | | (510 | ) | | (938 | ) | |
| | |
|
| |
|
| |
|
| | |
| Balance at July 31, 2004 | | | 1,062 | | | 250 | | | 1,312 | | |
| Utilized | | | (529 | ) | | (73 | ) | | (602 | ) | |
| Reversal of excess reserves (b) | | | (120 | ) | | — | | | (120 | ) | |
| Other changes (a) | | | (413 | ) | | (177 | ) | | (590 | ) | |
| | |
|
| |
|
| |
|
| | |
| Balance at July 31, 2005 | | $ | — | | $ | — | | $ | — | | |
| | |
|
| |
|
| |
|
| | |
| | |
| a) | Other changes reflect translation impact. In addition, fiscal year 2003 includes the reversal of excess restructuring accruals of $1,250 related to the FSG acquisition that were originally recorded as adjustments to goodwill in accordance with EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. |
| | |
| b) | Reflects the reversal of excess restructuring reserves recorded in the consolidated statements of earnings in fiscal years 2003 and 2004. |
| | |
| c) | Includes severance and other exit costs of $7,453 and $6,578, respectively, related to FSG employees and facilities that were recorded as adjustments to goodwill in accordance with EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. |
ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
| | | | | 2005 | | | 2004 | | |
| | | |
|
| |
|
| | |
| | Billed | | $ | 463,959 | | $ | 460,062 | | |
| | Unbilled | | | 43,206 | | | 20,905 | | |
| | | |
|
| |
|
| | |
| | Total | | | 507,165 | | | 480,967 | | |
| | Less allowances for doubtful accounts | | | (13,515 | ) | | (12,062 | ) | |
| | | |
|
| |
|
| | |
| | Accounts receivable | | $ | 493,650 | | $ | 468,905 | | |
| | | |
|
| |
|
| | |
Unbilled receivables principally relate to long-term contracts recorded under the percentage-of-completion method of accounting.
INVENTORIES
The major classes of inventory are as follows:
| | | | | 2005 | | | 2004 | | |
| | | |
|
| |
|
| | |
| | Raw materials and components | | $ | 113,202 | | $ | 88,341 | | |
| | Work-in-process | | | 44,837 | | | 45,747 | | |
| | Finished goods | | | 207,890 | | | 168,773 | | |
| | | |
|
| |
|
| | |
| | | | $ | 365,929 | | $ | 302,861 | | |
| | | |
|
| |
|
| | |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
| | | | | 2005 | | | 2004 | | |
| | | |
|
| |
|
| | |
| | Land | | $ | 39,270 | | $ | 39,289 | | |
| | Buildings and improvements | | | 447,660 | | | 420,841 | | |
| | Machinery and equipment | | | 715,692 | | | 678,972 | | |
| | Furniture and fixtures | | | 75,895 | | | 77,345 | | |
| | | |
|
| |
|
| | |
| | | | | 1,278,517 | | | 1,216,447 | | |
| | Less: Accumulated depreciation and amortization | | | 669,759 | | | 616,064 | | |
| | | |
|
| |
|
| | |
| | Property, plant and equipment, net | | $ | 608,758 | | $ | 600,383 | | |
| | | |
|
| |
|
| | |
GOODWILL AND INTANGIBLE ASSETS
The following table presents goodwill, net of accumulated amortization, allocated by reportable segment in accordance with SFAS No. 142:
| | | | | 2005 | | | 2004 | | |
| | | |
|
| |
|
| | |
| | Medical | | $ | 28,578 | | $ | 28,433 | | |
| | BioPharmaceuticals | | | 45,538 | | | 28,602 | | |
| | | |
|
| |
|
| | |
| | Life Sciences | | | 74,116 | | | 57,035 | | |
| | | |
|
| |
|
| | |
| | General Industrial | | | 151,878 | | | 154,753 | | |
| | Aerospace | | | 5,704 | | | 6,127 | | |
| | Microelectronics | | | 21,206 | | | 21,745 | | |
| | | |
|
| |
|
| | |
| | Industrial | | | 178,788 | | | 182,625 | | |
| | | |
|
| |
|
| | |
| | | | $ | 252,904 | | $ | 239,660 | | |
| | | |
|
| |
|
| | |
The change in the carrying amount of goodwill is primarily attributable to the excess of cost over the fair value of the net assets acquired relating to the acquisitions of Biosepra and Euroflow, which are reflected in the Biopharmaceuticals segment and the reversal of excess restructuring reserves and tax allowances. For more detail regarding the acquisitions of Biosepra and Euroflow, refer to the Acquisitions note. In addition, goodwill has been restated for the Life Sciences segment for July 31, 2004 consistent with the Company’s implementation of an integrated business approach in the first quarter of fiscal year 2005. Refer to the Segment Information and Geographies note for a more detailed description.
Intangible assets consist of the following:
| | | | | 2005 | | |
| | | |
|
| | |
| | | | | Gross | | | Accumulated Amortization | | | Net | | |
| | | |
|
| |
|
| |
|
| | |
| | Patents and unpatented technology | | $ | 88,098 | | $ | 41,858 | | $ | 46,240 | | |
| | Trademarks | | | 4,545 | | | 1,849 | | | 2,696 | | |
| | Other | | | 5,301 | | | 4,233 | | | 1,068 | | |
| | | |
|
| |
|
| |
|
| | |
| | | | $ | 97,944 | | $ | 47,940 | | $ | 50,004 | | |
| | | |
|
| |
|
| |
|
| | |
| | | | | 2004 | | |
| | | |
|
| | |
| | | | | Gross | | | Accumulated Amortization | | | Net | | |
| | | |
|
| |
|
| |
|
| | |
| | Patents and unpatented technology | | $ | 76,724 | | $ | 36,108 | | $ | 40,616 | | |
| | Trademarks | | | 3,619 | | | 1,432 | | | 2,187 | | |
| | Other | | | 5,090 | | | 3,764 | | | 1,326 | | |
| | | |
|
| |
|
| |
|
| | |
| | | | $ | 85,433 | | $ | 41,304 | | $ | 44,129 | | |
| | | |
|
| |
|
| |
|
| | |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Patents and trademarks include costs to register new patents and trademarks. Patents also include expenditures to successfully defend certain patents as well as for paid-up licenses for third-party patents.
Amortization expense for fiscal years 2005, 2004 and 2003 was $6,762, $7,888 and $7,833, respectively. Amortization expense is estimated to be approximately $7,176 in 2006, $7,185 in 2007, $6,208 in 2008, $5,745 in 2009 and $5,678 in 2010.
OTHER CURRENT AND NON-CURRENT ASSETS
Other current assets consist of the following:
| | | | | 2005 | | | 2004 | | |
| | | |
|
| |
|
| | |
| | Prepaid expenses | | $ | 21,858 | | $ | 22,859 | | |
| | Deferred income taxes | | | 57,632 | | | 68,888 | | |
| | Income tax receivable | | | 38,641 | | | 21,411 | | |
| | Other receivables | | | 17,754 | | | 19,958 | | |
| | | |
|
| |
|
| | |
| | | | $ | 135,885 | | $ | 133,116 | | |
| | | |
|
| |
|
| | |
Other non-current assets consist of the following:
| | | | | 2005 | | | 2004 | | |
| | | |
|
| |
|
| | |
| | Deferred income taxes (a) | | $ | 89,787 | | $ | 74,803 | | |
| | Investments (b) | | | 6,605 | | | 13,139 | | |
| | Retirement benefit assets (b) | | | 59,998 | | | 61,027 | | |
| | Intangible pension assets (c) | | | 11,379 | | | 10,598 | | |
| | Other | | | 25,474 | | | 26,829 | | |
| | | |
|
| |
|
| | |
| | | | $ | 193,243 | | $ | 186,396 | | |
| | | |
|
| |
|
| | |
| | | | | | | | | | |
| (a) | Refer to the Income Taxes note for further discussion. |
| | |
| (b) | The Company has invested in certain companies to form strategic alliances, enabling the Company to broaden its portfolio of products. Included in investments are certain investments of $6,576 and $6,499 at July 31, 2005 and July 31, 2004, respectively, that the Company classifies as available-for-sale. Amongst these investments is the Company’s investment in VITEX, a leading developer of a broad portfolio of blood products and systems using its proprietary viral reduction technology. At July 31, 2005, the Company owned 617.5 shares of VITEX stock (as adjusted for the one for ten reverse stock split declared by VITEX on March 15, 2005; the number of shares and per share amounts within this note for periods before the subject stock split have all been restated for the split for comparability purposes). At July 31, 2005 and July 31, 2004, the Company’s cost basis, as adjusted by previous impairment charges, was $8.00 per share and $12.70 per share, respectively. In August 2005, the Company sold the 617.5 shares for proceeds aggregating $6,783. The resulting gain of $1,806, net of fees and commissions, will be recognized in the first quarter of fiscal year 2006. |
| | |
| | Also included in investments at July 31, 2004, was the Company’s investment in and loans to Euroflow, prior to the Company’s acquisition of Euroflow (refer to the Acquisitions note for further detail), aggregating $6,640. |
| | |
| | Retirement benefit assets are held to satisfy obligations related to certain unfunded retirement benefit plans, which provide benefits to eligible employees in Germany and the U.S. Included therein are guaranteed investment contracts of $24,795 and $23,746 as of July 31, 2005 and July 31, 2004, respectively. The guaranteed investment contracts were established to pay for supplementary retirement benefits related to unfunded plans in Germany. The July 31, 2005, and July 31, 2004, balance sheets reflect related liabilities in the amounts of $51,814 and $41,211, respectively. |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
| | Also included within retirement benefit assets is a benefits protection trust, with assets aggregating $35,203 and $37,281 as of July 31, 2005 and July 31, 2004, respectively, established for the purpose of satisfying certain unfunded supplemental retirement benefit obligations in the U.S. for eligible executives in the event of a change of control of the Company. In addition to holding cash equivalents primarily to satisfy short-term cash requirements relating to benefit payments, the trust primarily invests in U.S. government obligations, debt obligations of corporations and financial institutions with high credit ratings and equity mutual fund shares. Contractual maturity dates of debt securities held by the trust range from 2005 to 2028. Such debt and equity securities are classified as available-for-sale and aggregated $33,522 and $27,236 as of July 31, 2005 and July 31, 2004, respectively. The July 31, 2005 and July 31, 2004, balance sheets reflect liabilities related to the trust in the amounts of $55,014 and $45,348, respectively. |
| | |
| | The following is a summary of the Company’s available-for-sale investments by category at July 31, 2005 and July 31, 2004: |
| | | | | | | | | | | | | | | | | | | | |
| | | Cost/
Amortized
Cost
Basis | | Fair Value | | Gross
Unrealized
Holding
Gains | | Gross
Unrealized
Holding
Losses | | Net
Unrealized
Holding
Gains/
(Losses) | | Foreign
Exchange
Gains/
(Losses) | |
| | |
| |
| |
| |
| |
| |
| |
| | 2005 | | | | | | | | | | | | | | | | | | | |
| | Equity securities | | $ | 10,085 | | $ | 10,614 | | $ | 1,448 | | $ | (1,235 | ) | $ | 213 | | $ | 316 | |
| | Debt securities: | | | | | | | | | | | | | | | | | | | |
| | U.S. Treasury | | | 8,833 | | | 8,783 | | | — | | | (50 | ) | | (50 | ) | | — | |
| | Other U.S. government | | | 10,954 | | | 10,855 | | | — | | | (99 | ) | | (99 | ) | | — | |
| | CMO/mortgage-backed | | | 474 | | | 500 | | | 26 | | | — | | | 26 | | | — | |
| | Corporate | | | 9,432 | | | 9,375 | | | — | | | (57 | ) | | (57 | ) | | — | |
| | |
| |
| |
| |
| |
| |
| |
| | | | $ | 39,778 | | $ | 40,127 | | $ | 1,474 | | $ | (1,441 | ) | $ | 33 | | $ | 316 | |
| | |
| |
| |
| |
| |
| |
| |
| | 2004 | | | | | | | | | | | | | | | | | | | |
