Aerospace sales were down 3½% reflecting the timing of large projects in the Military and Marine Water portion of this business. By geography, overall Aerospace sales in the Western Hemisphere were down 4½%, while sales in Europe were flat. In Asia, the smallest of the Company’s Aerospace markets, sales were down 12½%. Military sales decreased 10½% compared to last year reflecting decreases in the Western Hemisphere and Asia of 15½% and 11½%, respectively. Military sales in Europe were up 4½%. Commercial sales increased 7½% reflecting growth in the Western Hemisphere and Europe. Military comprised 46% of total Aerospace sales in fiscal 2005 compared with 50% in fiscal 2004.
Microelectronics sales in fiscal year 2005 were up 4% reflecting growth in the Western Hemisphere (4½%) and Asia (9½%). In Europe, sales were down 15% reflecting the malaise blanketing the industry there.
The consolidated operating profit as a percentage of sales was 16.7% in fiscal year 2005 as compared to 17.5% in fiscal year 2004. The reduction in operating profit margin reflects the impact of higher systems sales, which carry lower margins, pricing pressures in the Company’s Medical segment and lower profitability in the Company’s Aerospace segment due to a decline in Military sales. The growth in systems sales negatively impacted margins in the BioPharmaceuticals and General Industrial segments as well as margins in all geographies. The above factors were partially offset by the impact of the Company’s cost reduction initiatives and increased overall sales. Operating profit dollars increased by $8,488, or 2½%, to $317,646. The operating profit details for the years ended July 31, 2005 and July 31, 2004 can be found in the Segment Information and Geographies note accompanying the consolidated financial statements.
The table below presents sales for the years ended July 31, 2005 and July 31, 2004 to unaffiliated customers by geography, including the effect of exchange rates for comparative purposes.
By geography, sales in the Western Hemisphere increased 3% in both local currency and on a reported basis compared with fiscal year 2004, as strong growth in BioPharmaceuticals and General Industrial was partly offset by a decline in Medical and Aerospace. Exchange rates increased sales in the year by $2,500, primarily related to the strengthening of the Canadian dollar. Operating profit increased to 17.5% of total sales (including intercompany sales to other geographies) as compared with 14.9% in fiscal year 2004. Operating profit dollars increased $33,628, or 26½% reflecting the improvement in margin as well as the growth in sales.
In Europe, sales were flat as double-digit growth in BioPharmaceuticals and modest growth in Medical was offset by decreases in General Industrial (Municipal Water, Machinery & Equipment and Power Generation) and Microelectronics. The strengthening of European currencies added $42,541 in sales resulting in reported sales growth of 6½%. Operating profit was 11.1% of total sales (including intercompany sales to other geographies) as compared to 14.4% in fiscal year 2004, while operating profit dollars were down $19,976, or 16½%.
Sales in Asia increased 13½% with all segments contributing to this gain with the exception of Aerospace. The strengthening of Asian currencies added $13,584 in sales, resulting in reported sales growth of 17½%. Operating profit was 14.6% of total sales (including intercompany sales to other geographies) as compared with 16.8% in fiscal year 2004, reflecting the impact of increased General Industrial system sales. Operating profit dollars increased by $1,403, or 2%.
General corporate expenses decreased $7,323 in fiscal year 2005. The decline in expenses reflects the impact of the Company’s cost reduction initiatives, reduced bonus expense and a decrease in consulting expenses (related to cost reduction initiatives) partly offset by increased costs related to Sarbanes-Oxley compliance initiatives.
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Liquidity and Capital Resources
Net cash provided by operating activities in fiscal year 2006 was $218,828, an increase of $57,220, or 35½% as compared with fiscal year 2005. The increase in cash flow reflects an improvement in accounts receivable days sales outstanding (“DSO”), the impact of the transaction with Satair, increased net earnings as well as changes in working capital items, particularly inventories and reduced payments for income taxes.
Free cash flow, which is defined as net cash provided by operating activities less capital expenditures, was $122,861 in fiscal year 2006, as compared with $75,455 in fiscal year 2005. The increase in free cash flow reflects the factors discussed above, partly offset by a higher level of capital expenditures. Company management believes this measure is important because it is a key element of its planning. The Company utilizes free cash flow, which is a non-GAAP measure, as one way to measure its current and future financial performance. The following table reconciles free cash flow to net cash provided by operating activities.
| | 2006 | | 2005 | | 2004 | |
Net cash provided by operating activities | | $ | 218,828 | | $ | 161,608 | | $ | 191,946 | |
Less capital expenditures | | | 95,967 | | | 86,153 | | | 61,262 | |
Free cash flow | | $ | 122,861 | | $ | 75,455 | | $ | 130,684 | |
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, 2006 to those at July 31, 2005, the British Pound and the Euro have strengthened against the U.S. dollar, while the Japanese Yen has weakened against the U.S. dollar.
Working capital was approximately $846,200, a ratio of 2.6 at July 31, 2006 as compared with $703,300, a ratio of 2.5 at July 31, 2005. DSO improved to 75 days, as compared to 84 days in fiscal year 2005. Inventory turns were 2.64 for the year ended July 31, 2006 as compared to 2.85 for the year ended July 31, 2005. The effect of foreign exchange increased working capital, excluding cash by $12,255, including net inventory, net accounts receivable and other current assets by $8,058, $13,735 and $2,106, respectively, as compared with fiscal year 2005. Additionally, foreign exchange increased accounts payable and other current liabilities by $9,537.
In August 2005, the Company sold its investment in VITEX and recorded a gain on the sale of $1,806, net of fees and commissions. In addition, in January 2006, the Company sold its stock rights in Satair and recorded a gain of $394. For more detail regarding these transactions, refer to the Restructuring and Other Charges, Net note accompanying the consolidated financial statements.
Overall, net debt (debt net of cash and cash equivalents), as a percentage of total capitalization (net debt plus equity), was 24.7% as compared to 24.5% at July 31, 2005. Net debt increased by approximately $14,800 compared with July 31, 2005 reflecting an increase in gross debt of $163,200 partly offset by an increase in cash of $147,400. The impact of foreign exchange rates reduced net debt by about $1,000. On June 21, 2006, the Company and certain wholly-owned subsidiary borrowers, entered into a multi-currency (U.S.$, Pound, Euro), five-year $500,000 unsecured senior revolving credit facility (“the facility”) with a syndicate of banks, which expires on June 21, 2011. Borrowings under the new facility bear interest at either a variable rate based upon LIBOR (U.S.$ and Pound borrowings) or Euribor (Euro borrowings) or at the prime rate of the Administrative Agent (U.S.$ borrowing only). The new facility contains customary affirmative and negative covenants, financial covenants, representations and warranties and events of defaults. Simultaneously, the Company and one of its domestic subsidiaries borrowed approximately $445,000 under this facility and used the proceeds principally (1) to repay the $213,869 of borrowings, accrued interest and fees due under its then existing $350,000 unsecured senior revolving credit facility entered into on July 29, 2005, (2) to prepay a 90-day term $200,000 loan plus accrued interest, (3) to pay various fees associated with the new facility and (4) for general corporate purposes. The then existing $350,000 unsecured revolving credit facility was simultaneously terminated. Letters of credit outstanding against the $500,000 revolving credit facility as of July 31, 2006 were approximately $14,407.
During fiscal year 2007, the Company intends to refinance its Yen 3 billion loan, approximately $26,214, as of July 31, 2006, which is due in its entirety on June 20, 2007. The Company was in compliance with all financial covenants of its various debt agreements as of July 31, 2006. For more detail regarding the aforementioned transactions, refer to the Notes Payable and Long-Term Debt note accompanying the consolidated financial statements.
Net proceeds from stock plans were $28,964 in fiscal year 2006. Capital expenditures were $95,967 in fiscal year 2006. Depreciation and amortization expense were $87,010 and $8,648, respectively. In fiscal year 2007, capital expenditures are expected to be $110,000, exclusive of capital to be spent under the facilities rationalization and consolidation plan, which is estimated to be $15,000 - $20,000 in fiscal year 2007 depending on the timing of the closure and consolidation. Depreciation and amortization expense are expected to total approximately $104,000.
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On October 17, 2003, the Board of Directors authorized the expenditure of up to $200,000 to repurchase shares of the Company’s common stock. Furthermore, on October 14, 2004, the Board of Directors authorized an additional expenditure of another $200,000 to repurchase shares. During fiscal years 2004 and 2005, the Company repurchased stock of $75,000 and $64,246, respectively. In fiscal year 2006, the Company repurchased stock of $100,727 leaving $160,027 remaining at July 31, 2006 of the $400,000 authorized. In fiscal year 2006, the Company paid dividends of $52,379. The Company increased its quarterly dividend by 10%, from 10 to 11 cents per share, effective with the dividend that was declared on January 19, 2006.
In the fourth quarter the Company completed its plans to repatriate low taxed foreign earnings under the AJCA and brought $398,000 in foreign subsidiary earnings into the U.S. at a cost of $17,000 or 14 cents per share. Repatriating these earnings under the AJCA allowed the Company to minimize taxes ultimately paid on these earnings. As of July 31, 2006 the proceeds of the dividend were utilized to repay approximately $200,000 of U.S. debt as discussed in the proceeding paragraph, fund qualified U.S. defined-benefit pension plans of approximately $39,000 ($28,000 of which was in excess of minimum funding required) as well as fund non-executive compensation in the U.S.; all in accordance with the Dividend Reinvestment Plan.
On July 21, 2006, several foreign, non-U.S. dollar functional currency, subsidiary borrowers initiated loans under the new facility to facilitate the funding of a substantial portion of the aforementioned repatriation made pursuant to the implementation plan under the American Jobs Creation Act of 2004. Such borrowings were individually Pound 36,000 (U.S.$67,266) and Euro 141,400 (U.S.$180,483) (U.S. dollar equivalents stated at relevant year-end spot rates) and were used to repay a portion of the initial outstandings under the new facility as well as for other general corporate purposes.
Company management considers its existing lines of credit, along with the cash generated from operations, to be sufficient to meet its short-term liquidity needs.
The following is a summary of our contractual commitments as of July 31, 2006:
| | Year Ended | | | | | |
| | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | Thereafter | | Total | |
Long-term debt | | $ | 27,561 | | $ | 1,933 | | $ | 1,477 | | $ | 1,551 | | $ | 349,244 | | $ | 285,809 | | $ | 667,575 | |
Operating leases | | | 22,333 | | | 13,357 | | | 7,778 | | | 3,701 | | | 1,391 | | | 5,131 | | | 53,691 | |
Purchase commitments | | | 25,391 | | | 18,043 | | | 696 | | | 451 | | | 1,256 | | | — | | | 45,837 | |
Employment contracts | | | 7,458 | | | 3,154 | | | — | | | — | | | — | | | — | | | 10,612 | |
Other commitments | | | 1,719 | | | 1,218 | | | 402 | | | 236 | | | 2,220 | | | 590 | | | 6,385 | |
Total commitments | | $ | 84,462 | | $ | 37,705 | | $ | 10,353 | | $ | 5,939 | | $ | 354,111 | | $ | 291,530 | | $ | 784,100 | |
Adoption of New Accounting Pronouncements
Effective August 1, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123(R) using the modified-prospective-transition method. Under that transition method, compensation cost recognized for the year ended July 31, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of, August 1, 2005, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for the vested portion of share-based payments granted subsequent to August 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated.
The following table illustrates the impact of adopting SFAS No. 123(R) on August 1, 2005 on the Company’s earnings before income taxes, net earnings and earnings per share (which excludes the effect of certain changes to the Company’s stock plans under the 2005 Plan such as restricted stock units granted in contemplation of the change in accounting):
| | July 31, 2006 | |
Impact on earnings before income taxes | | $ | 8,199 | |
Impact on net earnings | | $ | 7,267 | |
Impact on basic earnings per share | | $ | 0.06 | |
Impact on diluted earnings per share | | $ | 0.06 | |
SFAS No. 123(R) also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows. For the year ended July 31, 2006, this treatment resulted in cash flows from financing activities of $1,937. The tax benefit recognized related to the total compensation cost for stock-based payment arrangements totaled $2,042 and $353 for the years ended July 31, 2006 and July 31, 2005, respectively. The actual tax benefit realized for the tax deductions from option exercise of the stock-based payment arrangements totaled $4,153 and $4,470 for the years ended July 31, 2006 and July 31, 2005, respectively.
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In March 2005, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (“FIN No. 47”). FIN No. 47 clarifies that the term “conditional asset retirement obligation” refers to a legal obligation to perform an asset retirement activity in which the timing and/(or) method of settlement are conditional on a future event that may or may not be within the control of an entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN No. 47 was effective for the Company as of the end of fiscal year 2006. The adoption of FIN No. 47 did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
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 earnings 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 is effective for the Company beginning in fiscal year 2007.
In June 2006, the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN No. 48”). FIN No. 48 establishes a recognition threshold and measurement for income tax positions recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 also prescribes a two-step evaluation process for tax positions. The first step is recognition and the second is measurement. For recognition, an enterprise judgmentally determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the more-likely-than-not recognition threshold it is measured and recognized in the financial statements as the largest amount of tax benefit that is greater than 50% likely of being realized. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements.
