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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 October 27, 2001
Commission File No. 1-4311
PALL CORPORATION
Incorporated in New York State I.R.S. Employer Identification # 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 December 6, 2001, 122,142,304 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 - October 27, 2001
and July 28, 2001 3
Condensed consolidated statements of earnings -
three months ended October 27, 2001 and October 28, 2000 4
Condensed consolidated statements of cash flows -
three months ended October 27, 2001 and October 28, 2000 5
Notes to condensed consolidated financial statements 6
Item 2. Management's discussion and analysis of financial condition and
results of operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and reports on Form 8-K 16
SIGNATURES 17
EXHIBIT INDEX 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
October 27, July 28,
2001 2001
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 51,719 $ 54,927
Short-term investments 75,200 146,600
Accounts receivable, net of allowances
for doubtful accounts of $7,588
and $7,197, respectively 304,714 309,171
Inventories 213,648 209,499
Other current assets 58,659 58,791
----------- -----------
Total Current Assets 703,940 778,988
Property, plant and equipment, net of
accumulated depreciation of $488,081
and $477,232, respectively 506,799 503,016
Goodwill, net 54,131 54,044
Intangible assets, net of accumulated amortization of
$25,717 and $24,606, respectively 36,437 37,009
Other assets 178,328 175,453
----------- -----------
Total Assets $ 1,479,635 $ 1,548,510
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ 43,108 $ 57,089
Accounts payable and
other current liabilities 187,893 203,647
Income taxes 22,213 27,531
Current portion of long-term debt 31,485 25,582
----------- -----------
Total Current Liabilities 284,699 313,849
Long-term debt, less current portion 329,001 359,094
Deferred taxes and other
non-current liabilities 104,429 105,525
----------- -----------
Total Liabilities 718,129 778,468
----------- -----------
Stockholders' Equity:
Common stock, $.10 par value 12,796 12,796
Capital in excess of par value 109,838 108,164
Retained earnings 823,564 825,247
Treasury stock, at cost (128,616) (120,431)
Stock option loans (4,211) (4,635)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (48,100) (49,947)
Minimum pension liability (1,754) (1,799)
Unrealized investment (losses) gains (325) 1,704
Unrealized losses on derivatives (1,686) (1,057)
----------- -----------
(51,865) (51,099)
Total Stockholders' Equity 761,506 770,042
----------- -----------
Total Liabilities and
Stockholders' Equity $ 1,479,635 $ 1,548,510
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements
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PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands,
except per share data)
Three Months Ended
-------------------------
Oct. 27, Oct. 28,
2001 2000
-------- --------
Net sales $274,119 $278,151
-------- --------
Costs and expenses:
Cost of sales 135,070 129,757
Selling, general and
administrative expenses 98,074 97,842
Research and development 12,847 13,104
Interest expense, net 3,263 4,227
-------- --------
Total costs and expenses 249,254 244,930
-------- --------
Earnings before income taxes 24,865 33,221
Income taxes 5,473 7,641
-------- --------
Net earnings $ 19,392 $ 25,580
======== ========
Earnings per share:
Basic $ 0.16 $ 0.21
Diluted $ 0.16 $ 0.21
Dividends declared per share $ 0.170 $ 0.165
Average number of shares
outstanding:
Basic 122,190 122,937
Diluted 123,486 123,843
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)
Three Months Ended
----------------------------
Oct. 27, Oct. 28,
2001 2000
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES, NET OF
EFFECT OF ACQUISITIONS $ 16,614 $ 38,581
------------ ------------
INVESTING ACTIVITIES:
Capital expenditures (19,374) (18,868)
Disposals of fixed assets 595 1,499
Short-term investments 71,400 (16,600)
Benefits protection trust -- (3,947)
Acquisitions of businesses, net of cash acquired -- (1,426)
------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 52,621 (39,342)
------------ ------------
FINANCING ACTIVITIES:
Notes payable (14,786) (166,530)
Long-term borrowings 1,497 212,803
Payments on long-term debt (31,711) (26,714)
Net proceeds from stock plans 3,193 4,187
Purchase of treasury stock (10,000) (14,977)
Dividends paid (20,808) (20,358)
------------ ------------
NET CASH USED BY FINANCING ACTIVITIES (72,615) (11,589)
------------ ------------
CASH FLOW FOR PERIOD (3,380) (12,350)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 54,927 81,008
EFFECT OF EXCHANGE RATE CHANGES ON CASH 172 (1,847)
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 51,719 $ 66,811
============ ============
Supplemental disclosures:
Interest paid $ 7,511 $ 4,400
Income taxes paid (net of refunds) 11,103 15,571
See accompanying Notes to Condensed Consolidated Financial Statements.