| | Equity securities | | $ | 13,679 | | $ | 9,932 | | $ | 58 | | $ | (3,638 | ) | $ | (3,580 | ) | $ | (167 | ) |
| | Debt securities: | | | | | | | | | | | | | | | | | | | |
| | U.S. Treasury | | | 5,435 | | | 5,378 | | | — | | | (57 | ) | | (57 | ) | | — | |
| | Other U.S. government | | | 10,437 | | | 10,363 | | | — | | | (74 | ) | | (74 | ) | | — | |
| | CMO/mortgage-backed | | | 939 | | | 992 | | | 53 | | | — | | | 53 | | | — | |
| | Corporate | | | 6,967 | | | 7,070 | | | 103 | | | — | | | 103 | | | — | |
| | |
| |
| |
| |
| |
| |
| |
| | | | $ | 37,457 | | $ | 33,735 | | $ | 214 | | $ | (3,769 | ) | $ | (3,555 | ) | $ | (167 | ) |
| | |
| |
| |
| |
| |
| |
| |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
| | The following table shows the gross unrealized losses and fair value of the Company’s available-for-sale investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position: |
| | | | | | | | | | | | |
| | | | Less than 12 months | | 12 months or greater | | Total | |
| | | |
| |
| |
| |
| | | Fair Value | | Gross
Unrealized
Holding
Losses | | Fair Value | | Gross
Unrealized
Holding
Losses | | Fair Value | | Gross
Unrealized
Holding
Losses | |
| | |
| |
| |
| |
| |
| |
| |
| | 2005 | | | | | | | | | | | | | | | | | | | |
| | Equity securities | | $ | 3,705 | | $ | 1,235 | | $ | — | | $ | — | | $ | 3,705 | | $ | 1,235 | |
| | Debt securities: | | | | | | | | | — | | | — | | | | | | | |
| | U.S. Treasury | | | 8,783 | | | 50 | | | — | | | — | | | 8,783 | | | 50 | |
| | Other U.S. government | | | 10,855 | | | 99 | | | — | | | — | | | 10,855 | | | 99 | |
| | Corporate | | | 9,375 | | | 57 | | | — | | | — | | | 9,375 | | | 57 | |
| | |
| |
| |
| |
| |
| |
| |
| | | | $ | 32,718 | | $ | 1,441 | | $ | — | | $ | — | | $ | 32,718 | | $ | 1,441 | |
| | |
| |
| |
| |
| |
| |
| |
| | | | | | | | | |
| | | | Less than 12 months | | 12 months or greater | | Total | |
| | | |
| |
| |
| |
| | | Fair Value | | Gross
Unrealized
Holding
Losses | | Fair Value | | Gross
Unrealized
Holding
Losses | | Fair Value | | Gross
Unrealized
Holding
Losses | |
| | |
| |
| |
| |
| |
| |
| |
| | 2004 | | | | | | | | | | | | | | | | | | | |
| | Equity securities | | $ | 5,001 | | $ | 2,814 | | $ | 3,433 | | $ | 824 | | $ | 8,434 | | $ | 3,638 | |
| | Debt securities: | | | | | | | | | | | | | | | | | | | |
| | U.S. Treasury | | | 5,378 | | | 57 | | | — | | | — | | | 5,378 | | | 57 | |
| | Other U.S. government | | | 10,363 | | | 74 | | | — | | | — | | | 10,363 | | | 74 | |
| | |
| |
| |
| |
| |
| |
| |
| | | | $ | 20,742 | | $ | 2,945 | | $ | 3,433 | | $ | 824 | | $ | 24,175 | | $ | 3,769 | |
| | |
| |
| |
| |
| |
| |
| |
| | |
| | The following table shows the proceeds and gross gains and losses from the sale of available-for-sale investments for the years ended July 31, 2005, July 31, 2004 and August 2, 2003: |
| | | | | | | | | | |
| | | | 2005 | | 2004 | | 2003 | | |
| | | |
| |
| |
| | |
| | Proceeds from sales | | $ | 6,900 | | $ | 12,663 | | $ | 19,643 | | |
| | Realized gross gains on sales | | | 160 | | | 304 | | | 747 | | |
| | Realized gross losses on sales | | | 2 | | | 283 | | | 102 | | |
| | |
| (c) | Intangible pension assets represent the unfunded accumulated benefit obligations to the extent of unrecognized prior service costs. Refer to the Pension and Profit Sharing Plans and Arrangements note for further discussion. |
NOTES PAYABLE AND LONG-TERM DEBT
At July 31, 2005, the Company had unsecured credit facilities which require no compensating balances, totaling approximately $137,505. In addition to providing short-term liquidity and overdraft protection, these facilities also support various “credit enhancement” programs (guarantee, performance, warranty) and other financial exposures (foreign exchange forward contracts) of the Company. At July 31, 2005, notes payable were $24,299 and an additional $20,078 was committed to various credit enhancement programs. The weighted average interest rates on notes payable at the end of fiscal years 2005 and 2004 were 3.7% and 4.5%, respectively.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Long-term debt consists of:
| | | 2005 | | 2004 | | |
| | |
| |
| | |
| Senior revolving credit facility, due in 2010 (a) | | $ | 190,000 | | $ | 54,000 | | |
| Private placement senior notes, due in 2010 (a) | | | — | | | 100,000 | | |
| Private placement senior notes, due in 2012 (b) | | | 280,000 | | | 280,000 | | |
| Bank loan, due through October 2007 (b) | | | — | | | 50,000 | | |
| Yen denominated loan, due in 2007 (c) | | | 26,727 | | | 26,931 | | |
| Other | | | 14,606 | | | 5,790 | | |
| | |
| |
| | |
| | | | 511,333 | | | 516,721 | | |
| SFAS No. 133 fair value adjustment, net (d) | | | 187 | | | 2,479 | | |
| | |
| |
| | |
| Total long-term debt | | | 511,520 | | | 519,200 | | |
| Current portion | | | (1,359 | ) | | (30,514 | ) | |
| | |
| |
| | |
| Long-term debt, net of current portion | | $ | 510,161 | | $ | 488,686 | | |
| | |
| |
| | |
| | | | | | | | | |
| (a) | On July 29, 2005, the Company entered into a five-year $350,000 unsecured senior revolving credit facility with a syndicate of banks, which expires on July 29, 2010. Simultaneously, the Company borrowed $190,000 under this facility and used the proceeds principally to (1) redeem all of its $100,000 private placement 7.83% senior notes (discussed below), including approximately $3,241 in accrued interest and $14,702 in make-whole payments and (2) repay the $65,250 of borrowings, accrued interest and fees due under its then existing $300,000 unsecured senior revolving credit facility entered into on August 24, 2004 (discussed below), and (3) various fees associated with the new facility. The existing $300,000 unsecured senior revolving credit facility was terminated upon the execution of the new $350,000 revolving credit facility. Letters of credit outstanding against the $350,000 revolving credit facility as of July 31, 2005 were approximately $12,396. |
| | |
| | Borrowings under the new facility bear interest at either a variable rate based upon LIBOR or at the prime rate of the Administrative Agent. The new facility contains customary affirmative and negative covenants, financial covenants, representations and warranties and events of defaults. The financial covenants are as follows: |
| | | |
| | i. | Minimum interest coverage ratio: The Ratio of Earnings Before Net Interest, Taxes, Depreciation, Amortization and the Non-Cash Portion of Non-Recurring Charges and Income (“EBITDA”) to Net Interest Expense shall not be less than 5 to 1 computed on the basis of cumulative results for the most recently ended four consecutive quarters. |
| | | |
| | ii. | Maximum funded debt ratio: The Ratio of Consolidated Funded Debt to EBITDA shall not exceed 3 to 1, EBITDA computed on the basis of cumulative results for the most recently ended four consecutive quarters. |
| | |
| | On August 24, 2004, the Company entered into a five-year $300,000 unsecured senior revolving credit facility with a syndicate of banks, which was due to expire on August 24, 2009. Simultaneously, the Company borrowed $125,000 under this facility and used the proceeds principally to repay (1) $71,200 ($54,000 outstanding as of July 31, 2004) of borrowings under its then existing $200,000 unsecured senior revolving credit facility entered into on August 30, 2000, (2) the $50,000 balance due on its then existing $100,000 bank loan (discussed below) which otherwise was to mature on October 18, 2007 and (3) various fees associated with the new facility. Both the $200,000 revolving credit facility and the $100,000 bank loan were terminated upon the execution of the new revolving credit facility. This facility was terminated on July 29, 2005, as described above. |
| | |
| | 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 five-year $200,000 unsecured senior revolving credit facility, which was due to expire on August 30, 2005. The balance outstanding under this facility of $54,000 as of July 31, 2004 was classified as long-term based on the refinancing of this indebtedness on August 24, 2004, as described above. Also as discussed above, on July 29, 2005, the balance due on the $100,000 private placement was repaid. |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
| | | The Company was in compliance with all covenants of its various debt agreements as of July 31, 2005. |
| | |
| (b) | On August 6, 2002, the Company completed a private placement 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 bank loan, bearing interest at a variable rate based upon LIBOR or the prime rate of the Administrative Agent, which matured in quarterly installments of $5,000 starting in January 2003 and running through October 2007. As discussed above, the balance due on the $100,000 loan was repaid on August 24, 2004. |
| | |
| (c) | The Company refinanced its Yen 3 billion loan (approximately $26,727 as of July 31, 2005), which was due on June 20, 2005, until June 20, 2007. Interest payments are at a variable rate based upon Yen LIBOR. The Company has designated the June 2005 Yen 3 billion loan as a non-derivative hedge of its net Yen investment in a Japanese subsidiary. As a result of such designation, adjustments related to the fair market value of the Yen 3 billion loan are reported in other comprehensive income. |
| | |
| (d) | Refer to the Financial Instruments and Risks and Uncertainties note for further discussion of the Company’s hedging activities. |
The aggregate annual maturities of long-term debt during fiscal years 2006 through 2010 are approximately as follows:
| | 2006 | | $ | 1,359 | | |
| | 2007 | | | 28,627 | | |
| | 2008 | | | 1,408 | | |
| | 2009 | | | 1,475 | | |
| | 2010 | | | 191,547 | | |
Interest expense, net, for fiscal years 2005, 2004 and 2003 is comprised of:
| | | | 2005 | | 2004 | | 2003 | | |
| | | |
| |
| |
| | |
| | Interest expense | | $ | 30,895 | | $ | 24,143 | | $ | 28,450 | | |
| | Interest income | | | 4,945 | | | 3,642 | | | 4,012 | | |
| | | |
| |
| |
| | |
| | Interest expense, net | | $ | 25,950 | | $ | 20,501 | | $ | 24,438 | | |
| | | |
| |
| |
| | |
FINANCIAL INSTRUMENTS AND RISKS AND UNCERTAINTIES
The Company is exposed to market risks, such as changes in foreign currency exchange rates and interest rates. The purpose of the Company’s foreign currency hedging program is to reduce the risk caused by short-term changes in exchange rates. To accomplish this, the Company uses certain contracts, primarily foreign currency forward contracts (“forwards”), which minimize cash flow risks from changes in foreign currency exchange rates. The Company manages interest risk using a mix of fixed-rate and variable-rate debt. To manage this risk in a cost efficient manner, the Company enters into interest rate swaps in which the Company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. Derivative instruments are not used for speculative or trading purposes.