Tax positions that meet the more-likely-than-not recognition threshold at the effective date of FIN No. 48 may be recognized or, continue to be recognized, upon adoption of FIN No. 48. The cumulative effect of applying the provisions of FIN No. 48 shall be reported as an adjustment to the opening balance of retained earnings for that fiscal year. FIN No. 48 is effective for the Company beginning in fiscal year 2008, with earlier adoption permitted. The Company is in the process of assessing the effect FIN No. 48 may have on its consolidated financial statements.
On September 13, 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB No. 108”) which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. If the effect of initial adoption is determined to be material, the cumulative effect may be reported as an adjustment to the beginning of year retained earnings with disclosure of the nature and amount of each individual error being corrected in the cumulative adjustment. The guidance is applicable for the Company beginning in fiscal year 2007. The Company is in the process of assessing the effect SAB No. 108 may have on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for the Company beginning with fiscal year 2009. The Company is in the process of assessing the effect SFAS No. 157 may have on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of SFAS No. 87, 106, and 132 (R) (“SFAS No. 158”). SFAS No. 158 requires companies to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income to report the funded status of defined benefit pension and other postretirement benefit plans. SFAS No. 158 is effective for the Company’s fiscal year ending July 31, 2007. Based upon the July 31, 2006 balance sheet and pension disclosures, the impact of adopting SFAS No. 158 is estimated to be an increase in liabilities of $18,000, a decrease in assets of $24,000 and a pretax increase in the accumulated other comprehensive loss of $42,000.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company’s 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 the Company’s earnings and cash flows. The changes used for these analyses reflect the Company’s 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
The Company’s reporting currency is the U.S. dollar. Because the Company operates through subsidiaries or branches in over thirty countries around the world, its 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. Company management estimates that foreign exchange translation reduced earnings per share by 1 cent in fiscal year 2006.
Most of the Company’s 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 or a reduction in the sales price from the selling 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 the Company’s earnings because the majority of Japan’s purchases are sourced from the U.S. In fiscal year 2006, the Euro, the Pound and the Yen weakened by approximately 3.44%, 3.22% and 7.11%, respectively, against the U.S. dollar compared with the average exchange rates in effect in fiscal year 2005. Additionally, the Euro weakened against the Pound by approximately 0.23%. Due to the difficulty in estimating the economic effect of foreign currency rates, particularly in periods of high volatility of such rates, Company management does not provide such estimated effects and reports only the translation effect to earnings per share disclosed above.
The Company is 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, the Company enters into loans denominated in foreign currencies to offset the earnings and cash flow impact of nonfunctional currency-denominated receivables. The Company does not enter into forwards for trading purposes. At July 31, 2006, these exposures amounted to approximately $72,988 and were offset by forwards with a notional principal amount of $33,553. If a hypothetical 10% simultaneous adverse change had occurred in exchange rates, net earnings would have decreased by approximately $3,105, or approximately 3 cents per share.
Interest Rates
The Company is exposed to changes in interest rates, primarily due to its 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.
The Company’s debt portfolio is comprised of both fixed and variable rate borrowings. The Company manages 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 55% variable rate at July 31, 2006, compared to 40% variable rate at July 31, 2005. As of July 31, 2006, the Company had cash flow interest rate swaps (i.e., variable to fixed rate swaps) with notional amounts aggregating $26,214 outstanding. The fair value of the interest rate swaps at July 31, 2006 was an asset of $94. The cash flows on the above mentioned interest rate swaps mirror the cash flows of the hedged underlying debt instruments. The Company does not enter into interest rate swaps for trading purposes.
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For the year ended July 31, 2006, interest expense, net of interest income, was $22,977. A hypothetical 10% increase in market interest rates over the actual fiscal year 2006 average rate would have increased net interest expense by approximately $369.
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
Year | |
2006: | | | | | | | | | | | | | | | | |
Net sales | | $ | 431,162 | | $ | 478,436 | | $ | 509,981 | | $ | 597,251 | | $ | 2,016,830 | |
Gross profit | | | 201,677 | | | 225,818 | | | 238,593 | | | 277,992 | | | 944,080 | |
Restructuring and other charges, net (a) | | | (50 | ) | | 3,736 | | | 7,313 | | | 1,327 | | | 12,326 | |
Earnings before income taxes | | | 33,215 | | | 42,906 | | | 54,271 | | | 79,984 | | | 210,376 | |
Net earnings | | | 25,110 | | | 32,436 | | | 25,189 | | | 62,758 | | | 145,493 | |
Earnings per share: | | | | | | | | | | | | | | | | |
Basic | | | 0.20 | | | 0.26 | | | 0.20 | | | 0.50 | | | 1.16 | |
Diluted | | | 0.20 | | | 0.26 | | | 0.20 | | | 0.50 | | | 1.16 | |
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 | |
| (a) | Refer to the Restructuring and Other Charges, Net note in the notes accompanying the consolidated financial statements. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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ITEM 9A. CONTROLS AND PROCEDURES.
DISCLOSURE CONTROLS AND PROCEDURES
For the fiscal year ended July 31, 2006 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 U.S. generally accepted accounting principles. 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 U.S. generally accepted 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 (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, 2006. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of July 31, 2006 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, 2006, 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 other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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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, 2006, 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, 2006, 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, 2006 and 2005, 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, 2006, and our report dated October 12, 2006 expressed an unqualified opinion on those consolidated financial statements.
Melville, New York
October 12, 2006
(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, 2006, 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.
Not applicable.
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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 exhibit 14 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 and a nominating/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, without charge, 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”, “Indebtedness of Executive Officers and Directors under Stock Option Plans” and “Certain Relationships and Related Party Transactions,” 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 captions “Audit and Non-Audit Fees” and “Policy on Audit Committee Pre-Approval of Audit and Permitted Non-Audit Services,” 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, 2006 and July 31, 2005
Consolidated Statements of Earnings - years ended July 31, 2006, July 31, 2005 and July 31, 2004
Consolidated Statements of Stockholders’ Equity - years ended July 31, 2006, July 31, 2005 and
July 31, 2004
Consolidated Statements of Cash Flows - years ended July 31, 2006, July 31, 2005 and July 31, 2004
Notes to consolidated financial statements
(2) The following financial statement schedule is filed as part of this report:
Schedule II - Valuation and Qualifying Accounts
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.
(3) Exhibits:
The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this report.
| Exhibit Index |
Exhibit
Number | Description of Exhibit |
| |
3(i)* | Restated Certificate of Incorporation of the Registrant as amended through November 23, 1993, filed as Exhibit 3(i) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended July 30, 1994. |
| |
3(ii)* | By-Laws of the Registrant as amended through July 18, 2006, filed as exhibit 3(ii) to the Registrant’s Current Report on Form 8-K filed on July 24, 2006. |
| |
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. |
| |
4(ii)* | Credit Agreement dated June 21, 2006, between Pall Corporation and JPMorgan Chase Bank and the Other Lenders Party Thereto, filed as Exhibit 4(ii) to the Registrant’s Current Report on Form 8-K filed on June 27, 2006. |
| |
| 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. |
| |
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 30, 2005 to Employment Agreement dated May 1, 2003 between the Registrant and Marcus Wilson, filed as Exhibit 10.2 to the Registrant’s Form 8-K filed on September 2, 2005. |
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Exhibit
Number | Description of Exhibit |
| |
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 September 12, 2005 between the Registrant and Roberto Perez. |
| |
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*‡ | Employment Agreement dated June 1, 2004 between the Registrant and Lisa McDermott, filed as Exhibit 10.11 to the 2005 10-K. |
| |
10.10*‡ | 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. |
| |
10.11*‡ | 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. |
| |
10.12*‡ | 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. |
| |
10.13*‡ | 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. |
| |
10.14*‡ | 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. |
| |
10.15†‡ | Pall Corporation 2004 Executive Incentive Bonus Plan, as amended effective January 18, 2006. |
| |
10.16*‡ | 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. |
| |
10.17*‡ | 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. |
| |
10.18*‡ | 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. |
| |
10.19*‡ | 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. |
| |
10.20*‡ | Form of Notice of Grant of Restricted Stock Units Under Pall Corporation 2005 Stock Compensation Plan, filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2005. |
| |
10.21*‡ | Form of Notice of Grant of Annual Award Units Under Pall Corporation 2005 Stock Compensation Plan, filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2005. |
| |
10.22*‡ | Pall Corporation 2005 Stock Compensation Plan, as amended effective January 19, 2006, filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2006. |
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Exhibit
Number | Description of Exhibit |
| |
10.23*‡ | 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. |
| |
10.24*‡ | 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. |
| |
10.25*‡ | 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. |
| |
10.26*‡ | Pall Corporation Employee Stock Purchase Plan as amended effective October 17, 2003, filed as Exhibit 10.27 to the 2003 10-K. |
| |
10.27*‡ | 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. |
| | |
| 10.28†‡ | Amendment dated May 3, 2006 to Employment Agreement dated January 21, 2004, as amended and restated effective July 20, 2005, between the Registrant and Eric Krasnoff. |
| | |
| 10.29†‡ | Amendment dated July 18, 2006 to Employment Agreement dated January 21, 2004, as amended and restated effective July 20, 2005, between the Registrant and Eric Krasnoff. |
| | |
| 10.30†‡ | Amendment dated May 3, 2006 to Employment Agreement dated May 1, 2003 between the Registrant and Marcus Wilson. |
| | |
| 10.31†‡ | Amendment dated July 18, 2006 to Employment Agreement dated May 1, 2003 between the Registrant and Marcus Wilson. |
| | |
| 10.32†‡ | Amendment dated May 3, 2006 to Employment Agreement dated November 15, 2001, between the Registrant and Donald B. Stevens. |
| | |
| 10.33†‡ | Amendment dated July 18, 2006 to Employment Agreement dated November 15, 2001, between the Registrant and Donald B. Stevens. |
| | |
| 10.34†‡ | Amendment dated June 21, 2005 to Employment Agreement dated May 1, 2003, between the Registrant and Andrew Denver. |
| | |
| 10.35†‡ | Amendment dated May 3, 2006 to Employment Agreement dated May 1, 2003, as amended effective June 21, 2005, between the Registrant and Andrew Denver. |
| | |
| 10.36†‡ | Amendment dated May 3, 2006 to Employment Agreement dated September 12, 2005, between the Registrant and Roberto Perez. |
| | |
| 10.37†‡ | Amendment dated July 18, 2006 to Employment Agreement dated September 12, 2005, between the Registrant and Roberto Perez. |
| | |
| 10.38†‡ | Amendment dated May 3, 2006 to Employment Agreement dated June 1, 2004 between the Registrant and Lisa McDermott. |
| | |
| 10.39†‡ | Amendment dated July 18, 2006 to Employment Agreement dated June 1, 2004 between the Registrant and Lisa McDermott. |
| |
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. |
‡ | 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 12, 2006 | | By: /s/ |
LISA MCDERMOTT
|
| | | | | Lisa McDermott, Chief Financial Officer and Treasurer |
| | | | | |
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 | | Chairman of the Board and Chief Executive Officer | | October 12, 2006 |
Eric Krasnoff |
| | | | |
/s/ MARCUS WILSON | | President and Director | | October 12, 2006 |
Marcus Wilson |
| | | | |
/s/ LISA MCDERMOTT | | Chief Financial Officer and Treasurer (principal financial and accounting officer) | | October 12, 2006 |
Lisa McDermott |
| | | | |
/s/ DANIEL J. CARROLL, JR. | | Director | | October 12, 2006 |
Daniel J. Carroll, Jr. |
| | | | |
/s/ JOHN H. F. HASKELL, JR. | | Director | | October 12, 2006 |
John H. F. Haskell, Jr. |
| | | | |
/s/ ULRIC S. HAYNES, JR. | | Director | | October 12, 2006 |
Ulric S. Haynes, Jr. |
| | | | |
/s/ DENNIS N. LONGSTREET | | Director | | October 12, 2006 |
Dennis N. Longstreet |
| | | | |
/s/ EDWIN W. MARTIN | | Director | | October 12, 2006 |
Edwin W. Martin |
| | | | |
/s/ KATHERINE L. PLOURDE | | Director | | October 12, 2006 |
Katherine L. Plourde |
| | | | |
/s/ HEYWOOD SHELLEY | | Director | | October 12, 2006 |
Heywood Shelley |
| | | | |
/s/ EDWARD L. SNYDER | | Director | | October 12, 2006 |
Edward L. Snyder |
| | | | |
/s/ EDWARD TRAVAGLIANTI | | Director | | October 12, 2006 |
Edward Travaglianti |
| | | | |
/s/ JAMES D. WATSON | | Director | | October 12, 2006 |
James D. Watson |
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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, 2006 and 2005, 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, 2006. 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 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, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 2006, 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, present fairly, in all material respects, the information set forth therein.
As discussed in the notes to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123 (R), “Shared-Based Payment”, effective August 1, 2005.
