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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended May 2, 1998
Commission File No. 1-4311
PALL CORPORATION
Incorporated in New York State I.R.S. Employer Identifi-
cation # 11-1541330
2200 Northern Boulevard, East Hills, N.Y. 11548
Telephone Number (516) 484-5400
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
At June 11, 1998, 123,996,150 shares of common stock of the Registrant were
outstanding.
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PALL CORPORATION
INDEX TO FORM 10-Q
-----------------------------------
COVER SHEET 1
INDEX TO FORM 10-Q 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed consolidated balance sheets - May 2, 1998
and August 2, 1997 3
Condensed consolidated statements of earnings -
three months and nine months ended May 2, 1998 4
and May 3, 1997
Condensed consolidated statements of cash flows -
nine months ended May 2, 1998 and May 3, 1997 5
Notes to condensed consolidated financial statements 6
Item 2. Management's discussion and analysis of financial condition and
results of operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 13
SIGNATURES 13
EXHIBIT INDEX 14
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
May 2, August 2,
ASSETS 1998 1997
----------- -----------
Current Assets:
Cash and cash equivalents $ 41,376 $ 17,972
Short-term investments 24,800 37,500
Accounts receivable, net of allowances
for doubtful accounts of $6,911
and $6,602, respectively 275,495 266,604
Inventories - Note 2 230,116 198,080
Taxes receivable 46,473 40,262
Deferred income taxes 20,000 20,971
Other 32,962 25,215
----------- -----------
Total Current Assets 671,222 606,604
Property, plant and equipment, net of
accumulated depreciation of $387,974
and $345,493, respectively 519,345 504,046
Other assets 196,593 154,974
----------- -----------
Total Assets $ 1,387,160 $ 1,265,624
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ 113,416 $ 123,974
Accounts payable 63,031 53,200
Accrued liabilities:
Salaries and commissions 38,339 34,239
Other 112,420 57,319
----------- -----------
150,759 91,558
Income taxes 27,809 27,620
Current portion of long-term debt 22,500 4,677
Dividends payable 19,272 --
----------- -----------
Total Current Liabilities 396,787 301,029
Long-term debt, less current portion 149,959 62,126
Deferred income taxes 32,672 27,678
Other non-current liabilities 52,640 49,958
----------- -----------
Total Liabilities 632,058 440,791
----------- -----------
Stockholders' Equity:
Common stock, $.10 par value 12,796 12,796
Capital in excess of par value 92,893 92,893
Retained earnings 744,774 749,923
Treasury stock, at cost (78,921) (12,837)
Foreign currency translation (4,598) (4,722)
Minimum pension liability (3,926) (4,348)
Stock option loans (7,883) (8,820)
Cumulative unrealized investment losses (33) (52)
----------- -----------
Total Stockholders' Equity 755,102 824,833
----------- -----------
Total Liabilities and
Stockholders' Equity $ 1,387,160 $ 1,265,624
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements
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PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, (in thousands,
except per share data) except per share data)
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
May 2, May 3, May 2, May 3,
1998 1997 1998 1997
-------- --------- -------- --------
Net sales $289,171 $ 275,339 $785,526 $771,889
Costs and expenses:
Cost of sales 122,791 139,099 343,786 346,974
Selling, general and
administrative expenses 101,630 92,190 290,243 282,368
Research and development 15,271 13,761 44,026 39,569
Gelman merger and
restructuring charges -- 26,710 -- 30,621
Other charges, net 27,000 43,360 19,222 43,360
Interest expense, net 2,257 629 4,973 2,022
-------- --------- -------- --------
Total costs and expenses 268,949 315,749 702,250 744,914
Earnings (loss) before income taxes 20,222 (40,410) 83,276 26,975
Income taxes 12,275 (18,206) 29,369 2,927
-------- --------- -------- --------
Net earnings (loss) $ 7,947 $ (22,204) $ 53,907 $ 24,048
======== ========= ======== ========
Earnings (loss) per share
Basic $ 0.06 ($ 0.18) $ 0.43 $ 0.19
Diluted $ 0.06 ($ 0.18) $ 0.43 $ 0.19
Dividends declared per share $ 0.155 $ 0.140 $ 0.450 $ 0.403
Average number of shares
outstanding
Basic 124,186 126,684 125,373 126,027
Diluted 124,742 126,684 126,025 127,293
See accompanying Notes to Condensed Consolidated Financial Statements.