The Company entered into two consecutive, non-concurrent, “receive fixed, pay variable” fair value interest rate swap transactions related to the then existing $100,000 private placement of 7.83% notes due in 2010. Both transactions had an aggregate notional amount of $100,000 and both were terminated prior to maturity to enable the Company to monetize, or realize, gains in the fair value of the swaps. The initial swap was entered into in fiscal year 2001 and terminated in fiscal year 2002. The second swap was entered into in fiscal year 2002 (concurrent with the termination of the first swap) and was terminated in fiscal year 2003. Proceeds related to the terminations in fiscal years 2002 and 2003, net of accrued interest due to the Company of $1,035 in fiscal year 2003, totaled $1,000 and $7,533, respectively; such amounts being reflected as a realized adjustment to the carrying value of the underlying indebtedness and amortized, as a reduction of interest expense, over the then remaining life of such indebtedness. A combined unamortized balance of $5,506 was written off on July 29, 2005 pursuant to the early extinguishment of the $100,000 private placement 7.83% senior notes due in 2010.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The Company also entered into two consecutive, non-concurrent, “receive fixed, pay variable” fair value interest rate swap transactions related to the $280,000 private placement 6.00% notes due in 2012. Both transactions had an aggregate notional amount of $230,000 and both were terminated prior to maturity. The initial swap was entered into in fiscal year 2003 and terminated that same year to monetize, or realize, gains in the fair market value of the swap. Proceeds, net of accrued interest due to the Company of $2,667, were $13,467 and are being amortized as a reduction of interest expense over the remaining life of the underlying indebtedness. The second swap was entered into in fiscal year 2003 (concurrent with the termination of the first swap) and was terminated in fiscal year 2005 to effect a decision by management to increase the fixed rate portion of the Company’s debt portfolio in response to changes in the interest rate environment. The cash outlay, augmented by accrued interest due to the Company of $894, totaled $10,938; such amount being amortized as an increase to interest expense over the remaining life of the underlying indebtedness. The unamortized balance of both swaps, netting to $187 at July 31, 2005, is reflected as a realized adjustment to the carrying value of the underlying indebtedness.
The components of SFAS No. 133 fair value adjustment, net, as reflected in the note entitled “Notes Payable and Long-Term Debt” are as follows:
| | | 2005 | | 2004 | | |
| | |
| |
| | |
| | $280,000
Private
Placement | | $100,000
Private
Placement | | $280,000
Private
Placement | | Total | | |
| |
| |
| |
| |
| | |
| Realized | | $ | 187 | | $ | 6,589 | | $ | 11,752 | | $ | 18,341 | | |
| Unrealized | | | — | | | — | | | (15,862 | ) | | (15,862 | ) | |
| |
| |
| |
| |
| | |
| Total | | $ | 187 | | $ | 6,589 | | $ | (4,110 | ) | $ | 2,479 | | |
| |
| |
| |
| |
| | |
On March 7, 2003, the Company entered into a forward dated “receive variable, pay fixed” interest rate swap related to the Yen 3 billion loan that matured in June 2005, whereby the Company received payments at a variable rate based upon Yen LIBOR and made payments at a fixed rate of .95% on a notional amount of Yen 3 billion. Concurrent with the maturity of the underlying Yen 3 billion loan, this swap terminated in June 2005. On May 9, 2005 the Company entered into a forward dated “receive variable, pay fixed” interest rate swap related to the June 2005 refinancing of the Yen 3 billion loan. The Company will receive payments at a variable rate based upon Yen LIBOR, and will make payments at an all-in fixed rate of 0.36% on a notional amount of Yen 3 billion. The swap has the same term as the Yen 3 billion loan.
In April 2003, the Company amended the terms of the “receive variable, pay fixed” interest rate swap related to certain borrowings under the senior credit facility. The Company receives payments at a variable rate based on LIBOR and makes payments at an effective rate of 4.3% on a notional amount of $25,000. The swap expires in February 2006.
In June 2005, pursuant to the execution of a Yen 3.5 billion loan from a U.S. dollar functional Netherlands subsidiary of the Company (“PNBV”) to a Japanese subsidiary of the Company (“NPL”), PNBV entered into a cross currency swap with a financial institution. Under the terms of the agreement, PNBV will make interest payments to the financial institution at a fixed rate, based upon a notional amount of Yen 3.5 billion. In return, the financial institution will make interest payments to PNBV, at a fixed rate, based upon a $32,154 notional amount (the U.S. dollar equivalent of the Yen 3.5 billion based upon the spot rate on the date of the closing of this transaction). At the end of this arrangement, PNBV will remit the Yen 3.5 billion principal, which it will receive from NPL, to the financial institution, which in turn will remit the $32,154 to PNBV.
As of July 31, 2005, the Company had interest rate swaps and forwards outstanding with notional amounts aggregating $51,726 and $36,874, respectively, whose fair values were a liability of $11 and $76, respectively. Other comprehensive income includes $11 of cumulative unrealized losses on variable to fixed rate interest rate swaps (i.e., cash flow hedges) of which $22 is expected to be reclassified into earnings within one year.
The credit risk related to the interest rate swaps and the forwards is considered low because such instruments are entered into only with financial institutions having high credit ratings and are generally settled on a net basis.
The Company considers the fair value of all non-derivative financial instruments to be not materially different from their carrying value at year-end, except for fixed rate debt with a face value of $280,000, a carrying value of $280,187 and a fair value of $296,500. The fair market value was determined by calculating the present value of all future cash flows (i.e., interest and principal) using the discount factor mandated by the indenture in the event of early extinguishment.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The Company’s cash and cash equivalents are in high-quality securities placed with a wide array of financial institutions with high credit ratings. This investment policy limits the Company’s exposure to concentration of credit risks.
The Company’s products are sold to a diverse group of customers throughout the world. The Company is subject to certain risks and uncertainties as a result of changes in general economic conditions, sources of supply, competition, foreign exchange rates, tax reform, litigation and regulatory developments. The diversity and breadth of the Company’s products and geographic operations mitigate the risk that adverse changes in any event would materially affect the Company’s financial position. Additionally, as a result of the diversity of its customer base, the Company does not consider itself exposed to concentration of credit risks. These risks are further minimized by placing credit limits, ongoing monitoring of customers’ account balances, and assessment of customers’ financial strength.
INCOME TAXES
The components of earnings before income taxes are as follows:
| | | 2005 | | 2004 | | 2003 | |
| | |
| |
| |
| |
| Domestic operations, including Puerto Rico | | $ | 37,621 | | $ | 52,612 | | $ | 19,042 | |
| Foreign operations | | | 143,450 | | | 145,220 | | | 124,194 | |
| | |
| |
| |
| |
| | | $ | 181,071 | | $ | 197,832 | | $ | 143,236 | |
| | |
| |
| |
| |
| The provisions for income taxes consist of the following items: | | | | | | | | | | |
| Current: | | | | | | | | | | |
| Federal and Puerto Rico | | $ | 9,069 | | $ | 18,240 | | $ | 6,744 | |
| Foreign | | | 33,084 | | | 46,685 | | | 43,627 | |
| | |
| |
| |
| |
| | | | 42,153 | | | 64,925 | | | 50,371 | |
| | |
| |
| |
| |
| Deferred: | | | | | | | | | | |
| Federal and Puerto Rico | | | 3,273 | | | (18,105 | ) | | (12,027 | ) |
| Foreign | | | (5,171 | ) | | (561 | ) | | 1,690 | |
| | |
| |
| |
| |
| | | | (1,898 | ) | | (18,666 | ) | | (10,337 | ) |
| | |
| |
| |
| |
| | | $ | 40,255 | | $ | 46,259 | | $ | 40,034 | |
| | |
| |
| |
| |
A reconciliation of the provisions for income taxes follows:
| | | % of Pretax Earnings | |
| | |
| |
| | | 2005 | | 2004 | | 2003 | |
| | |
| |
| |
| |
| Computed “expected” tax expense | | | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Tax benefit of Puerto Rico operations | | | (8.4 | ) | | (8.4 | ) | | (14.3 | ) |
| Non-deductibility of in-process research and development write-off | | | — | | | — | | | 9.2 | |
| Change in valuation allowance | | | 0.6 | | | (1.6 | ) | | 3.4 | |
Foreign income and withholding taxes,
net of U.S. foreign tax credits | | | (4.5 | ) | | (4.5 | ) | | (4.7 | ) |
| Other | | | (0.5 | ) | | 2.9 | | | (0.7 | ) |
| | |
|
| |
|
| |
|
| |
| Effective tax rate | | | 22.2 | % | | 23.4 | % | | 27.9 | % |
| | |
|
| |
|
| |
|
| |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The Company has two Puerto Rico subsidiaries that are organized as “possessions corporations” as defined in Section 936 of the Internal Revenue Code. The Small Business Job Protection Act of 1996 repealed Section 936 of the Internal Revenue Code which provided a tax credit for U.S. companies with operations in certain U.S. possessions, including Puerto Rico. For companies with existing qualifying Puerto Rico operations, such as The Company, Section 936 will be phased out, with a decreasing credit being available through the last taxable year beginning before January 1, 2006.