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, 2006, 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, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
Melville, New York
October 12, 2006
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PALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| | July 31, 2006 | | July 31, 2005 | |
ASSETS | | | | | | | | | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | | $ | 317,657 | | | $ | 164,928 | | |
Accounts receivable | | | 517,632 | | | | 493,650 | | |
Inventories | | | 408,273 | | | | 365,929 | | |
Other current assets | | | 133,419 | | | | 135,885 | | |
Total current assets | | | 1,376,981 | | | | 1,160,392 | | |
Property, plant and equipment, net | | | 620,979 | | | | 608,758 | | |
Goodwill | | | 246,476 | | | | 252,904 | | |
Intangible assets | | | 51,477 | | | | 50,004 | | |
Other non-current assets | | | 256,945 | | | | 193,243 | | |
Total assets | | $ | 2,552,858 | | | $ | 2,265,301 | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | |
Current liabilities: | | | | | | | | | |
Notes payable | | $ | 35,821 | | | $ | 24,299 | | |
Accounts payable | | | 144,883 | | | | 142,839 | | |
Accrued liabilities | | | 241,630 | | | | 217,280 | | |
Income taxes payable | | | 67,484 | | | | 58,928 | | |
Current portion of long-term debt | | | 27,561 | | | | 1,359 | | |
Dividends payable | | | 13,437 | | | | 12,434 | | |
Total current liabilities | | | 530,816 | | | | 457,139 | | |
Long-term debt, net of current portion | | | 640,015 | | | | 510,161 | | |
Deferred income taxes | | | 7,637 | | | | 10,321 | | |
Other non-current liabilities | | | 195,694 | | | | 147,703 | | |
Total liabilities | | | 1,374,162 | | | | 1,125,324 | | |
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 | | | 137,165 | | | | 121,934 | | |
Retained earnings | | | 1,151,044 | | | | 1,066,848 | | |
Treasury stock, at cost (2006 – 5,800 shares, 2005 – 3,616 shares) | | | (156,775 | ) | | | (90,878 | ) | |
Stock option loans | | | (1,311 | ) | | | (1,808 | ) | |
Accumulated other comprehensive income (loss): | | | | | | | | | |
Foreign currency translation | | | 107,133 | | | | 80,412 | | |
Minimum pension liability | | | (73,084 | ) | | | (49,353 | ) | |
Unrealized investment gains | | | 1,949 | | | | 33 | | |
Unrealized losses on derivatives | | | (221 | ) | | | (7 | ) | |
| | | 35,777 | | | | 31,085 | | |
Total stockholders’ equity | | | 1,178,696 | | | | 1,139,977 | | |
Total liabilities and stockholders’ equity | | $ | 2,552,858 | | | $ | 2,265,301 | | |
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, 2006 | | July 31, 2005 | | July 31, 2004 | |
Net sales | | $ | 2,016,830 | | $ | 1,902,284 | | $ | 1,770,747 | |
Cost of sales | | | 1,072,750 | | | 978,916 | | | 899,119 | |
Gross profit | | | 944,080 | | | 923,368 | | | 871,628 | |
| | | | | | | | | | | |
Selling, general and administrative expenses | | | 641,030 | | | 621,401 | | | 583,539 | |
Research and development | | | 57,371 | | | 56,183 | | | 57,279 | |
Restructuring and other charges, net | | | 12,326 | | | 38,763 | | | 12,477 | |
Interest expense, net | | | 22,977 | | | 25,950 | | | 20,501 | |
Earnings before income taxes | | | 210,376 | | | 181,071 | | | 197,832 | |
Provision for income taxes | | | 64,883 | | | 40,255 | | | 46,259 | |
| | | | | | | | | | | |
Net earnings | | $ | 145,493 | | $ | 140,816 | | $ | 151,573 | |
| | | | | | | | | | | |
Earnings per share: | | | | | | | | | | |
Basic | | $ | 1.16 | | $ | 1.13 | | $ | 1.21 | |
Diluted | | $ | 1.16 | | $ | 1.12 | | $ | 1.20 | |
| | | | | | | | | | | |
Average shares outstanding: | | | | | | | | | | |
Basic | | | 124,931 | | | 124,645 | | | 125,685 | |
Diluted | | | 125,819 | | | 125,598 | | | 126,737 | |
See accompanying notes to consolidated financial statements.
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PALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Years Ended July 31, 2004, July 31,
2005 and July 31, 2006 | | 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 3, 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
and tax benefit relating to 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 gains | | | | | | | | | | | | | | | | | | | | | | | 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
and tax benefit relating to 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 | | | | | | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings | | | | | | | | | | | 145,493 | | | | | | | | | | | | | | | | 145,493 | | | | 145,493 | | |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Translation adjustment | | | | | | | | | | | | | | | | | | | | | | | 26,721 | | | | 26,721 | | | | 26,721 | | |
Minimum pension liability | | | | | | | | | | | | | | | | | | | | | | | (23,731 | ) | | | (23,731 | ) | | | (23,731 | ) | |
Unrealized investment gains | | | | | | | | | | | | | | | | | | | | | | | 1,916 | | | | 1,916 | | | | 1,916 | | |
Unrealized loss on derivatives | | | | | | | | | | | | | | | | | | | | | | | (214 | ) | | | (214 | ) | | | (214 | ) | |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 150,185 | | |
Dividends declared | | | | | | | | | | | (53,801 | ) | | | | | | | | | | | | | | | (53,801 | ) | | | | | |
Issuance of 1,372 shares for stock plans
and tax benefit relating to stock plans | | | | | | | (699 | ) | | | (7,496 | ) | | | 34,830 | | | | | | | | | | | | 26,635 | | | | | | |
Restricted stock units related to stock plans | | | | | | | 4,065 | | | | | | | | | | | | | | | | | | | | 4,065 | | | | | | |
Stock based compensation expense | | | | | | | 11,865 | | | | | | | | | | | | | | | | | | | | 11,865 | | | | | | |
Purchase of 3,556 shares | | | | | | | | | | | | | | | (100,727 | ) | | | | | | | | | | | (100,727 | ) | | | | | |
Stock option loans | | | | | | | | | | | | | | | | | | | 497 | | | | | | | | 497 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at July 31, 2006 | | $ | 12,796 | | | $ | 137,165 | | | $ | 1,151,044 | | | $ | (156,775 | ) | | $ | (1,311 | ) | | $ | 35,777 | | | $ | 1,178,696 | | | | | | |
See accompanying notes to consolidated financial statements.
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PALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | Years Ended | |
| | July 31, 2006 | | July 31, 2005 | | July 31, 2004 | |
Operating activities: | | | | | | | | | | |
Net earnings | | $ | 145,493 | | $ | 140,816 | | $ | 151,573 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | |
Restructuring and other charges, net | | | 12,326 | | | 38,763 | | | 12,477 | |
Depreciation and amortization of long-lived assets | | | 95,658 | | | 90,921 | | | 88,935 | |
Non-cash stock compensation | | | 11,865 | | | — | | | — | |
Excess tax benefits from stock based compensation arrangements | | | (1,937 | ) | | — | | | — | |
Amortization of net proceeds from terminated interest rate swaps | | | (27 | ) | | (1,711 | ) | | (2,552 | ) |
Amortization of deferred revenue | | | (1,256 | ) | | — | | | — | |
Deferred income taxes | | | 6,939 | | | (1,898 | ) | | (18,666 | ) |
Provisions for doubtful accounts | | | 2,052 | | | 3,979 | | | 3,217 | |
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: | | | | | | | | | | |
Inventories | | | (34,494 | ) | | (54,604 | ) | | (15,817 | ) |
Accounts receivable | | | (12,799 | ) | | (24,800 | ) | | (26,765 | ) |
Income taxes receivable/payable | | | (7,081 | ) | | (23,531 | ) | | (10,386 | ) |
Accounts payable and accrued expenses | | | (4,047 | ) | | 8,203 | | | (10,416 | ) |
Other assets | | | (7,031 | ) | | (9,547 | ) | | 23,623 | |
Other liabilities | | | 13,167 | | | (4,983 | ) | | (3,277 | ) |
Net cash provided by operating activities | | | 218,828 | | | 161,608 | | | 191,946 | |
Investing activities: | | | | | | | | | | |
Capital expenditures | | | (95,967 | ) | | (86,153 | ) | | (61,262 | ) |
Purchases of retirement benefit assets | | | (78,187 | ) | | (19,392 | ) | | (30,307 | ) |
Proceeds from sale of retirement benefit assets | | | 43,791 | | | 19,173 | | | 22,668 | |
Disposals of fixed assets | | | 9,950 | | | 5,127 | | | 4,115 | |
Proceeds from sale of strategic investments | | | 7,387 | | | 915 | | | 21,344 | |
Acquisitions of businesses, net of disposals and cash acquired | | | (75 | ) | | (30,879 | ) | | (2,005 | ) |
Advances to and investments in strategic alliances | | | — | | | — | | | (2,125 | ) |
Other | | | (3,001 | ) | | (3,354 | ) | | (3,679 | ) |
Net cash used by investing activities | | | (116,102 | ) | | (114,563 | ) | | (51,251 | ) |
Financing activities: | | | | | | | | | | |
Long-term borrowings | | | 348,295 | | | 315,349 | | | 40,014 | |
Repayments of long-term debt | | | (191,487 | ) | | (330,412 | ) | | (70,159 | ) |
Notes payable | | | 9,813 | | | (4,842 | ) | | 8,181 | |
Purchase of treasury stock | | | (100,727 | ) | | (64,246 | ) | | (75,000 | ) |
Dividends paid | | | (52,379 | ) | | (47,075 | ) | | (45,097 | ) |
Net proceeds from stock plans | | | 28,964 | | | 62,490 | | | 51,772 | |
Excess tax benefits from stock based compensation arrangements | | | 1,937 | | | — | | | — | |
Make whole payment to redeem senior notes | | | — | | | (14,702 | ) | | — | |
Payments/proceeds related to terminated interest rate swaps | | | — | | | (10,044 | ) | | — | |
Net cash provided/(used) by financing activities | | | 44,416 | | | (93,482 | ) | | (90,289 | ) |
Cash flow for year | | | 147,142 | | | (46,437 | ) | | 50,406 | |
Cash and cash equivalents at beginning of year | | | 164,928 | | | 207,277 | | | 149,753 | |
Effect of exchange rate changes on cash | | | 5,587 | | | 4,088 | | | 7,118 | |
Cash and cash equivalents at end of year | | $ | 317,657 | | $ | 164,928 | | $ | 207,277 | |
Supplemental disclosures: | | | | | | | | | | |
Interest paid | | $ | 33,662 | | $ | 26,158 | | $ | 17,527 | |
Income taxes paid (net of refunds) | | | 64,733 | | | 75,215 | | | 56,549 | |
Non-cash investing and financing activities: | | | | | | | | | | |
Capital lease entered into for new building | | | — | | | 7,272 | | | 4,438 | |
Note receivable | | | 2,539 | | | — | | | — | |
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, purification and separation products and integrated systems solutions throughout the world to a diverse group of customers within two principal business groups - 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.
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 earnings. Transaction losses, net, in fiscal years 2006, 2005 and 2004 amounted to $3,180, $2,796 and $1,727, respectively.
To prepare the Company’s consolidated financial statements in accordance with U.S. generally accepted accounting principles, 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 recoverability; 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; allocation to market segments; 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.
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 (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, including 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 event that the overall fair value of the reporting unit was to be 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 comprised 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 is provided over the estimated useful lives of the respective assets, principally on the straight-line basis. The estimated useful lives range from 30 to 50 years for buildings, 3 to 10 years for machinery and equipment and 8 to 10 years for furniture and fixtures. Leasehold improvements are depreciated over the remaining lease term and building improvements are depreciated over the remaining life of the building.
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 (or asset group) may not be recoverable. If the sum of the expected cash flows, undiscounted, is less than the carrying amount of the asset (or asset group), an impairment loss is recognized as the amount by which the carrying amount of the asset (or asset group) 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
The Company currently has four stock-based employee compensation plans (collectively, the “Stock Plans”), which are described more fully below under the captions Stock Purchase Plans and Stock Option and Restricted Stock Unit Plans. Prior to August 1, 2005, the Company accounted for stock-based compensation related to those Stock Plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and related Interpretations, as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). As such, there was no stock-based employee compensation cost recognized in net earnings relating to any shares under the Employee Stock Purchase Plan (“ESPP”) or stock options granted under any of the existing or terminated stock option plans prior to August 1, 2005 as all stock options were granted with an exercise price equal to the fair market value on the date of grant. There was, however, stock-based employee compensation cost recognized in net earnings for periods prior to August 1, 2005 resulting from the issuance of restricted stock units under the 2005 Stock Compensation Plan (“2005 Plan”) and the Management Stock Purchase Plan (“MSPP”).
Effective August 1, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment (“SFAS No. 123(R)”), using the modified-prospective-transition method. Under that transition method, compensation cost recognized for the year ended July 31, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of, August 1, 2005, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for the vested portion of share-based payments granted subsequent to August 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated.