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PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
------------------------------
May 2, May 3,
1998 1997
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 153,666 $ 62,677
INVESTING ACTIVITIES:
Acquisition of Rochem, net of cash acquired (62,094) --
Investments and licenses (11,928) (7,000)
Capital expenditures (60,840) (69,724)
Disposals of fixed assets 2,032 999
Short-term investments 12,700 (4,850)
Benefits protection trust (4,095) (1,109)
--------- --------
NET CASH USED BY INVESTING ACTIVITIES (124,225) (81,684)
FINANCING ACTIVITIES:
Net short-term borrowings (12,422) 15,341
Long-term borrowings 119,959 8,731
Payments on long-term debt (7,559) (9,637)
Net proceeds from exercise of stock options 7,095 26,521
Purchase of treasury stock (74,999) --
Sale of treasury stock -- 3,375
Dividends paid (37,028) (44,430)
--------- --------
NET CASH USED BY FINANCING ACTIVITIES (4,954) (99)
--------- --------
CASH FLOW FOR PERIOD 24,487 (19,106)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 17,972 44,118
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,083) (859)
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 41,376 $ 24,153
========= ========
Supplemental disclosures:
Interest paid (net of amount capitalized) $ 8,622 $ 7,108
Income taxes paid (net of refunds) 29,875 54,369
See accompanying Notes to Condensed Consolidated Financial Statements.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The financial information included herein is unaudited. However, such
information reflects all material adjustments which are, in the opinion of
management, necessary to present fairly (i) the financial position of the
Company at May 2, 1998 and August 2, 1997, (ii) the results of its operations
for the three months and nine months ended May 2, 1998 and May 3, 1997, and
(iii) its cash flows for the nine months ended May 2, 1998 and May 3, 1997.
These financial statements should be read in conjunction with the financial
statements and notes set forth in the Company's Annual Report on Form 10-K for
the fiscal year ended August 2, 1997.
NOTE 2 - INVENTORIES
The major classes of inventory are as follows:
(in thousands)
May 2, August 2,
1998 1997
-------- --------
Raw materials and components $ 88,858 $ 79,545
Work-in-process 31,279 22,065
Finished goods 109,979 96,470
-------- --------
Total inventory $230,116 $198,080
======== ========
NOTE 3 - NEW ACCOUNTING STANDARD
The Company adopted SFAS No. 128, Earnings per Share in the second quarter. This
statement mandates dual presentation of 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. Dilutive earnings per share considers the potential effect of dilution
on basic earnings per share assuming exercise of all stock options that meet
certain criteria. Basic and dilutive earnings (loss) per share are the same in
the current quarter and for the comparable quarter last year, as well as for the
nine month periods in both years.
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NOTE 4 - OTHER MATTERS
On October 6, 1997, the Company announced a stock buy-back program of up to $150
million. The repurchased shares will be available for general corporate
purposes, including the exercise of stock options. Through the end of the third
quarter, the Company reacquired 3.4 million of its shares for $75 million. In
early June 1998, management purchased another $7 million of the Company's
shares.
On October 27, 1997, the Company entered into a long-term debt agreement to
borrow $40 million at 6.31%. Payments are due in installments through the year
2002. Proceeds from the borrowings were used principally for the stock buy-back
program initiated in October 1997.