The Company also operates a third Puerto Rico entity as a branch of a wholly owned controlled foreign corporation (“CFC”). Under U.S. tax principles, the earnings of a CFC are normally subject to U.S. tax only upon repatriation. Accordingly, no taxes have been provided on the unrepatriated earnings of this subsidiary.
The components of the net deferred tax asset at July 31, 2005 and July 31, 2004, are as follows:
| | | | 2005 | | 2004 | | |
| | | |
| |
| | |
| | Deferred tax asset: | | | | | | | | |
| | Tax loss and tax credit carry-forwards | | $ | 122,794 | | $ | 146,514 | | |
| | Inventories | | | 18,544 | | | 14,166 | | |
| | Compensation and benefits | | | 56,039 | | | 48,656 | | |
| | Environmental | | | 8,300 | | | 10,003 | | |
| | Accrued expenses | | | 12,409 | | | 17,693 | | |
| | Other | | | 39,233 | | | 18,748 | | |
| | | |
| |
| | |
| | Gross deferred tax asset | | | 257,319 | | | 255,780 | | |
| | Valuation allowance | | | (57,631 | ) | | (68,829 | ) | |
| | | |
| |
| | |
| | Total deferred tax asset | | | 199,688 | | | 186,951 | | |
| | | |
| |
| | |
| | Deferred tax liability: | | | | | | | | |
| | Plant and equipment | | | (38,615 | ) | | (36,971 | ) | |
| | Pension assets | | | (8,840 | ) | | (10,086 | ) | |
| | Other | | | (15,993 | ) | | (12,208 | ) | |
| | | |
| |
| | |
| | Total deferred tax liability | | | (63,448 | ) | | (59,265 | ) | |
| | | |
| |
| | |
| | Net deferred tax asset | | $ | 136,240 | | $ | 127,686 | | |
| | | |
| |
| | |
As of July 31, 2005, the Company had available tax operating loss, tax capital loss and tax credit carry forwards subject to expiration as follows:
| | | | Losses | | | | | |
| | | |
| | | | | |
| | Year of Expiration | | Operating | | Capital | | Tax Credits | | |
| | | |
| |
| |
| | |
| | 2006 | | $ | — | | $ | — | | $ | 5,818 | | |
| | 2007-2015 | | | 8,958 | | | 66,656 | | | 55,588 | | |
| | 2016-2025 | | | 5,750 | | | — | | | — | | |
| | | |
| |
| |
| | |
| | Subtotal | | | 14,708 | | | 66,656 | | | 61,406 | | |
| | Indefinite | | | 58,573 | | | — | | | 14,007 | | |
| | | |
| |
| |
| | |
| | Total | | $ | 73,281 | | $ | 66,656 | | $ | 75,413 | | |
| | | |
| |
| |
| | |
The valuation allowance has been reduced by $11,198 as of July 31, 2005. During the period, a charge of $2,488 was recorded to goodwill due to the release of valuation allowances of acquired net operating losses. The remainder of the reduction was primarily the result of the expiration of previously reserved operating losses in various foreign entities.
In evaluating the reasonableness of the valuation allowance, management assesses whether it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Ultimately, the realization of deferred tax assets is dependent upon generation of future taxable income during those periods in which temporary differences become deductible and/or credits can be utilized. To this end, management considers the level of historical taxable income, the scheduled reversal of deferred tax liabilities, tax-planning strategies and projected future taxable income. Based on these considerations, and the indefinite carry-forward availability of certain deferred tax credits (principally related to alternative minimum tax), management believes it is more likely than not that the Company will realize the benefit of the deferred tax asset, net of the July 31, 2005 valuation allowance.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
If subsequently recognized, the tax benefit attributable to $38,184 would be charged to goodwill. This valuation allowance relates primarily to pre-acquisition tax operating loss and tax capital loss carry forwards.
On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act provides for a special one-time tax deduction of 85% of certain foreign earnings that are repatriated, as defined in the Act. As of July 31, 2005, the Company has not provided deferred taxes on $1,036,983 of undistributed foreign subsidiaries’ earnings since substantially all such earnings were expected to be permanently invested in foreign operations. The range of reasonably possible amounts, based upon the law, that are being considered for repatriation due to the aforementioned provision is between zero and $500,000. The related potential range of income tax is between zero and $26,250. The extent to which the Company will ultimately take advantage of this provision depends on a number of factors, including the manner in which the funds will be utilized and the ability to obtain financing abroad.
ACCRUED AND OTHER NON-CURRENT LIABILITIES
Accrued liabilities consist of the following:
| | | | 2005 | | 2004 | | |
| | | |
| |
| | |
| | Payroll and related taxes | | $ | 93,869 | | $ | 91,081 | | |
| | Benefits | | | 33,001 | | | 38,395 | | |
| | Interest payable | | | 18,784 | | | 14,047 | | |
| | Environmental remediation (a) | | | 5,699 | | | 7,276 | | |
| | Other | | | 65,927 | | | 58,724 | | |
| | | |
| |
| | |
| | | | $ | 217,280 | | $ | 209,523 | | |
| | | |
| |
| | |
Other non-current liabilities consist of the following:
| | | | 2005 | | 2004 | | |
| | | |
| |
| | |
| | Retirement benefits | | $ | 126,399 | | $ | 100,629 | | |
| | Environmental remediation (a) | | | 18,836 | | | 22,416 | | |
| | Fair value of interest rate swaps (b) | | | — | | | 15,862 | | |
| | Other | | | 2,468 | | | 1,830 | | |
| | | |
| |
| | |
| | | | $ | 147,703 | | $ | 140,737 | | |
| | | |
| |
| | |
| (a) | For further discussion regarding environmental remediation liabilities refer to the Contingencies and Commitments note. |
| | |
| (b) | For further discussion regarding interest rate swaps refer to the Financial Instruments and Risks and Uncertainties note. |
PENSION AND PROFIT SHARING PLANS AND ARRANGEMENTS
Pension Plans
The Company provides substantially all domestic and foreign employees with retirement benefits. Funding policy for domestic plans, which is primarily comprised of a cash balance pension plan, is in accordance with the Employee Retirement Income Security Act of 1974 (“ERISA”); for foreign plans, funding is determined by local tax laws and regulations. Pension costs charged to operations totaled $29,890, $24,962 and $17,723 in fiscal years 2005, 2004 and 2003, respectively.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The Company uses a July 31 measurement date for its defined benefit pension plans. The following table reflects the change in benefit obligations, change in plan assets and funded status for these plans:
| | | | | U.S. Plans | | Foreign Plans | |
| | | | |
| |
| |
| | | | | 2005 | | 2004 | | 2005 | | 2004 | |
| | | | |
| |
| |
| |
| |
| | Change in benefit obligation: | | | | | | | | | | | | | |
| | | Benefit obligation – beginning of year | | $ | 153,145 | | $ | 141,291 | | $ | 239,452 | | $ | 205,958 | |
| | | Curtailments and settlements | | | — | | | — | | | 141 | | | (1,110 | ) |
| | | Service cost | | | 6,633 | | | 6,540 | | | 6,897 | | | 7,423 | |
| | | Interest cost | | | 9,227 | | | 8,416 | | | 12,864 | | | 11,408 | |
| | | Plan participant contributions | | | — | | | — | | | 2,464 | | | 2,425 | |
| | | Plan amendments | | | 1,682 | | | 937 | | | — | | | 3,572 | |
| | | Actuarial loss (gain) | | | 26,151 | | | 6,195 | | | 47,667 | | | (5,450 | ) |
| | | Total benefits paid | | | (10,646 | ) | | (10,234 | ) | | (9,939 | ) | | (8,202 | ) |
| | | Effect of exchange rates | | | — | | | — | | | (8,165 | ) | | 23,428 | |
| | | | |
| |
| |
| |
| |
| | Benefit obligation – end of year | | | 186,192 | | | 153,145 | | | 291,381 | | | 239,452 | |
| | | | |
| |
| |
| |
| |
| | Change in plan assets (a): | | | | | | | | | | | | | |
| | | Fair value of plan assets – beginning of year | | | 74,529 | | | 66,576 | | | 139,302 | | | 118,204 | |
| | | Actual return on plan assets | | | 10,319 | | | 7,756 | | | 27,858 | | | 5,639 | |
| | | Company contributions | | | 17,597 | | | 10,431 | | | 10,049 | | | 6,439 | |
| | | Plan participant contributions | | | — | | | — | | | 2,464 | | | 2,425 | |
| | | Benefits paid from plan assets | | | (10,646 | ) | | (10,234 | ) | | (9,939 | ) | | (8,202 | ) |
| | | Effect of exchange rates | | | — | | | — | | | (5,620 | ) | | 14,797 | |
| | | | |
| |
| |
| |
| |
| | Fair value of plan assets – end of year | | | 91,799 | | | 74,529 | | | 164,114 | | | 139,302 | |
| | | | |
| |
| |
| |
| |
| | Funded status (a): | | | (94,393 | ) | | (78,616 | ) | | (127,267 | ) | | (100,150 | ) |
| | | Unrecognized actuarial loss | | | 46,696 | | | 27,168 | | | 99,355 | | | 79,293 | |
| | | Unrecognized prior service cost | | | 8,107 | | | 7,309 | | | 3,642 | | | 4,413 | |
| | | Unrecognized transition (asset) obligation | | | (85 | ) | | (127 | ) | | — | | | 142 | |
| | | | |
| |
| |
| |
| |
| | Net amount recognized | | $ | (39,675 | ) | $ | (44,266 | ) | $ | (24,270 | ) | $ | (16,302 | ) |
| | | | |
| |
| |
| |
| |
| | Amount recognized in the balance sheet consists of: | | | | | | | | | | | | | |
| | | Prepaid benefit | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | Accrued benefit liability | | | (71,403 | ) | | (66,600 | ) | | (77,365 | ) | | (59,693 | ) |
| | | Intangible asset | | | 7,990 | | | 6,815 | | | 3,389 | | | 3,783 | |
| | | Accumulated other comprehensive income | | | 23,738 | | | 15,519 | | | 49,706 | | | 39,608 | |
| | | | |
| |
| |
| |
| |
| | Net amount recognized | | $ | (39,675 | ) | $ | (44,266 | ) | $ | (24,270 | ) | $ | (16,302 | ) |
| | | | |
| |
| |
| |
| |
| | | | | | | | | | | | | | | |
| | Accumulated benefit obligation | | $ | 162,787 | | $ | 138,680 | | $ | 241,347 | | $ | 195,175 | |
| | | | | | | | | | | | | | | |