The Company adopted the 2005 Plan (described in more detail below) in contemplation of the change in the accounting for share-based payments required by SFAS No. 123(R). Specifically, the 2005 Plan provides the Company with the ability to award stock units with various restrictions and vesting requirements. The detailed components of stock-based compensation expense recorded in the Consolidated Statements of Earnings for the years ended July 31, 2006, July 31, 2005 and July 31, 2004 are illustrated in the table below.
| | July 31, 2006 | | July 31, 2005 | | July 31, 2004 |
Stock options | | $ | 6,019 | | | $ | — | | | $ | — | |
Restricted stock units | | | 2,347 | | | | 564 | | | | — | |
ESPP | | | 2,180 | | | | — | | | | — | |
MSPP | | | 1,319 | | | | 755 | | | | 566 | |
Total | | $ | 11,865 | | | $ | 1,319 | | | $ | 566 | |
Stock-based compensation expense related to stock options and the ESPP for the years ended July 31, 2005 and July 31, 2004 was not recorded in the Consolidated Statements of Earnings, but had been disclosed in the pro forma disclosures as required by SFAS No. 123 and SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123 (“SFAS No. 148”).
The following table illustrates the impact of adopting SFAS No. 123(R) on August 1, 2005 on the Company’s earnings before income taxes, net earnings and earnings per share (which excludes the effect of certain changes to the Company’s stock plans under the 2005 Plan, such as restricted stock units granted, in contemplation of the change in accounting):
| | July 31, 2006 | |
Impact on earnings before income taxes | | $ | 8,199 | | |
Impact on net earnings | | $ | 7,267 | | |
Impact on basic earnings per share | | $ | 0.06 | | |
Impact on diluted earnings per share | | $ | 0.06 | | |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
SFAS No. 123(R) also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows. For the year ended July 31, 2006, this treatment resulted in cash flows from financing activities of $1,937. The tax benefit recognized related to the total compensation cost for stock-based payment arrangements totaled $2,042, $353 and $338 for the years ended July 31, 2006, July 31, 2005 and July 31, 2004, respectively. The actual tax benefit realized for the tax deductions from option exercise of the stock-based payment arrangements totaled $4,153, $4,470 and $3,361 for the years ended July 31, 2006, July 31, 2005 and July 31, 2004, respectively.
The following table illustrates the effect on net earnings and earnings per share for the years ended July 31, 2005 and July 31, 2004 as if the Company had applied the fair value recognition provisions of SFAS No. 123 (R) to options granted under the Company’s stock plans prior to adoption of SFAS No. 123(R) on August 1, 2005. No pro forma disclosure has been made for periods subsequent to August 1, 2005 as all stock-based compensation has been recognized in net earnings. For purposes of this pro forma disclosure and compensation cost recorded in the Company’s condensed consolidated financial statements, the value of the options is estimated using a Black-Scholes-Merton option-pricing formula and amortized to expense over the options’ service periods.
| | For the years ended |
| | July 31, 2005 | | July 31, 2004 |
Net earnings, as reported | | $ | 140,816 | | | $ | 151,573 | |
Pro forma stock compensation expense, net of tax benefit | | | 11,667 | | | | 11,608 | |
Pro forma net earnings | | $ | 129,149 | | | $ | 139,965 | |
| | | | | | | | | |
Earnings per share: | | | | | | | | |
Basic—as reported | | $ | 1.13 | | | $ | 1.21 | |
Basic—pro forma | | $ | 1.04 | | | $ | 1.11 | |
Diluted—as reported | | $ | 1.12 | | | $ | 1.20 | |
Diluted—pro forma | | $ | 1.03 | | | $ | 1.10 | |
The following weighted average assumptions were used in estimating the fair value of stock options granted during the fiscal years:
| | 2006 | | 2005 | | 2004 |
Weighted average fair value of
stock-based compensation
awards granted | | $7 | .20 | | $7 | .93 | | $8 | .30 |
Valuation assumptions: | | | | | | | | | |
Expected dividend yield | | 1 | .9% | | 1 | .8% | | 1 | .7% |
Expected volatility | | 26 | .7% | | 30 | .0% | | 36 | .8% |
Expected life (years) | | 5 | | | 5 | | | 5 | |
Risk-free interest rate | | 4 | .6% | | 3 | .9% | | 4 | .4% |
The Company has placed exclusive reliance on historical volatility in its estimate of expected volatility. The Company used a sequential period of historical data equal to the expected term (or expected life) of the options using a simple average calculation based upon the daily closing prices of the aforementioned period.
The expected life (years) represents the period of time for which the options granted are expected to be outstanding. This estimate was derived from historical share option exercise experience, which management believes provides the best estimate of the expected term.
The following paragraphs describe each of the aforementioned stock-based compensation plans in detail:
Stock Purchase Plans
During fiscal year 2000, the Company’s shareholders approved two stock purchase plans, the MSPP and the ESPP. 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.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
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 732 and 616 as of July 31, 2006 and July 31, 2005, respectively. During the years ended July 31, 2006 and July 31, 2005, approximately 68 and 77 vested restricted units, respectively, were distributed. During the years ended July 31, 2006, July 31, 2005 and July 31, 2004, participants’ deferred compensation and cash payments amounted to $3,501, $2,508 and $2,836. Dividends are paid on unvested restricted units (in the form of additional restricted units) and vest over the remaining service period of the restricted units for which the dividends were recorded. Dividends are paid on vested restricted units (in the form of additional restricted units) and are vested upon grant. As of July 31, 2006, there was $3,623 of total unrecognized compensation cost related to nonvested restricted stock units granted under the MSPP, which is expected to be recognized over a weighted-average period of 3.0 years. The total fair value of restricted stock units vested during the years ended July 31, 2006, July 31, 2005 and July 31, 2004, was $565, $488 and $636, respectively.
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. For the years ended July 31, 2006, July 31, 2005 and July 31, 2004, the Company issued 472, 404 and 304 shares at an average price of $22.10, $21.23 and $18.99, respectively.
Both plans provide for accelerated vesting if there is a change in control (as defined in the plans). All of the above shares were issued from treasury stock.
Stock Option and Restricted Stock Unit 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 Plan, which had been developed in contemplation of adopting the provisions of SFAS No. 123(R). As a result of such approval, the Compensation Committee of the Board of Directors (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, and (b) terminated all other stock plans, except that options then outstanding thereunder remained in effect in accordance with their terms. Up to 5,000 shares are issuable under the 2005 Plan. Both plans provide for accelerated vesting if there is a change in control (as defined in the plans). 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).
The fair value of the restricted unit 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 (and any related dividends paid in the form of additional units) are converted to shares once the director ceases to be a member of the Board. A total of 14 annual award units were granted during the year ended July 31, 2006, with a weighted-average fair market value of $27.89 per share. Restricted stock units granted to employees cliff-vest after the fourth anniversary of the date of grant. Dividends paid on unvested restricted stock units vest at the same time as the restricted units for which the dividends were recorded.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
A summary of restricted stock unit activity, excluding annual award units, for the 2005 Stock Plan during the year ended July 31, 2006, is presented below:
| | Shares | | Weighted-
Average
Grant-Date
Fair Value | |
Nonvested at August 1, 2005 | | | 261 | | | $ | 30.07 | | |
Granted | | | 273 | | | | 26.46 | | |
Exercised | | | — | | | | — | | |
Forfeited | | | (21 | ) | | | 30.02 | | |
Nonvested at July 31, 2006 | | | 513 | | | $ | 28.15 | | |
As of July 31, 2006 there was $12,173 of total unrecognized compensation cost related to nonvested restricted stock units granted under the 2005 Stock Plan, which is expected to be recognized over a weighted-average period of 3.27 years. None of the restricted stock units vested during the year ended July 31, 2006.
The forms of options adopted provide that the options may not be exercised within one year from the date of grant, and expire if not completely exercised within 7 years from the date of grant. Generally, 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 plans.
A summary of option activity for all stock option plans during the year ended July 31, 2006 is presented below:
Options | | Shares | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual Term | | Aggregate
Intrinsic
Value | |
Outstanding at August 1, 2005 | | | 4,302 | | | $ | 20.27 | | | | | | | | |
Granted | | | 444 | | | | 27.30 | | | | | | | | |
Exercised | | | (811 | ) | | | 18.83 | | | | | | | | |
Forfeited or Expired | | | (141 | ) | | | 20.58 | | | | | | | | |
Outstanding at July 31, 2006 | | | 3,794 | | | $ | 21.39 | | | 5.7 | | | $ | 27,343 | |
Expected to vest at July 31, 2006 | | | 1,486 | | | $ | 22.68 | | | 6.3 | | | $ | 8,955 | |
Exercisable at July 31, 2006 | | | 2,179 | | | $ | 20.43 | | | 5.5 | | | $ | 17,615 | |
As of July 31, 2006, there was $6,193 of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted-average period of 2.6 years. The total intrinsic value of options exercised during the years ended July 31, 2006, July 31, 2005 and July 31, 2004 was $7,754, $15,316 and $11,197, respectively. The Intrinsic value is the result of multiplying shares by the amount by which the current market value of the underlying stock exceeds the exercise price of the option.
The Company currently uses treasury shares that have been repurchased through the Company’s stock repurchase program to satisfy share award exercises (see Common Stock footnote).
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
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 910, 212 and 166 for fiscal 2006, 2005 and 2004, 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:
| | 2006 | | 2005 | | 2004 | |
Basic shares outstanding | | 124,931 | | 124,645 | | 125,685 | |
Effect of dilutive securities (a) | | 888 | | 953 | | 1,052 | |
Diluted shares outstanding | | 125,819 | | 125,598 | | 126,737 | |
(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.
Adoption of New Accounting Pronouncements
Effective August 1, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123(R) using the modified-prospective-transition method (refer to the Stock Plans section of the Accounting Policies note for further details).
In March 2005, the FASB issued Financial Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (“FIN No. 47”). FIN No. 47 clarifies that the term “conditional asset retirement obligation” refers to a legal obligation to perform an asset retirement activity in which the timing and/(or) method of settlement are conditional on a future event that may or may not be within the control of an entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN No. 47 was effective for the Company as of the end of fiscal year 2006. The adoption of FIN No. 47 did not have a material impact on the Company’s consolidated financial statements.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
ACQUISITIONS
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 assumed, 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 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.
The July 31, 2006 condensed consolidated balance sheet reflects the final allocation of the purchase prices and non-deductible goodwill of $9,900 related to these acquisitions. The following table summarizes the final allocation of the purchase prices to the assets acquired and liabilities assumed at the dates of the acquisitions:
Purchase price | | $ | 38,349 | |
Transaction costs | | | 638 | |
Total purchase price | | | 38,987 | |
Cash acquired | | | 7,470 | |
Total purchase price, net of cash acquired | | | 31,517 | |
| | | | |
Accounts receivable | | | 1,710 | |
Inventories | | | 9,886 | |
Other current assets | | | 1,658 | |
Property plant and equipment | | | 6,771 | |
Intangible assets | | | 18,393 | |
Other non-current assets | | | 211 | |
Total assets acquired | | | 38,629 | |
| | | | |
Accounts payable and other current liabilities | | | 4,564 | |
Long-term debt | | | 2,563 | |
Due to the Company (from Euroflow) | | | 9,255 | |
Other non-current liabilities | | | 630 | |
Total liabilities assumed | | | 17,012 | |
Goodwill | | $ | 9,900 | |
Based upon the markets BioSepra and Euroflow serve, the goodwill was assigned to the Company’s BioPharmaceutical segment. 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.
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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/(gains) recorded in fiscal years 2006, 2005 and 2004:
2006 | | Restructuring (1) | | Other
Charges/(Gains)
(2) | | Total | |
Severance | | $ | 13,562 | | | $ | — | | | $ | 13,562 | |
Gain on sale of investments (2a) | | | — | | | | (2,200 | ) | | | (2,200 | ) |
Other exit costs | | | 3,043 | | | | — | | | | 3,043 | |
Gain on sale of assets | | | (696 | ) | | | — | | | | (696 | ) |
Environmental matters (2b) | | | — | | | | 925 | | | | 925 | |
Other | | | — | | | | (307 | ) | | | (307 | ) |
| | | 15,909 | | | | (1,582 | ) | | | 14,327 | |
Reversal of excess restructuring reserves | | | (2,001 | ) | | | — | | | | (2,001 | ) |
| | $ | 13,908 | | | $ | (1,582 | ) | | $ | 12,326 | |
Cash | | $ | 13,624 | | | $ | (1,459 | ) | | $ | 12,165 | |
Non-cash | | | 284 | | | | (123 | ) | | | 161 | |
| | $ | 13,908 | | | $ | (1,582 | ) | | $ | 12,326 | |
2005 | | | | | | | | | | | | |
Severance | | $ | 17,496 | | | $ | — | | | $ | 17,496 | |
Early extinguishment of debt, net (2c) | | | — | | | | 11,953 | | | | 11,953 | |
Impairment of investments (2a) | | | — | | | | 3,615 | | | | 3,615 | |
Other exit costs | | | 2,928 | | | | — | | | | 2,928 | |
Loss on sale and impairment of assets | | | 226 | | | | — | | | | 226 | |
Environmental matters (2b) | | | — | | | | 2,077 | | | | 2,077 | |
Other | | | — | | | | 836 | | | | 836 | |
| | | 20,650 | | | | 18,481 | | | | 39,131 | |
Reversal of excess restructuring 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 (2b) | | $ | — | | | $ | 20,837 | | | $ | 20,837 | |
Loss/(gain) on sale of assets (2a) | | | 63 | | | | (7,127 | ) | | | (7,064 | ) |
German pension liability (2d) | | | — | | | | (5,626 | ) | | | (5,626 | ) |
Severance | | | 4,117 | | | | — | | | | 4,117 | |
Other exit costs | | | 538 | | | | — | | | | 538 | |
Other | | | — | | | | (253 | ) | | | (253 | ) |
| | | 4,718 | | | | 7,831 | | | | 12,549 | |
Reversal of excess restructuring 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 | |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(1) Restructuring:
In connection with the acquisition of the Filtration and Separations Group (“FSG”) in fiscal year 2002, Company management began formulating integration plans and identifying synergistic opportunities. The study 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 have been ongoing since that time, including 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, and the Company’s facilities rationalization initiative and European cost reduction (“EuroPall”) initiative, which commenced in fiscal year 2006.