Effective January 1, 1998 , the Company acquired all of the outstanding capital
stock of the Swiss holding company Argentaurum AG, including its Rochem
subsidiaries (Rochem). Rochem manufactures and sells proprietary advanced design
reverse osmosis nanofiltration and ultrafiltration systems for treating and
desalinizing sea water, purifying landfill leachate and other municipal and
industrial wastewater applications. The final purchase price of approximately
$62 million, which exceeded the fair market value of the net assets acquired by
approximately $48 million, was determined in May 1998 following completion of an
audit by Rochem's external auditors. In the third quarter of fiscal 1998 the
Company wrote off $27 million attributable to in-process research and
development acquired and the remaining amount was allocated to goodwill and
patents. This acquisition was accounted for under the purchase method of
accounting and accordingly the operations of Rochem are included in the
Company's financial statements from the date of acquisition. The result of
operations for the Company would not be materially affected had Rochem been
included in fiscal 1998 from the beginning of the year, or had it been included
in fiscal year 1997.
The second quarter of fiscal 1998 includes one-time income of $13.5 million from
Micron Separations Inc., which was found to have infringed the Company's Nylon
membrane patent. The one-time income from the patent litigation settlement is
reported net of legal and professional fees related to the patent litigation; a
settlement, including costs, of $2.5 million with the Department of Defense
concerning a long standing disagreement over a sale dating back nearly 10 years;
and a write-off of $2.2 million of inventory and equipment due to the
acquisition of new technology.
On April 7, 1998, the Company entered into a long-term debt agreement to borrow
$50 million at 5.99%. Payments are due in installments through the year 2003.
Proceeds from the borrowings were used for the acquisition of Rochem.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's discussion & analysis may contain "forward looking statements" as
defined in the Private Securities Litigation Reform Act of 1995. These
statements are based on current Company expectations and are subject to risks
and uncertainties which could cause actual results to differ materially. In
addition to foreign exchange rates, such risks and uncertainties include, but
are not limited to, regulatory approval, market acceptance of new technologies,
economic conditions and market demand.
I. Results of Operations
Sales for the quarter increased 5% to $289 million, compared to last year's $275
million. In local currency, sales increased 8%. Adverse foreign currency
exchange rates reduced sales $8 million or 3%. For the nine months, sales
increased 2% to $786 million, compared to last year's $772 million. In local
currency, sales for the nine months increased 6%. Adverse foreign currency
exchange rates reduced sales $33 million or 4%. There was no effect from price
increases on sales in either the third quarter or nine months. The acquisition
of the Rochem business in January 1998 accounted for a 2 1/2% and 1% increase
in sales for the quarter and nine months, respectively. A detailed summary of
sales by market and geographic region is given below.
Sales by market
THIRD QUARTER ENDED
------------------------ EXCHANGE % CHANGE
MAY 2, MAY 3, % RATE IN LOCAL
1998 1997 CHANGE DIFFERENCE CURRENCY
---- ---- ------ ---------- --------
Patient Protection $ 70,071 $ 65,452 7 $ (1,844) 10
Other 77,993 77,719 1/2 (2,555) 3 1/2
-------- -------- -------
Total Health Care 148,064 143,171 3 1/2 (4,399) 6 1/2
Microelectronics 23,214 24,446 (5) (1,061) (1/2)
Other 51,131 43,357 18 (1,187) 20 1/2
-------- -------- -------
Total
Fluid Processing 74,345 67,803 9 1/2 (2,248) 13
Aeropower 66,762 64,365 3 1/2 (1,692) 6 1/2
-------- -------- -------
TOTAL $289,171 $275,339 5 $(8,339) 8
-------- -------- -------
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NINE MONTHS ENDED
------------------------ EXCHANGE % CHANGE
MAY 2, MAY 3, % RATE IN LOCAL
1998 1997 CHANGE DIFFERENCE CURRENCY
- ----------------------------------------------------------------------------------------------
Patient Protection $187,253 $186,945 - $ (7,505) 4
Other 214,292 220,016 (2 1/2) (9,988) 2
-------- -------- --------
Total Health Care 401,545 406,961 (1 1/2) (17,493) 3
Microelectronics 68,461 69,694 (2) (4,293) 4 1/2