| | Plans with accumulated benefit obligations in excess of plan assets consist of the following: | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | Accumulated benefit obligation | | $ | 162,787 | | $ | 138,680 | | $ | 241,347 | | $ | 195,175 | |
| | | Projected benefit obligation | | | 186,192 | | | 153,145 | | | 291,381 | | | 239,452 | |
| | | Plan assets at fair value | | | 91,799 | | | 74,529 | | | 164,114 | | | 139,302 | |
| | | |
| | (a) | The Company has certain unfunded supplemental defined benefit plans, which provide benefits to eligible executives in the U.S. and employees abroad. As such, the above tables do not include the Company’s assets relating to these plans of $34,107 and $36,341 for the U.S. plans and $24,795 and $23,746 for the foreign plans as of July 31, 2005 and July 31, 2004, respectively. Liabilities, included in the tables above, related to these plans were $53,711 and $44,177 for the U.S. plans and $51,814 and $41,211 for the foreign plans as of July 31, 2005 and July 31, 2004, respectively. |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Net periodic benefit cost for the Company’s defined benefit pension plans includes the following components:
| | | U.S. Plans | | Foreign Plans | |
| | |
| |
| |
| | | 2005 | | 2004 | | 2003 | | 2005 | | 2004 | | 2003 | |
| | |
| |
| |
| |
| |
| |
| |
| | Service cost | $ | 6,633 | | $ | 6,540 | | $ | 5,185 | | $ | 6,897 | | $ | 7,423 | | $ | 7,382 | |
| | Interest cost | | 9,227 | | | 8,416 | | | 8,459 | | | 12,864 | | | 11,408 | | | 9,685 | |
| | Expected return on plan assets | | (5,196 | ) | | (5,455 | ) | | (6,232 | ) | | (9,333 | ) | | (9,207 | ) | | (8,990 | ) |
| | Amortization of prior service cost | | 884 | | | 749 | | | 674 | | | 501 | | | 499 | | | 208 | |
| | Amortization of net transition asset | | (42 | ) | | (81 | ) | | (226 | ) | | 21 | | | 32 | | | (150 | ) |
| | Recognized actuarial loss | | 1,500 | | | 1,195 | | | 571 | | | 5,274 | | | 4,107 | | | 1,121 | |
| | (Gain) loss due to curtailments and settlements | | — | | | — | | | — | | | 660 | | | (664 | ) | | 36 | |
| | |
| |
| |
| |
| |
| �� |
| |
| | Net periodic benefit cost | $ | 13,006 | | $ | 11,364 | | $ | 8,431 | | $ | 16,884 | | $ | 13,598 | | $ | 9,292 | |
| | |
| |
| |
| |
| |
| |
| |
The following table provides the weighted-average assumptions used to determine benefit obligations and net periodic benefit cost:
| | | U.S. Plans | | Foreign Plans | |
| | |
| |
| |
| | | 2005 | | 2004 | | 2003 | | 2005 | | 2004 | | | 2003 | |
| | |
| |
| |
| |
| |
| | |
| |
| | Assumptions used to determine benefit obligations | | | | | | | | | | | | | | | | | | |
| | Discount rate | | 5.25 | % | | 6.25 | % | | 6.25 | % | | 4.51 | % | | 5.32 | % | | 5.10 | % |
| | Rate of compensation increase | | 3.67 | % | | 3.50 | % | | 4.00 | % | | 3.79 | % | | 3.64 | % | | 3.65 | % |
| | | | | | | | | | | | | | | | | | | | |
| | Assumptions used to determine net periodic benefit cost | | | | | | | | | | | | | | | | | | |
| | Discount rate | | 6.25 | % | | 6.25 | % | | 7.25 | % | | 5.32 | % | | 5.10 | % | | 5.62 | % |
| | Expected long-term rate of return on plan assets | | 7.00 | % | | 8.00 | % | | 9.00 | % | | 6.30 | % | | 6.31 | % | | 6.30 | % |
| | Rate of compensation increase | | 3.50 | % | | 4.00 | % | | 4.00 | % | | 3.64 | % | | 3.65 | % | | 3.58 | % |
The Company determines its actuarial assumptions on an annual basis. To develop the expected long-term rate of return on plan assets assumption, the Company considers the current level of expected returns on risk free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based upon the target asset allocation to develop the expected long-term rate of return on plan assets assumption for the portfolio.
The following table provides the Company’s weighted average target plan asset allocation and actual asset allocation by asset category:
| | | | 2005 | | 2004 | | |
| | | |
| |
| | |
| | | | Target
Allocation | | Actual
Allocation | | Actual
Allocation | | |
| | | |
| |
| |
| | |
| | Equity securities | | | 60-70% | | | 70 | % | | 69 | % | |
| | Debt securities | | | 21-30% | | | 23 | % | | 22 | % | |
| | Other | | | 5-10% | | | 7 | % | | 9 | % | |
The Company’s investment objective for defined benefit plan assets is to meet the plans’ benefit obligations, while preserving plan assets. The investment strategies focus on asset class diversification, liquidity to meet benefit payments and an appropriate balance of long-term return and risk. Plan assets are diversified across several investment managers and are generally invested in liquid funds that track broad market equity and bond indices. Plan fiduciaries oversee the investment allocation process, which includes selecting investment managers, commissioning periodic asset-liability studies, setting long-term strategic targets and monitoring asset allocations.
Management’s best estimate of the Company’s cash requirements for the defined benefit plans for the year ending July 31, 2006 is $23,392. This is comprised of expected benefit payments of $5,456, which will be paid directly to participants of unfunded plans from Company assets, as well as expected Company contributions to funded plans of $17,936. Expected contributions are dependent on many variables, including the variability of the market value of the assets as compared to the obligation and other market or regulatory conditions. Accordingly, actual funding may differ greatly from current estimates.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The following table provides the pension benefits expected to be paid to participants, which include payments funded from the Company’s assets, as discussed above, as well as payments paid from plan assets:
| | Expected pension benefit payments |
| | 2006 | | | $ 17,559 | |
| | 2007 | | | 18,694 | |
| | 2008 | | | 20,097 | |
| | 2009 | | | 20,032 | |
| | 2010 | | | 20,354 | |
| | 2011-2015 | | | 115,453 | |
Defined Contribution Plans
The Company’s 401(k) and profit sharing plan covers substantially all domestic employees of the Company and its participating subsidiaries, other than those employees covered by a union retirement plan. The Plan provides that participants may voluntarily contribute a percentage of their compensation and the Company will make a matching contribution equal to 100% of the first 3% of each participant’s contributions. Company contributions in excess of the matching contribution are contingent upon realization of profits of the Company and its participating subsidiaries, unless the Board of Directors decides otherwise. The expense associated with the plan for fiscal years 2005, 2004, and 2003 was $5,297, $5,781 and $5,775, respectively.
The Company and its subsidiaries also participate in defined contribution pension plans primarily for the benefit of certain foreign employees. The expense associated with these plans was $4,266, $2,165 and $1,686 for fiscal years 2005, 2004 and 2003, respectively.
CONTINGENCIES AND COMMITMENTS
Certain facilities of the Company are involved in environmental proceedings. The most significant matter pertains to the Company’s subsidiary, Gelman Sciences Inc. (“Gelman”), which constitutes most of the $24,535 and $29,692 of accruals in the Company’s Consolidated Balance Sheets at July 31, 2005, and July 31, 2004, respectively. The Company recorded charges of $2,077 and $20,837 in fiscal years 2005 and 2004, respectively, related to environmental matters. The increases recorded to the environmental liabilities represent management’s best estimate of the cost to be incurred to perform remediation. The estimates are based upon the feasibility of the use of certain remediation technologies and processes as well as the facts known to management at the time the estimates are made. (Refer to the Accounting Policies and Related Matters - Presentation and Use of Estimates note).
Nearly ten years prior to the Company’s acquisition of Gelman in February 1997, an action was filed in the Circuit Court for Washtenaw County, Michigan (“Court”) by the State of Michigan (“State”) seeking 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 (“the REO”) requiring Gelman to submit and implement a detailed plan that will reduce the contamination to acceptable levels within five years. Gelman’s plan has been submitted to, and approved by, both the Court and the State. Although Gelman has met monthly milestones established under the plan and although contaminant concentrations have been significantly reduced, the goal of reducing contaminant levels to acceptable levels within five years has not been met. The Court, however, concluded that Gelman was in compliance with the terms of the REO in a subsequent order issued in December 2004 (see below).
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
In February 2004, the Court instructed Gelman to submit its Final Feasibility Study describing how it intends to address an area of groundwater contamination not addressed by the previously approved plan. Gelman has submitted its Feasibility Study as instructed. The State also submitted its plan for remediating this area of contamination to the Court. On December 17, 2004, the Court issued its Order and Opinion Regarding Remediation and Contamination of the Unit E. Aquifer (the “Unit E Order”). The Court adopted, with limited modifications, Gelman’s remediation plan for this area of contamination. The Court also noted that Gelman was in compliance with the Court’s previous REO. The State has not appealed the Unit E Order. Gelman is now in the process of implementing the requirements of the Order.