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 implemented 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 groups, 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. |
2006:
| • | The Company continued its realignment plan and cost reduction initiatives, including its facilities rationalization initiative and its initiative to optimize European operations (“EuroPall”). As a result, the Company recorded severance liabilities for the termination of certain employees worldwide as well as other costs related to these initiatives. In addition, the Company recorded a gain on the sale of assets, primarily related to the sale of a building in the Western Hemisphere as part of its facilities rationalization initiative. |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The following table summarizes the activity related to restructuring liabilities that were recorded in fiscal years 2006 2005 and 2004:
| | Severance | | Lease
Termination
Liabilities &
Other | | Total | |
2006 | | | | | | | | | | | | |
Original Charge (a) | | $ | 13,335 | | $ | 3,043 | | | $ | 16,378 | | |
Utilized | | | (7,221 | ) | | (2,900 | ) | | | (10,121 | ) | |
Other changes (b) | | | 182 | | | 9 | | | | 191 | | |
Balance at July 31, 2006 | | $ | 6,296 | | $ | 152 | | | $ | 6,448 | | |
| | | | | | | | | | | | |
2005 | | | | | | | | | | | | |
Original Charge | | $ | 17,496 | | $ | 2,928 | | | $ | 20,424 | | |
Utilized | | | (8,404 | ) | | (2,739 | ) | | | (11,143 | ) | |
Other changes (b) | | | (86 | ) | | 4 | | | | (82 | ) | |
Balance at July 31, 2005 | | | 9,006 | | | 193 | | | | 9,199 | | |
Utilized | | | (3,243 | ) | | (87 | ) | | | (3,330 | ) | |
Reversal of excess
reserves (c) | | | (1,905 | ) | | (96 | ) | | | (2,001 | ) | |
Other changes (b) | | | 57 | | | 3 | | | | 60 | | |
Balance at July 31, 2006 | | $ | 3,915 | | $ | 13 | | | $ | 3,928 | | |
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 (c) | | |
(22
| ) | |
—
| | | |
(22
| ) | |
Other changes (b) | | | (87 | ) | | — | | | | (87 | ) | |
Balance at July 31, 2005 | | $ | — | | $ | — | | | $ | — | | |
| (a) | Amounts reflected as severance liabilities for fiscal year 2006 exclude $227 related to non-cash stock compensation. |
| (b) | Other changes reflect translation impact. |
| (c) | Reflects the reversal of excess restructuring reserves originally recorded in fiscal years 2005 and 2004. |
(2) Other Charges/(Gains):
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 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.
In fiscal year 2006, the Company sold all of the 617.5 shares it held of VITEX for total proceeds aggregating $6,783. The cost basis at the time of the sale, as adjusted by previous impairment charges, was $4,940. As a result, the Company recorded a gain of $1,806, net of fees and commissions. Furthermore, the Company sold its stock rights in Satair A/S (“Satair”) for total proceeds aggregating $641. The cost basis of the rights at the time of the sale was $247. As a result, the Company recorded a gain of $394.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
For further discussion of the Company’s investments, refer to the Other Current and Non-Current Assets note.
| (b) 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 primarily related to environmental matters in Sea Cliff, New York and Pinellas Park, Florida.
In fiscal year 2006, the Company increased its previously established environmental reserves by $925 primarily related to environmental matters in Ann Arbor, Michigan and Pinellas Park, Florida.
For more detail regarding environmental matters, please refer to the Contingencies and Commitments note.
| (c) 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.
| (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.
ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
| | 2006 | | 2005 | |
Billed | | $ | 483,205 | | $ | 463,959 | |
Unbilled | | | 46,329 | | | 43,206 | |
Total | | | 529,534 | | | 507,165 | |
Less allowances for doubtful accounts | | | (11,902 | ) | | (13,515 | ) |
Accounts receivable | | $ | 517,632 | | $ | 493,650 | |
Unbilled receivables principally relate to long-term contracts recorded under the percentage-of-completion method of accounting.
INVENTORIES
The major classes of inventory, net, are as follows:
| | 2006 | | 2005 | |
Raw materials and components | | $ | 130,731 | | $ | 113,202 | |
Work-in-process | | | 66,259 | | | 44,837 | |
Finished goods | | | 211,283 | | | 207,890 | |
| | $ | 408,273 | | $ | 365,929 | |
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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:
| | 2006 | | 2005 | |
Land | | $ | 44,923 | | $ | 39,270 | |
Buildings and improvements | | | 462,177 | | | 447,660 | |
Machinery and equipment | | | 758,182 | | | 715,692 | |
Furniture and fixtures | | | 76,624 | | | 75,895 | |
| | | 1,341,906 | | | 1,278,517 | |
Less: Accumulated depreciation and amortization | | | 720,927 | | | 669,759 | |
Property, plant and equipment, net | | $ | 620,979 | | $ | 608,758 | |
GOODWILL AND INTANGIBLE ASSETS
The following table presents goodwill, net of accumulated amortization (from prior to adopting SFAS No. 142), allocated by reportable segment, in accordance with SFAS No. 142:
| | 2006 | | 2005 | |
Medical | | $ | 29,210 | | $ | 28,578 | |
BioPharmaceuticals | | | 38,344 | | | 45,538 | |
Life Sciences | | | 67,554 | | | 74,116 | |
| | | | | | | | |
General Industrial | | | 151,997 | | | 151,878 | |
Aerospace | | | 5,706 | | | 5,704 | |
Microelectronics | | | 21,219 | | | 21,206 | |
Industrial | | | 178,922 | | | 178,788 | |
| | $ | 246,476 | | $ | 252,904 | |
The decrease in the carrying amount of goodwill is primarily attributable to the changes in the final allocation of the purchase price from the acquisition of Euroflow as discussed in the Acquisitions note. This was partly offset by the changes in foreign exchange rates used to translate the goodwill contained in the financial statements of foreign subsidiaries using the rates at each respective balance sheet date. Refer to the Segment Information and Geographies note for a more detailed description of the reportable segments.
Intangible assets consist of the following:
| | 2006 | |
| | Gross | | Accumulated
Amortization | | Net | |
Patents and unpatented technology | | $ | 78,579 | | $ | 30,232 | | $ | 48,347 | |
Trademarks | | | 4,648 | | | 2,261 | | | 2,387 | |
Other | | | 3,361 | | | 2,618 | | | 743 | |
| | $ | 86,588 | | $ | 35,111 | | $ | 51,477 | |
| | 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 | |
Patents and trademarks include costs to register new patents and trademarks. Patents also include expenditures to successfully defend certain patents.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The decrease in the gross amount of patents and unpatented technology compared to fiscal year 2005 primarily reflects the write-off of fully amortized patents of approximately $18,600, partly offset by the recording of $8,000 related to the finalization of the valuation of intangible assets purchased in the Euroflow acquisition, as discussed above. The fair value of these intangibles had not been determined as of July 31, 2005. As such, their cost had been preliminarily allocated based upon their book values.
Amortization expense for intangible assets for fiscal years 2006, 2005 and 2004 was $8,463, $6,762 and $7,888, respectively. Amortization expense is estimated to be approximately $8,120 in 2007, $7,188 in 2008, $6,782 in 2009, $6,776 in 2010 and $6,856 in 2011.
OTHER CURRENT AND NON-CURRENT ASSETS
Other current assets consist of the following:
| | 2006 | | 2005 | |
Deferred income taxes (a) | | $ | 42,819 | | $ | 57,632 | |
Income tax receivable (a) | | | 49,163 | | | 38,641 | |
Prepaid expenses | | | 25,259 | | | 21,858 | |
Other receivables | | | 16,178 | | | 17,754 | |
| | $ | 133,419 | | $ | 135,885 | |
Other non-current assets consist of the following:
| | 2006 | | 2005 | |
Deferred income taxes (a) | | $ | 111,591 | | $ | 89,787 | |
Retirement benefit assets (b) | | | 84,435 | | | 59,998 | |
Investments (b) | | | 4,066 | | | 6,605 | |
Prepaid pension expenses (c) | | | 20,193 | | | — | |
Intangible pension assets (c) | | | 9,273 | | | 11,379 | |
Other | | | 27,387 | | | 25,474 | |
| | $ | 256,945 | | $ | 193,243 | |
a) | Refer to the Income Taxes note for further discussion. |
b) | 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 $26,685 and $24,795 as of July 31, 2006 and July 31, 2005, respectively. The guaranteed investment contracts were established to pay for supplementary retirement benefits related to unfunded plans in Germany. The July 31, 2006, and July 31, 2005, balance sheets reflect related liabilities in the amounts of $55,596 and $51,814, respectively. |
Also included within retirement benefit assets is a benefits protection trust, with assets aggregating $57,750 and $35,203 as of July 31, 2006 and July 31, 2005, respectively. The trust was established for the purpose of satisfying certain unfunded supplemental post-employment 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 2007 to 2039. Such debt and equity securities are classified as available-for-sale and aggregated $55,648 and $33,522 as of July 31, 2006 and July 31, 2005, respectively. The July 31, 2006 and July 31, 2005, balance sheets reflect retirement benefit assets held in the trust of $51,860 and $35,203, related to retirement benefit liabilities of $53,627 and $55,014, respectively.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
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 $4,037 and $6,576 at July 31, 2006 and July 31, 2005, respectively, that the Company classifies as available-for-sale. Amongst these investments is the Company’s investment in Satair of $4,037 and $2,871, at July 31, 2006 and July 31, 2005, respectively. In addition, such investments at July 31, 2005 included the Company’s investment in VITEX, a developer of blood products and systems. In August 2005, the Company sold its investment in VITEX. For more detail regarding this transaction, refer to the Restructuring and Other Charges, Net note.
The following is a summary of the Company’s available-for-sale investments by category at July 31, 2006 and July 31, 2005:
| | Cost/
Amortized
Cost Basis | | Fair Value | | Gross
Unrealized
Holding
Gains | | Gross
Unrealized
Holding
Losses | | Net
Unrealized
Holding
Gains/
(Losses) | | Foreign
Exchange
Gains/
(Losses) | |
2006 | | | | | | | | | | | | | | | | | | | |
Equity securities | | $ | 5,396 | | $ | 7,980 | | $ | 2,066 | | $ | (103 | ) | $ | 1,963 | | $ | 621 | |
Debt securities: | | | | | | | | | | | | | | | | | | | |
U.S. Treasury | | | 22,913 | | | 22,609 | | | 19 | | | (323 | ) | | (304 | ) | | — | |
Other U.S. government | | | 11,209 | | | 11,064 | | | 6 | | | (151 | ) | | (145 | ) | | — | |
CMO/mortgage-backed | | | 3,699 | | | 3,696 | | | 11 | | | (14 | ) | | (3 | ) | | — | |
Corporate | | | 14,548 | | | 14,365 | | | 6 | | | (189 | ) | | (183 | ) | | — | |
| | $ | 57,765 | | $ | 59,714 | | $ | 2,108 | | $ | (780 | ) | $ | 1,328 | | $ | 621 | |
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 | |
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 | |
2006 | | | | | | | | | | | | | | | | | | | |
Equity securities | | $ | 3,913 | | $ | 103 | | $ | — | | $ | — | | $ | 3,913 | | $ | 103 | |
Debt securities: | | | | | | | | | — | | | — | | | | | | | |
U.S. Treasury | | | 13,678 | | | 323 | | | — | | | — | | | 13,678 | | | 323 | |
Other U.S. government | | | 7,391 | | | 151 | | | — | | | — | | | 7,391 | | | 151 | |
CMO/mortgage – backed | | | 1,112 | | | 14 | | | — | | | — | | | 1,112 | | | 14 | |
Corporate | | | 7,361 | | | 189 | | | — | | | — | | | 7,361 | | | 189 | |
| | $ | 33,455 | | $ | 780 | | $ | — | | $ | — | | $ | 33,455 | | $ | 780 | |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
| | 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 | |
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, 2006, July 31, 2005 and July 31, 2004:
| | 2006 | | 2005 | | 2004 | |
Proceeds from sales | | $ | 17,905 | | $ | 6,900 | | $ | 12,663 | |
Realized gross gains on sales | | | 2,217 | | | 160 | | | 304 | |
Realized gross losses on sales | | | 112 | | | 2 | | | 283 | |
c) | Prepaid pension expenses represent the non-current amounts arising from the excess of cumulative employer contributions over accrued net pension expenses. 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, 2006, the Company had unsecured credit facilities which require no compensating balances, totaling approximately $166,356. In addition to providing short-term liquidity and overdraft protection, these facilities also support various programs (such as guarantee, performance bond and warranty) mandated by customers and other financial exposures (foreign exchange forward contracts) of the Company. At July 31, 2006, notes payable were $35,821 and an additional $11,027 was committed to various other programs. The weighted average interest rates on notes payable at the end of fiscal years 2006 and 2005 were 4.6% and 3.7%, respectively.