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The financial information included herein is unaudited. However, such
information reflects all adjustments which are, in the opinion of management,
necessary to present fairly the Company's financial position, results of
operations and cash flows as of the dates and for the periods presented herein.
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 July 28, 2001.
NOTE 2 - INVENTORIES
The major classes of inventory are as follows:
Oct. 27, July 28,
2001 2001
------------ ------------
Raw materials and components $ 77,147 $ 78,487
Work-in-process 29,002 22,104
Finished goods 107,499 108,908
------------ ------------
Total inventory $ 213,648 $ 209,499
============ ============
NOTE 3 - NEW ACCOUNTING STANDARDS
In fiscal 2001, the Company adopted the provisions of Emerging Issues Task Force
("EITF") 00-10 Accounting for Shipping and Handling Fees. Accordingly, the
Company reclassified freight costs incurred to deliver products to customers,
which were historically included in "Selling, general and administrative
expenses" to "Cost of sales". The amount of freight cost reclassified to cost of
sales approximated $1,767 for the quarter ended October 28, 2000.
Effective July 29, 2001, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets ("SFAS No. 142"). SFAS No. 142 requires that goodwill and
intangible assets determined to have indefinite lives no longer be amortized,
but instead be tested for impairment at least annually and whenever events or
circumstances occur that indicate impairment might have occurred.
Upon the adoption of SFAS No. 142, the Company reassessed the useful lives of
its intangible assets to make any necessary amortization period adjustments. No
adjustments resulted from this assessment. The Company's intangible assets,
which are comprised almost entirely of patents, are subject to amortization.
Amortization expense for these intangible assets for the three months ended
October 27, 2001 and October 28, 2000 was $1,194 and $1,062, respectively.
Amortization expense is estimated to be $3,588 for the remainder of fiscal 2002,
$4,709 in 2003, $4,700 in 2004, $3,728 in 2005 and $3,240 in 2006.
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The statement provides a six-month transitional period from the date of adoption
for the Company to perform an assessment of whether there is an indication that
goodwill is impaired. The assessment requires the comparison of the fair value
of each of the Company's operating segments, or a component thereof, to the
carrying value of its respective net assets, including allocated goodwill. If
the fair value is below the carrying value, the Company must perform a second
test to measure the amount of impairment. The second test must be performed as
soon as possible, but no later than the end of the fiscal year.
As stated in the Segment Information and Geographies footnote in the Company's
fiscal 2001 Annual Report, certain assets are shared amongst the operating
segments and are, therefore, not specifically identifiable to them. As such,
balance sheets, which are maintained and managed on a geographic basis, are not
maintained for the Company's operating segments. Likewise, and as also noted in
the aforementioned footnote, certain of the Company's assets and liabilities,
though they may directly or indirectly relate to a segment, such as goodwill,
are managed at the Corporate level and are not allocated to the segments.
Because of the extensive effort needed to complete the impairment indication
assessment, including the creation of estimated segment balance sheets solely
for the purpose of carrying out the impairment tests required by SFAS No. 142,
the Company has not yet completed this assessment. However, as there have been
no events or circumstances that would indicate that there is any impairment,
management believes that this assessment will indicate no impairment of goodwill
exists.
The following table presents goodwill, net of accumulated amortization prior to
the adoption of SFAS No. 142, allocated by reportable segment solely for
purposes of SFAS No. 142 disclosure as of October 27, 2001 and July 28, 2001:
Oct. 27, July 28,
2001 2001
------- -------
Blood $18,465 $18,349
BioPharmaceutical 15,321 15,302
------- -------
Life Sciences 33,786 33,651
------- -------
General Industrial 14,183 14,234
Aerospace 6,033 6,032
Microelectronics 129 127
------- -------
Industrial 20,345 20,393
------- -------
Total $54,131 $54,044
------- -------
There was no goodwill acquired or disposed of during the first quarter of 2001.
The change in the carrying amount of goodwill is entirely attributable to the
translation of goodwill contained in the financial statements of foreign
subsidiaries using the rates at each respective balance sheet date.