On May 12, 2004, the City of Ann Arbor (the “City”) filed a lawsuit against Gelman 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 Gelman 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 Gelman will vigorously defend against the claim.
By Order dated July 19, 2005, the Court granted Gelman’s motion for partial summary disposition, in part, dismissing two of the City’s three common law claims. Gelman will continue to challenge the legal and factual basis of the City’s remaining statutory and common law claims. The trial, if one is necessary, is set for May 1, 2006.
On June 25, 2004, the Company was sued in the United States District Court for the Eastern District of Michigan by a private plaintiff in connection with the groundwater contamination. The complaint seeks both money damages and injunctive relief requiring remediation of the contamination. The plaintiff also seeks to represent a larger class of property owners and residents who plaintiff claims are affected by the groundwater contamination. On August 25, 2004, the Company filed a motion for summary judgment seeking to dismiss the plaintiff’s claims. In response, plaintiff’s counsel sought and was granted permission to amend the complaint. An amended complaint was filed on November 17, 2004, which added seven plaintiffs. The Company does not believe that there is substantive merit to the named plaintiffs’ claims or a basis for class certification.
On December 27, 2004, the Company filed a second motion for summary judgment addressing the new plaintiffs’ claims. In response, plaintiffs sought, and were granted leave to file a second amended complaint adding a federal statutory claim. Plaintiffs were also granted leave to conduct limited discovery. Discovery is nearing completion and the Company is to re-file its dispositive motion by October 17, 2005. No trial date has been set. The Company will continue to vigorously defend the lawsuit.
On August 10, 2005, the City filed a lawsuit against Gelman under the Federal Superfund Statute (“CERCLA”) for recovery of the City’s alleged response costs, including well replacement costs. Gelman filed its responsive pleadings on September 15, 2005 and will vigorously defend the lawsuit.
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. Because regulatory standards under environmental laws are becoming increasingly stringent, there can be no assurance that future developments, additional information and experience gained will not cause the Company to incur material environmental liabilities or costs beyond those accrued in its consolidated financial statements.
The Company and its subsidiaries are subject to certain other legal actions that arise in the normal course of business. It is management’s opinion that these other actions will not have a material effect on the Company’s financial position.
The Company warrants its products against defect in design, materials and workmanship over various time periods. Warranty costs are recorded based upon experience. The warranty accrual as of July 31, 2005 and July 31, 2004 is immaterial to the financial position of the Company and the change in the accrual for fiscal year 2005 is immaterial to the Company’s consolidated results of operations, cash flows and financial position.
As of July 31, 2005, the Company had performance bonds outstanding relating primarily to its long-term contracts with governmental agencies of approximately $57,778.
The Company and its subsidiaries lease office and warehouse space, automobiles, computers and office equipment. Rent expense for all operating leases amounted to approximately $24,103 in 2005, $22,870 in 2004, and $21,944 in 2003. Future minimum rental commitments at July 31, 2005, for all non-cancelable operating leases with initial terms exceeding one year are $23,281 in 2006; $15,021 in 2007; $8,988 in 2008; $5,901 in 2009; $3,297 in 2010 and $7,083 thereafter.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The Company and its subsidiaries have various non-cancelable purchase commitments for goods or services with various vendors that have terms in excess of one year. Future purchase commitments at July 31, 2005, for the aforementioned purchase commitments are $43,355 in 2006; $15,747 in 2007; $9,902 in 2008; $6,452 in 2009 and $119 in 2010.
The Company has employment agreements with its executive officers, the terms of which expire at various times through August 2005. Such agreements, which have been revised from time to time, provide for minimum salary levels, adjusted annually for cost-of-living changes, as well as for incentive bonuses that are payable if specified management goals are attained as discussed in the Incentive Compensation Plan note. The aggregate commitment for future salaries at July 31, 2005, excluding bonuses, was approximately $10,903.
COMMON STOCK
Shareholder Rights Plan
In 1989, the Board of Directors adopted, and the Company’s shareholders approved, a Shareholder Rights Plan. Under the Plan, as amended on April 20, 1999, one right is attached to each outstanding share of the Company’s common stock. Each right, when it becomes exercisable, will entitle the registered holder to purchase one share of the Company’s common stock at an initial exercise price of $80 per share, subject to adjustment in certain events. The rights will become exercisable and will trade separately from the common stock (1) ten days after any person or group acquires 20% or more of the Company’s outstanding common stock (an Acquiring Person), or (2) ten business days after any person or group commences or announces a tender offer for 20% or more of the outstanding common stock. If any person or group becomes an Acquiring Person, each holder of a right, other than rights owned by the Acquiring Person, would thereafter be entitled, upon exercise of the right at the exercise price, to receive a number of shares of common stock of the Company having a market value at that time of twice the exercise price of the right. Alternatively, the Board of Directors could exchange the rights not owned by the Acquiring Person for common stock at an exchange ratio of one share of common stock per right. In addition, if the Company is acquired in a merger or other business combination, or 50% or more of its consolidated assets or earning power are sold, each holder of a right would thereafter be entitled, upon exercise of the right at the exercise price, to receive a number of shares of the most powerful voting capital stock of the acquiring company which at the time of the business combination or sale had a market value of twice the exercise price of the right.
The rights will expire on December 1, 2009, unless earlier redeemed. The rights are redeemable by the Board of Directors for one-third of a cent per right at any time until a person or group becomes an Acquiring Person.
Stock Repurchase Programs
On October 17, 2003, the Company’s Board of Directors authorized the expenditure of up to $200,000 to repurchase shares of the Company’s common stock. On October 14, 2004, the Board authorized the additional expenditure of up to another $200,000 for the repurchase 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 these authorizations. In fiscal year 2004, the Company purchased 3,099 shares at an aggregate cost of $75,000 with an average price per share of $24.20. In fiscal year 2005, the Company purchased 2,435 shares at an aggregate cost of $64,246 with an average price per share of $26.38. Therefore, $260,754 remains to be expended under the current stock repurchase program. Repurchased shares are held in treasury for use in connection with the Company’s stock plans and for general corporate purposes.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
STOCK PLANS
Stock Purchase Plans
During fiscal year 2000, the Company’s shareholders approved two stock purchase plans, a Management Stock Purchase Plan (“MSPP”) and an Employee Stock Purchase Plan (“ESPP”). These plans enable employees of the Company to purchase the Company’s common stock. Participation in the MSPP is limited to certain executives as designated by the Compensation Committee of the Board of Directors, which also established common stock ownership targets for participants. Participation in the ESPP is available to all employees except those that are included in the MSPP.
The purpose of the MSPP is to encourage key employees of the Company to increase their ownership of shares of the Company’s common stock by providing such employees with an opportunity to elect to have portions of their total annual compensation paid in the form of restricted units, to make cash purchases of restricted units and to earn additional matching restricted units which vest over a three year period for matches prior to August 1, 2003 and vest over four years for matches made thereafter. Such restricted units aggregated 616 and 597 as of July 31, 2005 and July 31, 2004, respectively. In fiscal years 2005 and 2004, approximately 77 and 78 vested restricted units, respectively were distributed. During fiscal years 2005, 2004 and 2003 participants’ deferred compensation and cash payments amounted to $2,508, $2,836 and $1,142 and the Company recognized $754, $563 and $554, respectively, of expense related to matching restricted units.
The ESPP enables participants to purchase shares of the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the market price at the beginning or end of each semi-annual stock purchase period. The semi-annual offering periods end in April and October. During fiscal years 2005, 2004 and 2003, the Company issued 404, 304 and 305 shares at an average price of $21.23, $18.99 and $14.86, respectively.
All of the above shares were issued from treasury stock.
Stock Option Plans
The Company has adopted several plans that provide for the granting of stock options to employees and non-employee directors at option prices equal to the market price of the common stock at the date of grant. On November 17, 2004, the Company’s shareholders approved the 2005 Stock Compensation Plan (the “2005 Plan”) which: (a) amended the 2001 Stock Option Plan for non-employee directors to reduce the total number of shares remaining available for grants from 261 to 150, (b) terminated all other stock plans, except that options outstanding thereunder remain in effect in accordance with their terms, and (c) provided for the issuance of up to 5,000 shares under the 2005 Plan. The 2005 Plan permits the Company to grant to its employees and non-employee directors other forms of equity compensation in addition to stock options (that is, restricted shares, restricted units, performance shares and performance units).
In addition to the 423 stock options granted under the 2005 Plan, restricted stock units were also awarded in fiscal year 2005. The fair value of the awards are determined by reference to the closing price of the stock on the date of the award, and are charged to earnings over the service periods during which the awards are deemed to be earned; one year, in the case of the annual award units to non-employee directors, and four years, in the case of units awarded to employees. The annual award units granted to non-employee directors of the Company vest immediately and are converted to shares once the director ceases to be a member of the Board. A total of 9 units were awarded to non-employee directors in fiscal year 2005, with a market value of $252, of which $147 was charged to expense in fiscal year 2005. Restricted stock units to employees cliff-vest after the fourth anniversary of the date of grant. A total of 261 restricted stock units, net of forfeitures, were granted to employees in fiscal year 2005, with a market value of $7,842, of which $233 was charged to expense in fiscal year 2005.