Long-term debt consists of:
| | 2006 | | 2005 | |
Senior revolving credit facility, due in 2011 (a) | | $ | 347,749 | | $ | — | |
Senior revolving credit facility, due in 2010 (b) | | | — | | | 190,000 | |
Private placement senior notes, due in 2012 (c) | | | 280,000 | | | 280,000 | |
Yen denominated loan, due in 2007 (d) | | | 26,214 | | | 26,727 | |
Other | | | 13,453 | | | 14,606 | |
| | | 667,416 | | | 511,333 | |
SFAS No. 133 fair value adjustment, net (e) | | | 160 | | | 187 | |
Total long-term debt | | | 667,576 | | | 511,520 | |
Current portion | | | (27,561 | ) | | (1,359 | ) |
Long-term debt, net of current portion | | $ | 640,015 | | $ | 510,161 | |
(a) | On June 21, 2006, the Company and certain wholly-owned subsidiary borrowers, entered into a multi-currency (U.S.$, Pound, Euro), five-year $500,000 unsecured senior revolving credit facility with a syndicate of banks, which expires on June 21, 2011. Simultaneously, the Company and one of its domestic subsidiaries borrowed approximately $445,000 under this facility and used the proceeds principally (1) to repay the $213,869 of borrowings, accrued interest and fees due under its then existing $350,000 unsecured senior revolving credit facility entered into on July 29, 2005 (discussed in (b) below), (2) to prepay a 90-day term $200,000 loan plus accrued interest, (3) to pay various fees associated with the new facility and (4) for general corporate purposes. The then existing $350,000 unsecured revolving credit facility was terminated upon execution of the $500,000 revolving credit facility. Letters of credit outstanding against the $500,000 revolving credit facility as of July 31, 2006 were approximately $14,407. |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Borrowings under the new facility bear interest at either a variable rate based upon LIBOR (US$ and £ borrowings) or Euribor (Euro borrowings) or at the prime rate of the Administrative Agent (US$ borrowing only). 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 3.5 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 3.5 to 1, EBITDA computed on the basis of cumulative results for the most recently ended four consecutive quarters. |
The Company was in compliance with all financial covenants of its various debt agreements as of July 31, 2006.
On July 21, 2006, several foreign, non-U.S. dollar functional currency, subsidiary borrowers initiated loans under the new facility to facilitate the funding of a substantial portion of the dividend payment of $398,000 made pursuant to the implementation plan under the American Jobs Creation Act of 2004. Such borrowings were individually Pound 36,000 (U.S.$67,266) and Euro 141,400 (U.S.$180,483) (U.S. dollar equivalents stated at relevant year-end spot rates) and were used to repay a portion of the initial outstandings under the new facility as well as for other general corporate purposes.
(b) | On July 29, 2005, the Company entered into a five-year $350,000 unsecured senior revolving credit facility with a syndicate of banks, which was due to expire on July 29, 2010. Simultaneously, the Company borrowed $190,000 under this facility and used the proceeds principally to (1) redeem all of its then outstanding $100,000 private placement 7.83% senior notes, 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, and (3) various fees associated with the new facility. The then existing $300,000 unsecured senior revolving credit facility was terminated upon the execution of the $350,000 revolving credit facility. |
(c) | On August 6, 2002, the Company completed a private placement offering of $280,000 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. |
(d) | The Company refinanced its Yen 3 billion loan (approximately $26,214 as of July 31, 2006), 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. |
(e) | Refer to the Financial Instruments and Risks and Uncertainties note for further discussion of the Company’s hedging activities. |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The aggregate annual maturities of long-term debt during fiscal years 2007 through 2011 are approximately as follows:
2007 | | $ | 27,561 |
2008 | | | 1,933 |
2009 | | | 1,477 |
2010 | | | 1,551 |
2011 | | | 349,244 |
Interest expense, net, for fiscal years 2006, 2005 and 2004 is comprised of:
| | 2006 | | 2005 | | 2004 | |
Interest expense | | $ | 33,177 | | $ | 30,895 | | $ | 24,143 | |
Interest income | | | 10,200 | | | 4,945 | | | 3,642 | |
Interest expense, net | | $ | 22,977 | | $ | 25,950 | | $ | 20,501 | |
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 $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 $160 at July 31, 2006, 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:
| | 2006 | | 2005 | |
| | $280,000
Private
Placement | | $280,000
Private
Placement | |
Realized | | $ | 160 | | $ | 187 | |
Unrealized | | | — | | | — | |
Total | | $ | 160 | | $ | 187 | |
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 receives payments at a variable rate based upon Yen LIBOR, and makes 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 underlying Yen 3 billion loan.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
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 received payments at a variable rate based on LIBOR and made payments at an effective rate of 4.3% on a notional amount of $25,000. The swap expired 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, who in turn will remit the $32,154 to PNBV. As of July 31, 2006, the fair value of the cross currency swap was an asset of $1,289. Other comprehensive income includes an unrealized loss of $283 on the cross currency swap, of which $16 is expected to be reclassified into earnings within one year.
As of July 31, 2006, the Company had interest rate swaps and forwards outstanding with notional amounts aggregating $26,214 and $33,553 respectively, whose fair values were an asset of $94 and $501, respectively. Other comprehensive income includes $94 of cumulative unrealized gains on variable to fixed rate interest rate swaps (i.e., cash flow hedges) all of which 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 $280,161 and a fair value of $289,800. 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.
The Company’s cash and cash equivalents are in high-quality securities placed with a wide array of financial institutions with high credit ratings limiting 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.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
INCOME TAXES
The components of earnings before income taxes are as follows:
| | 2006 | | 2005 | | 2004 | |
Domestic operations, including Puerto Rico | | $ | 75,272 | | $ | 37,621 | | $ | 52,612 | |
Foreign operations | | | 135,104 | | | 143,450 | | | 145,220 | |
| | $ | 210,376 | | $ | 181,071 | | $ | 197,832 | |
The provisions for income taxes consist of the following items: | | | | | | | | | | |
Current: | | | | | | | | | | |
Federal and Puerto Rico | | $ | 14,255 | | $ | 9,069 | | $ | 18,240 | |
Foreign | | | 43,689 | | | 33,084 | | | 46,685 | |
| | | 57,944 | | | 42,153 | | | 64,925 | |
Deferred: | | | | | | | | | | |
Federal and Puerto Rico | | | 5,748 | | | 3,273 | | | (18,105 | ) |
Foreign | | | 1,191 | | | (5,171 | ) | | (561 | ) |
| | | 6,939 | | | (1,898 | ) | | (18,666 | ) |
| | $ | 64,883 | | $ | 40,255 | | $ | 46,259 | |
A reconciliation of the provisions for income taxes follows:
| | % of Pretax Earnings | |
| | 2006 | | 2005 | | 2004 | |
Computed “expected” tax expense | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | |
Tax benefit of Puerto Rico operations | | | (7.0 | ) | | | (8.4 | ) | | | (8.4 | ) | |
Incremental tax as a result of the American Jobs Creation Act | | | 7.8 | | | | — | | | | — | | |
Change in valuation allowance | | | (1.7 | ) | | | 0.6 | | | | (1.6 | ) | |
| | | | | | | | | | | | | |
Foreign income and withholding taxes,
net of U.S. foreign tax credits | | | (2.8 | ) | | | (4.5 | ) | | | (4.5 | ) | |
Other | | | (0.5 | ) | | | (0.5 | ) | | | 2.9 | | |
Effective tax rate | | | 30.8 | % | | | 22.2 | % | | | 23.4 | % | |
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 Pall Corporation, the repeal was effective July 31, 2006. The Company has formed a Puerto Rico Limited Liability Company (“LLC”), which purchased the assets and operations of the two Section 936 companies effective July 31, 2006. The LLC is a subsidiary of a wholly-owned controlled foreign corporation (“CFC”). The Company also operates another Puerto Rico entity as a branch of this wholly-owned 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.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The components of the net deferred tax asset at July 31, 2006 and July 31, 2005, are as follows:
| | 2006 | | 2005 |
Deferred tax asset: | | | | | | | | |
Tax loss and tax credit carry-forwards | | $ | 117,969 | | | $ | 122,794 | |
Inventories | | | 18,330 | | | | 18,544 | |
Compensation and benefits | | | 70,004 | | | | 56,039 | |
Environmental | | | 6,646 | | | | 8,300 | |
Accrued expenses | | | 14,960 | | | | 12,409 | |
Other | | | 34,265 | | | | 39,233 | |
Gross deferred tax asset | | | 262,174 | | | | 257,319 | |
Valuation allowance | | | (50,987 | ) | | | (57,631 | ) |
Total deferred tax asset | | | 211,187 | | | | 199,688 | |
Deferred tax liability: | | | | | | | | |
Plant and equipment | | | (38,295 | ) | | | (38,615 | ) |
Pension assets | | | (16,155 | ) | | | (8,840 | ) |
Other | | | (12,635 | ) | | | (15,993 | ) |
Total deferred tax liability | | | (67,085 | ) | | | (63,448 | ) |
Net deferred tax asset | | $ | 144,102 | | | $ | 136,240 | |
As of July 31, 2006, the Company had available tax net operating loss, tax capital loss and tax credit carry forwards subject to expiration as follows:
| | Losses | | |
Year of Expiration | | Operating | | Capital | | Tax Credits |
2007 | | $ | — | | | $ | — | | | $ | 9,057 | |
2008-2016 | | | 4,267 | | | | 79,521 | | | | 51,150 | |
2017-2026 | | | 5,750 | | | | — | | | | — | |
Subtotal | | | 10,017 | | | | 79,521 | | | | 60,207 | |
Indefinite | | | 61,093 | | | | — | | | | 3,246 | |
Total | | $ | 71,110 | | | $ | 79,521 | | | $ | 63,453 | |
The valuation allowance has been reduced by $6,644 during the fiscal year ended July 31, 2006. This reduction primarily resulted from the release of valuation allowances due to the Company’s ability to utilize certain capital losses and tax credits.
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, 2006 valuation allowance.
If subsequently recognized, the tax benefit attributable to $38,566 of the total valuation allowance 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 provided for a special one-time tax deduction of 85% of certain foreign earnings that are repatriated, as defined in the Act. During the fourth quarter of fiscal year 2006, the Company completed the repatriation of foreign earnings through intercompany dividends in the amount of $398,000 under the provisions of the Act. This action resulted in an incremental tax charge of approximately $17,000.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
As of July 31, 2006, the Company has not provided deferred taxes on $700,925 of undistributed foreign subsidiaries’ earnings because it intends to invest substantially all such earnings in its foreign operations indefinitely, except where it is possible to repatriate these earnings to the United States without a material incremental tax.
Pall Corporation and its domestic subsidiaries file a consolidated Federal income tax return.