Pro forma net earnings and earnings per share for the quarter ended October 28,
2000, adjusted to exclude goodwill amortization expense (net of taxes), is as
follows.
Basic Diluted
earnings earnings
per share per share
Reported net earnings $ 25,580 $ 0.21 $ 0.21
Goodwill amortization, net of tax 695 -- --
------------ ----------------------------
Pro forma net earnings $ 26,275 $ 0.21 $ 0.21
============ ============================
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NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT
During the three months ended October 28, 2000, the Company completed a $100
million private placement of 7.83% unsecured senior notes due in 2010. In
addition, the Company closed a $200 million unsecured senior revolving credit
facility, of which $150 million expires in 2005 and $50 million renews annually.
Borrowings under this facility bear interest at a floating rate based upon
LIBOR. The agreements contain various covenants, including financial covenants
pertaining to interest coverage, funded debt and minimum net worth. As a result
of these transactions, uncommitted lines of credit amounting to $230 million
were cancelled and the immediate credit availability of the Company increased
$70 million. Such proceeds are reflected in the consolidated statement of cash
flows during the first quarter of fiscal 2001.
NOTE 5 - COMPREHENSIVE INCOME
Comprehensive income was comprised of the following for the three months ended
October 27, 2001 and October 28, 2000:
Oct. 27, Oct. 28,
2001 2000
-------- --------
Net income $ 19,392 $ 25,580
-------- --------
Foreign currency translation adjustment 1,589 (13,260)
Income taxes 258 (436)
-------- --------
Foreign currency translation adjustment, net 1,847 (13,696)
-------- --------
Minimum pension liability adjustment (14) 193
Income taxes 59 (77)
-------- --------
Minimum pension liability adjustment, net 45 116
-------- --------
Unrealized investment losses (3,120) (1,685)
Income taxes 1,091 589
-------- --------
Unrealized investment losses, net (2,029) (1,096)
-------- --------
Unrealized (losses) gains on derivatives (967) 148
Income taxes 338 (52)
-------- --------
Unrealized (losses) gains on derivatives, net (629) 96
-------- --------
Total comprehensive income $ 18,626 $ 11,000
======== ========
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NOTE 6 - SEGMENT INFORMATION AND GEOGRAPHIES
Market Segment Information: Three Months Ended
Oct. 27, Oct. 28,
2001 2000
- --------------------------------------------------------------------------------
Sales to Unaffiliated Customers:
Blood $ 52,273 $ 52,084
BioPharmaceuticals 79,691 74,315
--------- ---------
Total Life Sciences 131,964 126,399
--------- ---------
General Industrial 79,957 73,755
Aerospace 37,644 36,511
Microelectronics 24,554 41,486
--------- ---------
Total Industrial 142,155 151,752
--------- ---------
Total $ 274,119 $ 278,151
- --------------------------------------------------------------------------------
Operating Profit:
Blood $ 4,037 $ 11,955
BioPharmaceuticals 17,480 14,038
--------- ---------
Total Life Sciences 21,517 25,993
--------- ---------
General Industrial 10,464 12,884
Aerospace 11,465 9,668
Microelectronics 30 4,747
--------- ---------
Total Industrial 21,959 27,299
--------- ---------
Subtotal 43,476 53,292
General corporate expenses (15,348) (15,844)
Interest expense, net (3,263) (4,227)
--------- ---------
Earnings before income taxes $ 24,865 $ 33,221
- --------------------------------------------------------------------------------
Geographies (a):
Sales to Unaffiliated Customers:
Western Hemisphere $ 125,692 $ 132,545
Europe 94,736 88,533
Asia 53,691 57,073
--------- ---------
Total $ 274,119 $ 278,151
- --------------------------------------------------------------------------------
Intercompany Sales between
Geographic Areas:
Western Hemisphere $ 28,055 $ 29,393
Europe 12,080 12,127
Asia 401 1,426
--------- ---------
Total $ 40,536 $ 42,946
- --------------------------------------------------------------------------------
Total Sales:
Western Hemisphere $ 153,747 $ 161,938
Europe 106,816 100,660
Asia 54,092 58,499
Eliminations (40,536) (42,946)
--------- ---------
Total $ 274,119 $ 278,151
- --------------------------------------------------------------------------------
Operating Profit:
Western Hemisphere $ 18,235 $ 30,323
Europe 15,486 15,327
Asia 8,804 10,109
Eliminations 951 (2,467)
--------- ---------
Subtotal 43,476 53,292
General corporate expenses (15,348) (15,844)
Interest expense, net (3,263) (4,227)
--------- ---------
Earnings before income taxes $ 24,865 $ 33,221
- --------------------------------------------------------------------------------
(a) Certain prior year amounts have been reclassified to conform to the
current year presentation.