The forms of option adopted provide that the options may not be exercised within one year from the date of grant, and expire if not completely exercised within 10 years from the date of grant. For the most part, in any year after the first year, the options can be exercised with respect to only up to 25% of the shares subject to the option, computed cumulatively. The Company’s shareholders have approved all of the Company’s stock option plans.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Changes in the options outstanding during fiscal years 2003, 2004 and 2005 are summarized in the following table:
| | | | Number of
Options | | | Price Range | | | Weighted
Average
Price | | | Options
Exercisable | | |
| | | |
| | |
| | |
| | |
| | |
Balance – August 4, 2002
Fiscal Year 2003: | | | 7,387 | | | 4.47-24.56 | | | 20.50 | | | 3,796 | | |
| Options granted | | | 3,930 | | | 16.13-23.89 | | | 17.33 | | | | | |
| Options exercised | | | (1,265 | ) | | 4.47-23.94 | | | 18.28 | | | | | |
| Options terminated | | | (1,521 | ) | | 16.13-22.09 | | | 20.30 | | | | | |
| | | |
| | | | | | | | | | | |
Balance – August 2, 2003
Fiscal Year 2004: | | | 8,531 | | | 11.50-24.56 | | | 19.36 | | | 2,824 | | |
| Options granted | | | 167 | | | 22.57-26.84 | | | 24.79 | | | | | |
| Options exercised | | | (2,062 | ) | | 11.50-23.94 | | | 18.97 | | | | | |
| Options terminated | | | (256 | ) | | 16.13-23.94 | | | 19.77 | | | | | |
| | | |
| | | | | | | | | | | |
Balance – July 31, 2004
Fiscal Year 2005: | | | 6,380 | | | 16.10-26.84 | | | 19.61 | | | 2,577 | | |
| Options granted | | | 450 | | | 24.65-30.83 | | | 28.76 | | | | | |
| Options exercised | | | (2,267 | ) | | 16.13-24.56 | | | 20.23 | | | | | |
| Options terminated | | | (261 | ) | | 16.10-24.56 | | | 19.18 | | | | | |
| | | |
| | | | | | | | | | | |
| Balance – July 31, 2005 | | | 4,302 | | | 16.10-30.83 | | | 20.27 | | | 1,988 | | |
| | | |
| | | | | | | | | | | |
As of July 31, 2005, 9,002 shares of common stock of the Company were reserved for the exercise of stock options and restricted stock units. To the extent treasury shares are used to satisfy option exercises, these reserved shares will not be issued.
The following table summarizes the status of stock options outstanding and exercisable as of July 31, 2005, by range of exercise price:
| | | | | | | 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 | |
| | |
| | |
| | |
| | |
| | |
| |
| $15.42-18.50 | | | 2,305 | | | $17.16 | | | 7.2 | | | 649 | | | $16.98 | |
| $18.51-21.58 | | | 83 | | | $21.71 | | | 6.0 | | | 53 | | | $20.74 | |
| $21.59-24.66 | | | 1,378 | | | $22.27 | | | 5.8 | | | 1,263 | | | $22.20 | |
| $24.67-27.75 | | | 297 | | | $26.75 | | | 7.0 | | | 23 | | | $26.45 | |
| $27.76-30.83 | | | 239 | | | $30.46 | | | 6.9 | | | — | | | — | |
| | | |
| | | | | | | | |
| | | | |
| | | | 4,302 | | | $20.27 | | | 6.7 | | | 1,988 | | | $20.50 | |
| | | |
| | | | | | | | |
| | | | |
INCENTIVE COMPENSATION PLAN
The plan provides additional compensation to officers and key employees of the Company and its subsidiaries based upon the achievement of specified management goals. The Compensation Committee of the Board of Directors establishes the goals on which the Company’s executive officers are compensated, and management establishes the goals for other covered employees. The aggregate amounts charged to expense in connection with the plan were $10,898, $16,377 and $19,960 for fiscal years 2005, 2004 and 2003, respectively.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
OTHER COMPREHENSIVE INCOME
The Company has elected to report comprehensive income in the Consolidated Statement of Stockholders’ Equity. The changes in the components of other comprehensive income are as follows:
| | | | Pretax Amount | | | Tax Effect | | | Net Amount | | |
| | |
|
| |
|
| |
|
| | |
| | | | | | | | | | | | |
| 2003 | | | | | | | | | | | |
| Unrealized translation adjustment | | $ | 43,584 | | $ | 2,751 | | $ | 46,335 | | |
| Minimum pension liability adjustment | | | (43,354 | ) | | 13,379 | | | (29,975 | ) | |
| Unrealized investment gains * | | | 4,555 | | | 116 | | | 4,671 | | |
| Unrealized gains on derivatives | | | 965 | | | (338 | ) | | 627 | | |
| | |
|
| |
|
| |
|
| | |
| Other comprehensive income | | $ | 5,750 | | $ | 15,908 | | $ | 21,658 | | |
| | |
|
| |
|
| |
|
| | |
| 2004 | | | | | | | | | | | |
| Unrealized translation adjustment | | $ | 46,431 | | $ | 2,248 | | $ | 48,679 | | |
| Minimum pension liability adjustment | | | (6,946 | ) | | 2,441 | | | (4,505 | ) | |
| Unrealized investment losses * | | | (7,738 | ) | | 28 | | | (7,710 | ) | |
| Unrealized gains on derivatives | | | 525 | | | (184 | ) | | 341 | | |
| | |
|
| |
|
| |
|
| | |
| Other comprehensive income | | $ | 32,272 | | $ | 4,533 | | $ | 36,805 | | |
| | |
|
| |
|
| |
|
| | |
| 2005 | | | | | | | | | | | |
| Unrealized translation adjustment | | | (39 | ) | | 2,866 | | | 2,827 | | |
| Minimum pension liability adjustment | | | (18,317 | ) | | 6,523 | | | (11,794 | ) | |
| Unrealized investment gains * | | | 3,588 | | | (280 | ) | | 3,308 | | |
| Unrealized gains on derivatives | | | 540 | | | (188 | ) | | 352 | | |
| | |
|
| |
|
| | |
| | |
| Other comprehensive income | | $ | (14,228 | ) | $ | 8,921 | | $ | (5,307 | ) | |
| | |
|
| |
|
| |
|
| | |
* The unrealized (losses) gains on available-for-sale securities, net of related taxes, consisted of the following:
| | | | 2005 | | | 2004 | | | 2003 | |
| | |
|
| | |
| |
|
| |
| Net unrealized (losses) gains arising during the period, net of tax (expense) benefit of $(22), $28 and $116 in 2005, 2004 and 2003, respectively | | $ | (48 | ) | $ | (7,871 | ) | $ | 4,516 | |
| Realized loss included in net earnings for the period | | | — | | | 161 | | | — | |
| Adjustment for unrealized loss included in net earnings due to impairment | | | 3,356 | | | — | | | 155 | |
| | |
|
| |
|
| |
|
| |
| Other comprehensive income (loss) | | $ | 3,308 | | $ | (7,710 | ) | $ | 4,671 | |
| | |
|
| |
|
| |
|
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SEGMENT INFORMATION AND GEOGRAPHIES
Financial information on the business segments identified as reporting segments in accordance with the provision of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” follows.
Life Sciences:
| | Medical: includes sales of disposable blood filtration and cardiovascular filtration products primarily to blood centers and hospitals. In addition, Medical includes products used in research laboratories in drug discovery, gene manipulation and proteomics applications. |
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| | BioPharmaceuticals: includes sales of separation systems and disposable filters primarily to pharmaceutical and biotechnology companies. |
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| | During the first quarter of fiscal year 2003, the Company reorganized its Life Sciences business to improve profitability. As a result, the hospital and medical OEM sub-segments, which were previously part of the BioPharmaceuticals segment, were combined with the Blood segment to create a new segment called Medical. In addition, as part of the restructuring plan announced in the first quarter of fiscal year 2005, the Biosciences division results, which were previously part of the BioPharmaceuticals segment, have been recorded within the Medical segment. Life Sciences segment information for prior periods has been restated for these changes. |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
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. |
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| | Aerospace: includes sales of filtration products, fluid monitoring equipment and shipboard water/waste water filtration products to the aerospace industry for use on commercial and military aircraft, ships and land-based vehicles. |
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| | Microelectronics: includes sales of disposable filtration products to producers of semiconductors, computer terminals, fiber optics, disc drives, thin film rigid discs, and photographic film. |
The above segments benefit from shared resources such that certain assets and activities are shared and are not specifically identifiable to a particular segment. Accounts receivable and inventory are most specifically identifiable to the segments, whereas certain operating assets, principally property, plant and equipment, are shared. Similarly, certain expenses incurred by those entities for various support functions such as human resources, information services, finance, facility costs (including depreciation expense) and other overhead costs are allocated to the segments using various methodologies based upon the nature of the expense. As such, this segment information includes extensive allocation of costs, which are judgmental in nature.
Cash and cash equivalents, short-term investments, investments and retirement benefit assets, income taxes, goodwill and intangible assets and headquarters assets, all of which are managed at the Corporate level, are included in Corporate assets. Expenses associated with the headquarters operations, amortization of intangible assets, interest expense, net, the provision for income taxes, as well as restructuring and other charges are currently excluded from the measurement and evaluation of the profitability of the Company’s reportable segments.
During fiscal year 2005, the Company undertook to reorganize its business structure into three underlying vertically integrated business units: Life Sciences, comprising Medical and BioPharmaceuticals; Aeropower, comprising Aerospace and the Machinery & Equipment portion of the current General Industrial segment; and Process Technologies, comprising General Industrial’s Food & Beverage, Fuels & Chemicals, Power Generation, Municipal Water divisions and Microelectronics. This reorganization is continuing and management has decided to further integrate the Industrial businesses (Aeropower and Process Technologies) to form one vertically integrated Industrial business unit. Thus, in the future the Company’s new structure will consist of two vertically integrated business units: Life Sciences and Industrial. Each business unit will have integrated support functions and responsibility for global manufacturing, sales and marketing, research and development, and finance functions to enable the Company to better meet its customers’ needs and in order to achieve greater efficiencies and profit growth. This revised organizational structure is in contrast to the former matrix organizational structure where, within each geography, these functions supported the market-based part of the matrix on a shared basis (as opposed to being directly vertically integrated into these business units).