Other 129,034 120,658 7 (4,870) 11
-------- -------- --------
Total
Fluid Processing 197,495 190,352 4 (9,163) 8 1/2
Aeropower 186,486 174,576 7 (6,789) 10 1/2
-------- -------- --------
TOTAL $785,526 $771,889 2 $(33,445) 6
-------- -------- --------
Sales by geographic region
THIRD QUARTER ENDED
------------------------- EXCHANGE % CHANGE
MAY 2, MAY 3, % RATE IN LOCAL
1998 1997 CHANGE DIFFERENCE CURRENCY
- --------------------------------------------------------------------------------------------------------
Asia $ 45,099 $ 47,191 (4 1/2) $ (4,020) 4
Europe 108,116 95,071 13 1/2 (4,208) 18
Western
Hemisphere 135,956 133,077 2 (111) 2 1/2
-------- -------- ---------
TOTAL $289,171 $275,339 5 $ (8,339) 8
-------- -------- --------
NINE MONTHS ENDED
--------------------------- EXCHANGE % CHANGE
MAY 2, MAY 3, % RATE IN LOCAL
1998 1997 CHANGE DIFFERENCE CURRENCY
- -----------------------------------------------------------------------------------------------------------
Asia $132,635 $141,841 (6 1/2) $(13,260) 3
Europe 279,309 271,508 3 (19,871) 10
Western
Hemisphere 373,582 358,540 4 (314) 4 1/2
-------- -------- ----------
TOTAL $785,526 $771,889 2 $(33,445) 6
-------- -------- ----------
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By market segment for the quarter, in local currency, sales in Health Care and
Aeropower each grew 6 1/2%, while Fluid Processing increased 13%.
In the Health Care segment, in local currency, sales increased in both Patient
Protection and Pharmaceuticals, the two largest subsegments of this market.
Patient Protection grew 10%, led by Europe which grew 17%. Sales in the US were
up 7 1/2%. The European growth was helped by Austria's launch of a universal
filtration policy. The Western Hemisphere amounts benefited from the adoption of
100% platelet filtration in Canada. Worldwide, sales of blood filters grew 9% as
the momentum towards universal filtration of transfused blood products grew.
Pharmaceuticals grew 7% in local currency. Asia led the Pharmaceuticals
subsegment with growth of 13%, followed by Europe which grew 10% and the Western
Hemisphere, which grew 4%.
Aeropower growth continued to be led by double-digit growth in Commercial
Aerospace. Military Aerospace declined 5% but Industrial Hydraulics, led by
Europe, grew a healthy 9% in local currency. Fluid Processing, excluding
Microelectronics, increased 20 1/2% in local currency. Sales in Europe grew 67%
due mainly to Rochem. Sales in Asia grew 7 1/2% and growth in the Western
Hemisphere was 5 1/2%. Microelectronics was flat in local currency, as growth of
11% in Asia and 3 1/2% in Europe was offset by a 14% decrease in the US. Overall
local currency sales in Europe (including Rochem) increased 18%. Sales in Asia
also increased 4% in local currency despite all of the economic turmoil in that
region.
Quarter-on-quarter, cost of sales (excluding inventory write-downs last year) as
a percentage of sales remained constant at 42 1/2%. The decrease in margins due
to adverse exchange rate effects was offset by improvement in manufacturing
efficiencies and favorable product mix. For the nine months, cost of sales
(excluding inventory write-downs last year) increased nearly 2% primarily due to
the adverse effects of exchange rates. Quarter-on-quarter and year-on-year,
selling, general and administrative expenses (SG&A) are up $9 million and $8
million, respectively as current year amounts include SG&A of distributors that
were acquired in the latter part of fiscal 1997 and Rochem, acquired in January
1998.
Other charges, net for the quarter, represents a $27 million write-off of
in-process research and development acquired in connection with the Rochem
acquisition. For the nine months, other charges, net includes the $27 million
write-off related to Rochem's acquired research and development and
non-recurring income of $13.5 million related to the payment by MSI to Pall in
settlement of patent litigation, net of certain one-time costs.
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At the beginning of the third quarter last year, the Company completed its
merger with Gelman Sciences. Upon completion of the merger the Company
restructured its operations and wrote off $30 million related to the Gelman
acquisition and $45 million related to the restructuring of its other business
lines. The Company also recorded a charge of $16.5 million for environmental
clean up costs and a judgment awarded against it.