ACCRUED AND OTHER NON-CURRENT LIABILITIES
Accrued liabilities consist of the following:
| | 2006 | | 2005 |
Payroll and related taxes | | $ | 106,637 | | $ | 93,869 |
Benefits | | | 24,844 | | | 33,001 |
Interest payable | | | 18,300 | | | 18,784 |
Environmental remediation (a) | | | 5,317 | | | 5,699 |
Other | | | 86,532 | | | 65,927 |
| | $ | 241,630 | | $ | 217,280 |
Other non-current liabilities consist of the following:
| | 2006 | | 2005 |
Retirement benefits | | $ | 159,520 | | $ | 126,399 |
Deferred revenue (b) | | | 18,129 | | | — |
Environmental remediation (a) | | | 14,416 | | | 18,836 |
Other | | | 3,629 | | | 2,468 |
| | $ | 195,694 | | $ | 147,703 |
| (a) | For further discussion regarding environmental remediation liabilities refer to the Contingencies and Commitments note. |
| (b) | On December 16, 2005, the Company sold the rights to its Western Hemisphere commercial aerospace aftermarket distribution channel for the Company’s products for a ten-year period to Satair. The proceeds received for the distribution rights were recorded as deferred revenue and are being amortized as an increase to sales over the life of the distribution agreement. |
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 other regulations. Pension costs charged to operations totaled $32,819, $29,890 and $24,962 in fiscal years 2006, 2005 and 2004, 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 |
| | 2006 | | 2005 | | 2006 | | 2005 |
Change in benefit obligation: | | | | | | | | | | | | | | | | |
Benefit obligation - beginning of year | | $ | 186,192 | | | $ | 153,145 | | | $ | 291,381 | | | $ | 239,452 | |
Curtailments and settlements | | | — | | | | — | | | | (22,820 | ) | | | 141 | |
Service cost | | | 7,511 | | | | 6,633 | | | | 6,774 | | | | 6,897 | |
Interest cost | | | 9,471 | | | | 9,227 | | | | 13,621 | | | | 12,864 | |
Plan participant contributions | | | — | | | | — | | | | 1,554 | | | | 2,464 | |
Plan amendments | | | 11 | | | | 1,682 | | | | 4,879 | | | | — | |
Actuarial (gain) loss | | | (8,397 | ) | | | 26,151 | | | | 27,874 | | | | 47,667 | |
Total benefits paid | | | (10,481 | ) | | | (10,646 | ) | | | (8,673 | ) | | | (9,939 | ) |
Effect of exchange rates | | | — | | | | — | | | | 16,672 | | | | (8,165 | ) |
Benefit obligation - end of year | | | 184,307 | | | | 186,192 | | | | 331,262 | | | | 291,381 | |
Change in plan assets (a): | | | | | | | | | | | | | | | | |
Fair value of plan assets - beginning of year | | | 91,799 | | | | 74,529 | | | | 164,114 | | | | 139,302 | |
Actual return on plan assets | | | 757 | | | | 10,319 | | | | 19,103 | | | | 27,858 | |
Company contributions | | | 41,996 | | | | 17,597 | | | | 19,909 | | | | 10,049 | |
Plan participant contributions | | | — | | | | — | | | | 1,554 | | | | 2,464 | |
Benefits paid from plan assets | | | (10,481 | ) | | | (10,646 | ) | | | (8,673 | ) | | | (9,939 | ) |
Effect of exchange rates | | | — | | | | — | | | | 10,113 | | | | (5,620 | ) |
Fair value of plan assets - end of year | | | 124,071 | | | | 91,799 | | | | 206,120 | | | | 164,114 | |
Funded status (a): | | | (60,236 | ) | | | (94,393 | ) | | | (125,142 | ) | | | (127,267 | ) |
Unrecognized actuarial loss | | | 40,973 | | | | 46,696 | | | | 93,479 | | | | 99,355 | |
Unrecognized prior service cost | | | 7,165 | | | | 8,107 | | | | 6,218 | | | | 3,642 | |
Unrecognized transition (asset) obligation | | | (42 | ) | | | (85 | ) | | | — | | | | — | |
Net amount recognized | | $ | (12,140 | ) | | $ | (39,675 | ) | | $ | (25,445 | ) | | $ | (24,270 | ) |
Amount recognized in the balance sheet consists of: | | | | | | | | | | | | | | | | |
Prepaid benefit | | $ | 20,193 | | | $ | — | | | $ | — | | | $ | — | |
Accrued benefit liability | | | (52,420 | ) | | | (71,403 | ) | | | (120,953 | ) | | | (77,365 | ) |
Intangible asset | | | 4,575 | | | | 7,990 | | | | 4,698 | | | | 3,389 | |
Accumulated other comprehensive income | | | 15,512 | | | | 23,738 | | | | 90,810 | | | | 49,706 | |
Net amount recognized | | $ | (12,140 | ) | | $ | (39,675 | ) | | $ | (25,445 | ) | | $ | (24,270 | ) |
| | | | | | | | | | | | | | | | | |
Accumulated benefit obligation | | $ | 164,125 | | | $ | 162,787 | | | $ | 326,659 | | | $ | 241,347 | |
| | | | | | | | | | | | | | | | | |
Plans with accumulated benefit obligations in excess of plan assets consist of the following: | | | | | | | | | | | | | | | | |
Accumulated benefit obligation | | $ | 52,420 | | | $ | 162,787 | | | $ | 326,659 | | | $ | 241,347 | |
Projected benefit obligation | | | 59,977 | | | | 186,192 | | | | 331,262 | | | | 291,381 | |
Plan assets at fair value | | | — | | | | 91,799 | | | | 206,120 | | | | 164,114 | |
| (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 $50,802 and $34,107 for the U.S. plans and $26,685 and $24,795 for the foreign plans as of July 31, 2006 and July 31, 2005, respectively. Liabilities, included in the tables above, related to these plans were $52,324 and $53,711 for the U.S. plans and $55,596 and $51,814 for the foreign plans as of July 31, 2006 and July 31, 2005, 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 | |
| | 2006 | | 2005 | | 2004 | | 2006 | | 2005 | | 2004 | |
Service cost | | $ | 7,511 | | | $ | 6,633 | | | $ | 6,540 | | | $ | 6,774 | | | $ | 6,897 | | | $ | 7,423 | | |
Interest cost | | | 9,471 | | | | 9,227 | | | | 8,416 | | | | 13,621 | | | | 12,864 | | | | 11,408 | | |
Expected return on plan assets | | | (6,288 | ) | | | (5,196 | ) | | | (5,455 | ) | | | (10,745 | ) | | | (9,333 | ) | | | (9,207 | ) | |
Amortization of prior service cost | | | 952 | | | | 884 | | | | 749 | | | | 439 | | | | 501 | | | | 499 | | |
Amortization of net transition asset | | | (42 | ) | | | (42 | ) | | | (81 | ) | | | — | | | | 21 | | | | 32 | | |
Recognized actuarial loss | | | 2,857 | | | | 1,500 | | | | 1,195 | | | | 7,954 | | | | 5,274 | | | | 4,107 | | |
Loss/(gain) due to curtailments and settlements | | | — | | | | — | | | | — | | | | 315 | | | | 660 | | | | (664 | ) | |
Net periodic benefit cost | | $ | 14,461 | | | $ | 13,006 | | | $ | 11,364 | | | $ | 18,358 | | | $ | 16,884 | | | $ | 13,598 | | |
The following table provides the weighted-average assumptions used to determine benefit obligations and net periodic benefit cost:
| | U.S. Plans | | Foreign Plans | |
| | 2006 | | 2005 | | 2004 | | 2006 | | 2005 | | 2004 | |
Assumptions used to determine
benefit obligations | | | | | | | | | | | | | |
Discount rate | | 6.25% | | 5.25% | | 6.25% | | 4.83% | | 4.51% | | 5.32% | |
Rate of compensation increase | | 4.68% | | 3.67% | | 3.50% | | 2.93% | | 3.79% | | 3.64% | |
Assumptions used to determine
net periodic benefit cost | | | | | | | | | | | | | |
Discount rate | | 5.25% | | 6.25% | | 6.25% | | 4.51% | | 5.32% | | 5.10% | |
Expected long-term rate of return on plan assets | | 7.00% | | 7.00% | | 8.00% | | 6.42% | | 6.30% | | 6.31% | |
Rate of compensation increase | | 3.67% | | 3.50% | | 4.00% | | 3.79% | | 3.64% | | 3.65% | |
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:
| | 2006 | | 2005 | |
| | Target
Allocation | | Actual
Allocation | | Actual
Allocation | |
Equity securities | | 66% | | 68% | | 70% | |
Debt securities | | 28% | | 26% | | 23% | |
Other | | 6% | | 7% | | 7% | |
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.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Management’s estimate of the Company’s cash requirements for the defined benefit plans for the year ending July 31, 2007 is $17,828. This is comprised of expected benefit payments of $8,940, which will be paid directly to participants of unfunded plans from Company assets, as well as expected Company contributions to funded plans of $8,888. 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.
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 | | | |
2007 | | $ | 25,171 | |
2008 | | | 23,217 | |
2009 | | | 23,838 | |
2010 | | | 24,323 | |
2011 | | | 25,903 | |
2012-2016 | | | 142,658 | |
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 2006, 2005, and 2004 was $5,392, $5,297 and $5,781, 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 $5,445, $4,266 and $2,165 for fiscal years 2006, 2005 and 2004, 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 the majority of the $19,733 and $24,535 of accruals in the Company’s Consolidated Balance Sheets at July 31, 2006, and July 31, 2005, respectively. The Company recorded charges of $925 and $2,077 in fiscal years 2006 and 2005, 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 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, groundwater concentrations remain above acceptable levels in much of the affected area. 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). Neither the State nor the Court has sought or suggested that Gelman should be penalized based on the continued presence of groundwater contamination at the site.
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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.
In December 2005, Gelman filed two motions for partial summary disposition seeking dismissal of the City’s claims for injunctive relief and the majority of its monetary claims. The City filed a motion for summary disposition with regard to Gelman’s liability under state statute. Rather than hear the motions, the Court ordered the parties into settlement facilitation. The facilitation period was recently extended to allow the parties to continue these settlement negotiations. Gelman is currently in negotiations with the City on the terms of the proposed settlement. If a settlement is not reached, the trial in this matter has been rescheduled to late fall 2006.
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. The City is seeking in this matter essentially the same relief it is seeking in the above-described state court action. In October 2005, Gelman filed a Motion for Stay, seeking to stay these federal proceedings pending resolution of the parallel state court action. The City subsequently filed a motion for summary judgment regarding Gelman’s liability under CERCLA. The parties have agreed to include this matter in the settlement facilitation ordered by the state court and to stay this matter pending the outcome of the facilitation process. The parties have been informed that the Court will place this action on “administrative leave” without prejudice to the City’s right to restart the litigation if the matter is not resolved through the facilitation process described above.
A local resident and the City filed petitions for a contested case on November 26, 2005 and November 30, 2005, respectively. The petitions challenge various aspects of the discharge permit issued to Gelman by the State on September 30, 2005. The petitions commence an administrative adjudicative hearing, which can result in changes to the discharge permit. Company management does not believe there is substantive merit to the claims made in either petition. The Administrative Law Judge has consolidated both petitions into one proceeding. The Administrative Law Judge has also stayed this proceeding to allow the City and Gelman to attempt to resolve this matter through the facilitative process described above. No damages are being sought in this proceeding.
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 the 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 renewed its motion for summary judgment on December 27, 2004, asserting various grounds for dismissing the complaint as to each plaintiff. As ordered by the Court, the Company withdrew its motion to allow the plaintiff an opportunity to further amend their complaint and conduct limited discovery. The plaintiffs filed a second amended complaint on March 9, 2005, adding two claims under the Federal Resource Conservation and Recovery Act (“RCRA”). Discovery on the specific issues related to the seven plaintiffs was completed, and on October 17, 2005, the Company renewed, for a third time, its motion for summary judgment, asserting that none of the plaintiffs had established claims under any of the counts alleged, including RCRA. By order dated January 30, 2006, the Court granted the Company’s motion and dismissed the entire case. The period for filing an appeal by right has expired.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
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, 2006 and July 31, 2005 is immaterial to the financial position of the Company as is the change in the accrual for fiscal year 2006 to the Company’s consolidated results of operations, cash flows and financial position.
As of July 31, 2006, the Company had performance bonds outstanding relating primarily to its long-term contracts with governmental agencies of approximately $78,858.
The Company and its subsidiaries lease office and warehouse space, automobiles, computers and office equipment. Rent expense for all operating leases amounted to approximately $24,835 in 2006, $24,103 in 2005 and $22,870 in 2004. Future minimum rental commitments at July 31, 2006, for all non-cancelable operating leases with initial terms exceeding one year are $22,333 in 2007; $13,357 in 2008; $7,778 in 2009; $3,701 in 2010; $1,391 in 2011 and $5,131 thereafter.
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, 2006, for the aforementioned purchase commitments are $25,391 in 2007; $18,043 in 2008; $696 in 2009; $451 in 2010 and $1,256 in 2011.
The Company has employment agreements with its executive officers, which vary in length from one to two years. 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, 2006, excluding bonuses, was approximately $10,612.
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.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
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. In fiscal year 2006, the Company purchased 3,556 shares at an aggregate cost of $100,727 with an average price per share of $28.33. Therefore, $160,027 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.
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 $16,082, $10,898 and $16,377 for fiscal years 2006, 2005 and 2004, respectively.