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
MARKET SEGMENT INFORMATION
| | | | 2005 | | | 2004 | | | 2003 | | |
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|
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|
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| SALES TO UNAFFILIATED CUSTOMERS: | | | | | | | | | | | |
| Medical | | $ | 443,256 | | $ | 444,015 | | $ | 411,058 | | |
| BioPharmaceuticals | | | 321,480 | | | 277,176 | | | 257,867 | | |
| | |
|
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|
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|
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| Life Sciences | | | 764,736 | | | 721,191 | | | 668,925 | | |
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|
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|
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|
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| General Industrial | | | 742,994 | | | 666,771 | | | 595,210 | | |
| Aerospace | | | 175,095 | | | 178,178 | | | 185,431 | | |
| Microelectronics | | | 219,459 | | | 204,607 | | | 164,069 | | |
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|
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|
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|
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| Industrial | | | 1,137,548 | | | 1,049,556 | | | 944,710 | | |
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|
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|
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|
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| Total | | $ | 1,902,284 | | $ | 1,770,747 | | $ | 1,613,635 | | |
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|
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|
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|
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| OPERATING PROFIT: | | | | | | | | | | | |
| Medical | | $ | 82,320 | | $ | 79,722 | | $ | 71,052 | | |
| BioPharmaceuticals | | | 77,143 | | | 69,100 | | | 68,900 | | |
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|
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|
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|
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| Life Sciences | | | 159,463 | | | 148,822 | | | 139,952 | | |
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|
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|
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|
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| General Industrial | | | 82,886 | | | 78,226 | | | 67,493 | | |
| Aerospace | | | 33,764 | | | 43,634 | | | 52,593 | | |
| Microelectronics | | | 41,533 | | | 38,476 | | | 28,103 | | |
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|
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|
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| Industrial | | | 158,183 | | | 160,336 | | | 148,189 | | |
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|
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|
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|
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| Subtotal | | | 317,646 | | | 309,158 | | | 288,141 | | |
| Restructuring and other charges, net | | | (39,600 | )(a) | | (12,477 | ) | | (47,524 | ) | |
| General corporate expenses | | | (71,025 | ) | | (78,348 | ) | | (72,943 | ) | |
| Interest expense, net | | | (25,950 | ) | | (20,501 | ) | | (24,438 | ) | |
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|
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|
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|
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| Earnings before income taxes | | $ | 181,071 | | $ | 197,832 | | $ | 143,236 | | |
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|
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| DEPRECIATION AND AMORTIZATION: | | | | | | | | | | | |
| Medical | | $ | 22,073 | | $ | 20,884 | | $ | 19,779 | | |
| BioPharmaceuticals | | | 12,734 | | | 12,527 | | | 11,040 | | |
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|
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|
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| Life Sciences | | | 34,807 | | | 33,411 | | | 30,819 | | |
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|
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|
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|
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| General Industrial | | | 26,540 | | | 26,943 | | | 26,415 | | |
| Aerospace | | | 5,289 | | | 4,985 | | | 4,304 | | |
| Microelectronics | | | 8,354 | | | 7,551 | | | 7,222 | | |
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|
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| Industrial | | | 40,183 | | | 39,479 | | | 37,941 | | |
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|
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|
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|
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| Subtotal | | | 74,990 | | | 72,890 | | | 68,760 | | |
| Corporate | | | 15,931 | | | 16,045 | | | 15,179 | | |
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|
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|
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|
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| Total | | $ | 90,921 | | $ | 88,935 | | $ | 83,939 | | |
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| CAPITAL EXPENDITURES: | | | | | | | | | | | |
| Life Sciences | | $ | 38,492 | | $ | 28,368 | | $ | 32,761 | | |
| Industrial | | | 43,499 | | | 30,054 | | | 26,739 | | |
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|
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|
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|
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| Subtotal | | | 81,991 | | | 58,422 | | | 59,500 | | |
| Corporate | | | 4,162 | | | 2,840 | | | 2,670 | | |
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|
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|
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| Total | | $ | 86,153 | | $ | 61,262 | | $ | 62,170 | | |
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|
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| IDENTIFIABLE ASSETS: | | | | | | | | | | | |
| Medical | | $ | 176,459 | | $ | 165,714 | | | | | |
| BioPharmaceuticals | | | 136,336 | | | 118,899 | | | | | |
| Shared Life Sciences Assets | | | 270,579 | | | 270,552 | | | | | |
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|
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|
| | | | | |
| Life Sciences | | | 583,374 | | | 555,165 | | | | | |
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|
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| General Industrial | | | 372,865 | | | 331,692 | | | | | |
| Aerospace | | | 78,578 | | | 72,770 | | | | | |
| Microelectronics | | | 95,341 | | | 82,670 | | | | | |
| Shared Industrial Assets | | | 306,054 | | | 298,882 | | | | | |
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|
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|
| | | | | |
| Industrial | | | 852,838 | | | 786,014 | | | | | |
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|
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|
| | | | | |
| Subtotal | | | 1,436,212 | | | 1,341,179 | | | | | |
| Corporate | | | 829,089 | | | 841,548 | | | | | |
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|
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|
| | | | | |
| Total | | $ | 2,265,301 | | $ | 2,182,727 | | | | | |
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|
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|
| | | | | |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
GEOGRAPHIES
| | | | 2005 | | | 2004 | | | 2003 | | |
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|
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|
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|
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| SALES TO UNAFFILIATED CUSTOMERS: | | | | | | | | | | | |
| Western Hemisphere | | $ | 689,172 | | $ | 667,535 | | $ | 630,307 | | |
| Europe | | | 782,481 | | | 735,969 | | | 671,660 | | |
| Asia | | | 430,631 | | | 367,243 | | | 311,668 | | |
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|
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|
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|
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| Total | | $ | 1,902,284 | | $ | 1,770,747 | | $ | 1,613,635 | | |
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|
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|
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| INTERCOMPANY SALES BETWEEN GEOGRAPHIC AREAS: | | | | | | | | | | | |
| Western Hemisphere | | $ | 231,576 | | $ | 185,538 | | $ | 164,512 | | |
| Europe | | | 126,718 | | | 104,034 | | | 87,057 | | |
| Asia | | | 6,529 | | | 4,736 | | | 3,828 | | |
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|
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|
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|
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| Total | | $ | 364,823 | | $ | 294,308 | | $ | 255,397 | | |
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|
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|
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| TOTAL SALES: | | | | | | | | | | | |
| Western Hemisphere | | $ | 920,748 | | $ | 853,073 | | $ | 794,819 | | |
| Europe | | | 909,199 | | | 840,003 | | | 758,717 | | |
| Asia | | | 437,160 | | | 371,979 | | | 315,496 | | |
| Eliminations | | | (364,823 | ) | | (294,308 | ) | | (255,397 | ) | |
| | |
|
| |
|
| |
|
| | |
| Total | | $ | 1,902,284 | | $ | 1,770,747 | | $ | 1,613,635 | | |
| | |
|
| |
|
| |
|
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| OPERATING PROFIT: | | | | | | | | | | | |
| Western Hemisphere | | $ | 160,863 | | $ | 127,235 | | $ | 116,035 | | |
| Europe | | | 101,102 | | | 121,078 | | | 120,992 | | |
| Asia | | | 63,934 | | | 62,531 | | | 52,269 | | |
| Eliminations | | | (8,253 | ) | | (1,686 | ) | | (1,155 | ) | |
| | |
|
| |
|
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|
| | |
| Subtotal | | | 317,646 | | | 309,158 | | | 288,141 | | |
| Restructuring and other charges, net | | | (39,600 | )(a) | | (12,477 | ) | | (47,524 | ) | �� |
| General corporate expenses | | | (71,025 | ) | | (78,348 | ) | | (72,943 | ) | |
| Interest expense, net | | | (25,950 | ) | | (20,501 | ) | | (24,438 | ) | |
| | |
|
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|
| |
|
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| Earnings before income taxes | | $ | 181,071 | | $ | 197,832 | | $ | 143,236 | | |
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|
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|
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|
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| IDENTIFIABLE ASSETS: | | | | | | | | | | | |
| Western Hemisphere | | $ | 616,887 | | $ | 592,832 | | | | | |
| Europe | | | 582,171 | | | 554,689 | | | | | |
| Asia | | | 262,906 | | | 211,340 | | | | | |
| Eliminations | | | (25,752 | ) | | (17,682 | ) | | | | |
| | |
|
| |
|
| | | | | |
| Subtotal | | | 1,436,212 | | | 1,341,179 | | | | | |
| Corporate | | | 829,089 | | | 841,548 | | | | | |
| | |
|
| |
|
| | | | | |
| Total | | $ | 2,265,301 | | $ | 2,182,727 | | | | | |
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|
| |
|
| | | | | |
| | |
| (a) | Included in restructuring and other charges, net, for the purposes of evaluation of segment and geographic profitability in fiscal year 2005 is a charge of $837 related to a one-time purchase accounting adjustment to step up the value of inventory acquired from Biosepra by $2,431, in accordance with SFAS No. 141, in the opening balance sheet. This step up increased cost of sales by $837 in fiscal year 2005 concurrent with the sale of a portion of the underlying inventory. The step up amount is excluded from operating profit since management considers it non-recurring in nature because, although the Company acquired the manufacturing operations of Biosepra, this adjustment was required by SFAS 141 as an elimination of the manufacturing profit in inventory acquired from Biosepra and subsequently sold in the period. |
Sales by the Company’s U.S. operations to unaffiliated customers totaled approximately $648,000, $632,000, and $600,000 in fiscal years 2005, 2004 and 2003, respectively. Included therein are export sales of approximately $61,000, $56,000 and $72,000 in fiscal years 2005, 2004 and 2003, respectively. Sales by the Company’s subsidiaries in Germany amounted to approximately $199,000, $201,000 and $183,000 in fiscal years 2005, 2004 and 2003, respectively. Sales by the Company’s subsidiary in Japan amounted to approximately $204,000, $179,000 and $169,000 in fiscal years 2005, 2004 and 2003, respectively. The Company considers its foreign operations to be of major importance to its future growth prospects. The risks related to the Company’s foreign operations include the local political and regulatory developments as well as the regional economic climate.
Intercompany sales between geographic areas are generally priced on the basis of a markup of manufacturing costs to achieve an appropriate sharing of the profit between the parties.
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PALL CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
| Description | | Balance at Beginning of Year | | Additions to Reserve | | Write-offs | | Translation Adjustments | | Balance at End of Year | |
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| |
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| Allowance for doubtful accounts: | | | | | | | | | | | | | | | | |
| Year Ended: | | | | | | | | | | | | | | | | |
| July 31, 2005 | | $ | 12,062 | | $ | 3,979 | | $ | (2,634 | ) | $ | 108 | | $ | 13,515 | |
| July 31, 2004 | | $ | 11,700 | | $ | 3,217 | | $ | (3,277 | ) | $ | 422 | | $ | 12,062 | |
| August 2, 2003 | | $ | 12,906 | | $ | 3,103 | | $ | (4,975 | ) | $ | 666 | | $ | 11,700 | |
| | | | | | | | | | | | | | | | | |
| Reserve for inventory obsolescence: | | | | | | | | | | | | | | | | |
| Year Ended: | | | | | | | | | | | | | | | | |
| July 31, 2005 | | $ | 26,009 | | $ | 9,867 | | $ | (6,160 | ) | $ | 126 | | $ | 29,842 | |
| July 31, 2004 | | $ | 27,492 | | $ | 6,706 | | $ | (9,044 | ) | $ | 855 | | $ | 26,009 | |
| August 2, 2003 | | $ | 37,177 | | $ | 8,808 | | $ | (19,883 | ) | $ | 1,390 | | $ | 27,492 | |
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Annual 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