Net interest expense is higher for the quarter and nine months on a comparable
basis as the Company's average debt, net of cash and short-term investments, was
also higher for the same comparable periods. Increases in debt were used to
finance the Company's share buy-backs and the Rochem acquisition.
The underlying tax rate for the nine months is 26% compared to 30% last year.
The reduction in the tax rate is due principally to the Company's efforts to
move production into manufacturing facilities in Ireland and Puerto Rico as well
as proportionately lower profits in high tax rate countries.
Earnings per share on a diluted basis for the quarter and nine months were 6
cents and 43 cents, respectively, compared to a loss per share of 18 cents and
earnings per share of 19 cents, respectively, for comparable periods last year.
Excluding non-recurring items (after pro forma tax effects), diluted earnings
per share for the third quarter would be 28 cents compared to 29 cents last year
and for the nine months diluted earnings per share would be 60 cents compared to
68 cents last year.
II. Liquidity and Capital Resources
Net cash provided by operating activities increased by $91 million; $47 million
representing accrual for the final Rochem acquisition payment which was made in
May. The remaining increase primarily relates to changes in accounts and taxes
payable balances. At the end of the quarter approximately $11 million of
accruals related to environmental matters are reflected on the balance sheet.
Capital expenditures and depreciation and amortization expenses for the nine
months were $61 million and $54 million, respectively. The Company spent $74
million for investments and licenses, including $62 million for the Rochem
acquisition.
On October 6, 1997, the Company announced a stock buy-back program of up to $150
million. The repurchased shares will be available for general corporate
purposes, including the exercise of stock options. Through the end of the second
quarter, the Company reacquired 3.4 million of its shares for $75 million. The
Company is continuing its buy-back program in the fourth quarter.
Debt and short-term borrowings, net of cash and short-term investments,
increased $84 million from the beginning of the fiscal year mainly as a result
of the stock buy-back program.
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Compliance With Year 2000
The Company has been assessing the impact that the Year 2000 issue will have on
its computer systems since 1996. In response to these assessments, which are
ongoing, the Company has developed a plan to inventory critical systems and
develop solutions to those systems that are found to have date-related
deficiencies. Project plans call for the completion of the solution
implementation phase and testing of those solutions prior to any anticipated
impact on our systems. There can be no assurance, however, that there will not
be a delay in, or increased costs associated with, the implementation of such
changes, and the Company's inability to implement such changes could have a
material impact on its financial statements.
The Company is also surveying critical suppliers, service providers and
distributors to determine the status of their Year 2000 compliance programs. The
Company's reliance on suppliers, service providers and distributors, and
therefore, proper functioning of their information systems and software means
that failure by such suppliers, service providers and distributors to address
Year 2000 issues could have a material impact on its financial statements.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
See the Exhibit Index immediately following this page.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the three months
ended May 2, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PALL CORPORATION
June 15, 1998 /s/ John Adamovich, Jr.
- ----------------------- ------------------------------
Date John Adamovich, Jr.
Chief Financial Officer
and Treasurer
June 15, 1998 /s/ Viraj J. Patel
- ----------------------- ------------------------------
Date Viraj J. Patel
Chief Corporate
Accountant
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Exhibit Index
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Exhibit
Number Description of Exhibit
- ------------- ------------------------------
2 * Agreement and Plan of Reorganization and Merger made
on October 27, 1996, by and among the Registrant,
Pall Acquisition Corporation and Gelman Sciences
Inc., filed as Exhibit A to The Proxy Statement -
Prospectus constituting Part I of the Registrant's
Registration Statement on Form S-4 (Registration No.
333-17417).
3(i)* Restated Certificate of Incorporation of the
Registrant as amended through November 23, 1993,
filed as Exhibit 3(i) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July
30, 1994.
3(ii)* By-Laws of the Registrant as amended on November 21,
1995, filed as Exhibit 3(ii) to the Registrant's
Quarterly Report on Form 10-Q for the quarterly
period ended October 28, 1995.
27 Financial Data Schedule (only filed electronically).
* Incorporated herein by reference.