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 | |
2004 | | | | | | | | | | | | | |
Unrealized translation adjustment | | $ | 46,431 | | | $ | 2,248 | | | $ | 48,679 | | |
Minimum pension liability adjustment | | | (6,946 | ) | | | 2,441 | | | | (4,505 | ) | |
Unrealized investment losses (a) | | | (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 (a) | | | 3,588 | | | | (280 | ) | | | 3,308 | | |
Unrealized gains on derivatives | | | 540 | | | | (188 | ) | | | 352 | | |
Other comprehensive income | | $ | (14,228 | ) | | $ | 8,921 | | | $ | (5,307 | ) | |
2006 | | | | | | | | | | | | | |
Unrealized translation adjustment | | $ | 26,158 | | | $ | 563 | | | $ | 26,721 | | |
Minimum pension liability adjustment | | | (32,878 | ) | | | 9,147 | | | | (23,731 | ) | |
Unrealized investment gains (a) | | | 1,916 | | | | — | | | | 1,916 | | |
Unrealized losses on derivatives | | | (177 | ) | | | (37 | ) | | | (214 | ) | |
Other comprehensive income | | $ | (4,981 | ) | | $ | 9,673 | | | $ | 4,692 | | |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
| (a) | The unrealized (losses) gains on available-for-sale securities, net of related taxes, consisted of the following: |
| | 2006 | | 2005 | | 2004 | |
Net unrealized gains/(losses) arising during the period, net of tax
(expense) benefit of $0, $(22) and $28 in 2006, 2005 and 2004, respectively | | $ | 3,446 | | | $ | (48 | ) | | $ | (7,871 | ) | |
Realized (gain)/loss included in net earnings for the period | | | (1,806 | ) | | | — | | | | 161 | | |
Adjustment for unrealized loss included in net earnings due to impairment | | | 276 | | | | 3,356 | | | | — | | |
Other comprehensive income (loss) | | $ | 1,916 | | | $ | 3,308 | | | $ | (7,710 | ) | |
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. In fiscal year 2006, certain research and development costs previously managed as a Corporate function were integrated into the Life Sciences and Industrial segments in the Western Hemisphere as part of the Company’s reorganization efforts.
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.
BioPharmaceuticals: includes sales of separation systems and disposable filters primarily to pharmaceutical and biotechnology companies for use by them in their development and commercialization of synthetically and organically derived drugs and vaccines.
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 fiscal year 2004 has been restated for this change.
Industrial:
General Industrial: the Company’s most diverse sub-segment, includes sales of filters, coalescers and integrated separation systems for hydraulic, fuel and lubrication systems on mechanical equipment across many industries, as well as to producers of energy (i.e., oil, gas, electricity and chemicals), food and beverages, municipal and industrial water and paper.
Aerospace: includes sales of filtration and fluid monitoring equipment to the aerospace industry for use on commercial and military aircraft, including hydraulic, lubrication, and fuel filters, coalescers to remove water from fuel, filters to remove viruses from aircraft cabin air and filter monitoring systems. The Company’s products and systems are also used in ships and land-based military vehicles.
Microelectronics: includes sales of disposable filtration products to the semiconductor, data storage, fiber optic, advanced display and materials markets.
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.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
In fiscal year 2005, the Company undertook to reorganize its business structure into three underlying vertically integrated business groups: Life Sciences, comprising Medical and BioPharmaceuticals; Aeropower, comprising Aerospace and the Machinery & Equipment portion of the current General Industrial marketplace; and Process Technologies, comprising General Industrial’s Food & Beverage, Fuels & Chemicals, Power Generation, Municipal Water and Microelectronics markets. In fiscal year 2006, management began a further integration of the Industrial groups (Aeropower and Process Technologies) to form one vertically integrated Industrial business group. This reorganization has been substantially completed and the Company’s new structure consists of two vertically integrated business groups: Life Sciences and Industrial. Each business group has integrated support functions and responsibility for global manufacturing, sales and marketing and research and development 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 groups).
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
MARKET SEGMENT INFORMATION
| | 2006 | | 2005 | | 2004 | |
SALES TO UNAFFILIATED CUSTOMERS: | | | | | | | | | | | | | |
Medical | | $ | 444,033 | | | $ | 443,256 | | | $ | 444,015 | | |
BioPharmaceuticals | | | 352,272 | | | | 321,480 | | | | 277,176 | | |
Life Sciences | | | 796,305 | | | | 764,736 | | | | 721,191 | | |
General Industrial | | | 772,010 | | | | 742,994 | | | | 666,771 | | |
Aerospace | | | 190,219 | | | | 175,095 | | | | 178,178 | | |
Microelectronics | | | 258,296 | | | | 219,459 | | | | 204,607 | | |
Industrial | | | 1,220,525 | | | | 1,137,548 | | | | 1,049,556 | | |
Total | | $ | 2,016,830 | | | $ | 1,902,284 | | | $ | 1,770,747 | | |
| | | | | | | | | | | | | | |
OPERATING PROFIT: | | | | | | | | | | | | | |
Medical | | $ | 53,597 | | | $ | 82,320 | | | $ | 79,722 | | |
BioPharmaceuticals | | | 88,220 | | | | 77,143 | | | | 69,100 | | |
Life Sciences | | | 141,817 | | | | 159,463 | | | | 148,822 | | |
General Industrial | | | 71,814 | | | | 82,886 | | | | 78,226 | | |
Aerospace | | | 31,478 | | | | 33,764 | | | | 43,634 | | |
Microelectronics | | | 63,007 | | | | 41,533 | | | | 38,476 | | |
Industrial | | | 166,299 | | | | 158,183 | | | | 160,336 | | |
Subtotal | | | 308,116 | | | | 317,646 | | | | 309,158 | | |
Restructuring and other charges, net (a) | | | (13,993 | ) | | | (39,600 | ) | | | (12,477 | ) | |
General corporate expenses | | | (60,770 | ) | | | (71,025 | ) | | | (78,348 | ) | |
Interest expense, net | | | (22,977 | ) | | | (25,950 | ) | | | (20,501 | ) | |
Earnings before income taxes | | $ | 210,376 | | | $ | 181,071 | | | $ | 197,832 | | |
| | | | | | | | | | | | | | |
DEPRECIATION AND AMORTIZATION: | | | | | | | | | | | | | |
Medical | | $ | 24,192 | | | $ | 22,073 | | | $ | 20,884 | | |
BioPharmaceuticals | | | 14,243 | | | | 12,734 | | | | 12,527 | | |
Life Sciences | | | 38,435 | | | | 34,807 | | | | 33,411 | | |
General Industrial | | | 26,775 | | | | 26,540 | | | | 26,943 | | |
Aerospace | | | 5,667 | | | | 5,289 | | | | 4,985 | | |
Microelectronics | | | 8,948 | | | | 8,354 | | | | 7,551 | | |
Industrial | | | 41,390 | | | | 40,183 | | | | 39,479 | | |
Subtotal | | | 79,825 | | | | 74,990 | | | | 72,890 | | |
Corporate | | | 15,833 | | | | 15,931 | | | | 16,045 | | |
Total | | $ | 95,658 | | | $ | 90,921 | | | $ | 88,935 | | |
| | | | | | | | | | | | | | |
CAPITAL EXPENDITURES: | | | | | | | | | | | | | |
Life Sciences | | $ | 43,049 | | | $ | 38,492 | | | $ | 28,368 | | |
Industrial | | | 48,154 | | | | 43,499 | | | | 30,054 | | |
Subtotal | | | 91,203 | | | | 81,991 | | | | 58,422 | | |
Corporate | | | 4,764 | | | | 4,162 | | | | 2,840 | | |
Total | | $ | 95,967 | | | $ | 86,153 | | | $ | 61,262 | | |
| | | | | | | | | | | | | |
IDENTIFIABLE ASSETS: | | | | | | | | | | | | |
Medical | | $ | 175,892 | | | $ | 176,459 | | | | | |
BioPharmaceuticals | | | 140,242 | | | | 136,336 | | | | | |
Shared Life Sciences Assets | | | 277,882 | | | | 270,579 | | | | | |
Life Sciences | | | 594,016 | | | | 583,374 | | | | | |
General Industrial | | | 421,195 | | | | 372,865 | | | | | |
Aerospace | | | 87,102 | | | | 78,578 | | | | | |
Microelectronics | | | 101,474 | | | | 95,341 | | | | | |
Shared Industrial Assets | | | 309,462 | | | | 306,054 | | | | | |
Industrial | | | 919,233 | | | | 852,838 | | | | | |
Subtotal | | | 1,513,249 | | | | 1,436,212 | | | | | |
Corporate | | | 1,039,609 | | | | 829,089 | | | | | |
Total | | $ | 2,552,858 | | | $ | 2,265,301 | | | | | |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
GEOGRAPHIES
| | 2006 | | 2005 | | 2004 | |
SALES TO UNAFFILIATED CUSTOMERS: | | | | | | | | | | | | | | | | |
Western Hemisphere | | | $ | 727,515 | | | | $ | 689,172 | | | | $ | 667,535 | | |
Europe | | | | 806,030 | | | | | 782,481 | | | | | 735,969 | | |
Asia | | | | 483,285 | | | | | 430,631 | | | | | 367,243 | | |
Total | | | $ | 2,016,830 | | | | $ | 1,902,284 | | | | $ | 1,770,747 | | |
INTERCOMPANY SALES BETWEEN GEOGRAPHIC AREAS: | | | | | | | | | | | | | | | | |
Western Hemisphere | | | $ | 251,285 | | | | $ | 231,576 | | | | $ | 185,538 | | |
Europe | | | | 128,682 | | | | | 126,718 | | | | | 104,034 | | |
Asia | | | | 7,640 | | | | | 6,529 | | | | | 4,736 | | |
Total | | | $ | 387,607 | | | | $ | 364,823 | | | | $ | 294,308 | | |
TOTAL SALES: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Western Hemisphere | | | $ | 978,800 | | | | $ | 920,748 | | | | $ | 853,073 | | |
Europe | | | | 934,712 | | | | | 909,199 | | | | | 840,003 | | |
Asia | | | | 490,924 | | | | | 437,160 | | | | | 371,979 | | |
Eliminations | | | | (387,606 | ) | | | | (364,823 | ) | | | | (294,308 | ) | |
Total | | | $ | 2,016,830 | | | | $ | 1,902,284 | | | | $ | 1,770,747 | | |
| | | | | | | | | | | | | | | | | |
OPERATING PROFIT: | | | | | | | | | | | | | | | | |
Western Hemisphere | | | $ | 141,824 | | | | $ | 160,863 | | | | $ | 127,235 | | |
Europe | | | | 86,931 | | | | | 101,102 | | | | | 121,078 | | |
Asia | | | | 75,345 | | | | | 63,934 | | | | | 62,531 | | |
Eliminations | | | | 4,016 | | | | | (8,253 | ) | | | | (1,686 | ) | |
Subtotal | | | | 308,116 | | | | | 317,646 | | | | | 309,158 | | |
Restructuring and other charges, net (a) | | | | (13,993 | ) | | | | (39,600 | ) | | | | (12,477 | ) | |
General corporate expenses | | | | (60,770 | ) | | | | (71,025 | ) | | | | (78,348 | ) | |
Interest expense, net | | | | (22,977 | ) | | | | (25,950 | ) | | | | (20,501 | ) | |
Earnings before income taxes | | | $ | 210,376 | | | | $ | 181,071 | | | | $ | 197,832 | | |
| | | | | | | | | | | | | | | | | |
IDENTIFIABLE ASSETS: | | | | | | | | | | | | | | | | |
Western Hemisphere | | | $ | 623,083 | | | | $ | 616,887 | | | | | | | |
Europe | | | | 643,448 | | | | | 582,171 | | | | | | | |
Asia | | | | 268,619 | | | | | 262,906 | | | | | | | |
Eliminations | | | | (21,901 | ) | | | | (25,752 | ) | | | | | | |
Subtotal | | | | 1,513,249 | | | | | 1,436,212 | | | | | | | |
Corporate | | | | 1,039,609 | | | | | 829,089 | | | | | | | |
Total | | | $ | 2,552,858 | | | | $ | 2,265,301 | | | | | | | |
(a) | Included in restructuring and other charges, net, for the purposes of evaluation of segment and geographic profitability are other adjustments of $1,667 and $837, recorded in cost of sales in the years ending July 31, 2006 and July 31, 2005, respectively; $898 and $837 in the years ended July 31, 2006 and July 31, 2005, respectively, related to a one-time purchase accounting adjustment to record, at market value, inventory acquired from BioSepra. This resulted in a $2,431 increase in acquired inventories, in accordance with SFAS No. 141, in the opening balance sheet and an increase in cost of sales concurrent with the sale of a portion of the underlying inventory. The adjustment is excluded from operating profit as 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. Furthermore, restructuring and other charges, net, for the purpose of segment and geographic profitability includes $769 in the year ended July 31, 2006 primarily comprised of incremental depreciation from the now planned early retirement of certain fixed assets (recorded in conjunction with the Company’s facilities rationalization initiatives) in accordance with SFAS No. 144. |
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Sales by the Company’s U.S. operations to unaffiliated customers totaled approximately $687,000, $648,000 and $632,000 in fiscal years 2006, 2005 and 2004, respectively. Included therein are export sales of approximately $65,000, $61,000 and $56,000 in fiscal years 2006, 2005 and 2004, respectively. Sales by the Company’s subsidiaries in Germany amounted to approximately $192,000, $199,000 and $201,000 in fiscal years 2006, 2005 and 2004, respectively. Sales by the Company’s subsidiary in Japan amounted to approximately $207,000, $204,000 and $179,000 in fiscal years 2006, 2005 and 2004, 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 | |
Allowance for doubtful accounts: | | | | | | | | | | | |
Year Ended: | | | | | | | | | | | |
July 31, 2006 | | $13,515 | | $2,052 | | $(3,956) | | $291 | | $11,902 | |
July 31, 2005 | | $12,062 | | $3,979 | | $(2,634) | | $108 | | $13,515 | |
July 31, 2004 | | $11,700 | | $3,217 | | $(3,277) | | $422 | | $12,062 | |
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