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As stated in the Segment Information and Geographies footnote in the Company's
2001 Annual Report, the Company undertook certain business realignments which
changed the way the market-based part of the business is managed and operated.
The following table reflects these fourth quarter business realignments for the
four quarters of fiscal year 2001:
Market Segment Information: Three Months Ended
(in thousands) ----------------------------------------------------------------- Year ended
Oct. 28, Jan. 27, Apr. 28, Jul. 28, Jul. 28,
2000 2001 2001 2001 2001
- ----------------------------------------------------------------------------------------------------------- -----------
Sales to Unaffiliated Customers:
Blood $ 52,084 $ 58,613 $ 60,080 $ 62,548 $ 233,325
BioPharmaceuticals 74,315 82,121 91,554 94,177 342,167
----------------------------------------------------------------- -----------
Total Life Sciences 126,399 140,734 151,634 156,725 575,492
----------------------------------------------------------------- -----------
General Industrial 73,755 83,289 86,933 102,482 346,459
Aerospace 36,511 35,738 43,504 42,557 158,310
Microelectronics 41,486 44,936 38,986 29,754 155,162
----------------------------------------------------------------- -----------
Total Industrial 151,752 163,963 169,423 174,793 659,931
----------------------------------------------------------------- -----------
Total $ 278,151 $ 304,697 $ 321,057 $ 331,518 $ 1,235,423
- ----------------------------------------------------------------------------------------------------------- -----------
Operating Profit:
Blood $ 11,955 $ 12,619 $ 5,760 $ 9,905 $ 40,239
BioPharmaceuticals 14,038 14,410 25,073 30,014 83,535
----------------------------------------------------------------- -----------
Total Life Sciences 25,993 27,029 30,833 39,919 123,774
----------------------------------------------------------------- -----------
General Industrial 12,884 15,890 15,086 14,144 58,004
Aerospace 9,668 9,611 13,942 12,875 46,096
Microelectronics 4,747 5,749 3,869 2,944 17,309
----------------------------------------------------------------- -----------
Total Industrial 27,299 31,250 32,897 29,963 121,409
----------------------------------------------------------------- -----------
Subtotal 53,292 58,279 63,730 69,882 245,183
Restructuring and other charges, net -- -- -- (17,248) (17,248)
General corporate expenses (15,844) (16,087) (12,137) (16,904) (60,972)
Interest expense, net (4,227) (4,270) (4,343) (3,803) (16,643)
----------------------------------------------------------------- -----------
Earnings before income taxes $ 33,221 $ 37,922 $ 47,250 $ 31,927 $ 150,320
- ----------------------------------------------------------------------------------------------------------- -----------
NOTE 7 - OTHER MATTERS
The Company bought back an additional $10 million of its common stock during the
first quarter of fiscal 2002 leaving $140 million remaining under the current
$200 million authorization program.
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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. Such
risks and uncertainties include, but are not limited to: fluctuations in foreign
currency exchange rates; regulatory approval and market acceptance of new
technologies; changes in product mix and product pricing and in interest rates
and cost of raw materials; the Company's success in enforcing its patents and
protecting its proprietary products and manufacturing techniques; global and
regional economic conditions and legislative, regulatory and political
developments; and domestic and international competition in the Company's global
markets.
I. Results of Operations
Review of Consolidated Results
Sales for the quarter were $274.1 million as compared to $278.1 million in the
first quarter of last year. Exchange rates reduced reported sales by
$3.1 million, or 1% as the recent strength of the Euro was offset by continued
weakness of the Yen. Excluding the effects of exchange rates, sales were
essentially level with last year. Overall, pricing reduced sales 2% in the
quarter, although increased volume offset the impact of the pricing decline. The
first quarter sales results were achieved in spite of an extremely difficult
operating environment. Excluding Microelectronics sales, which have been
negatively impacted by the continued downturn in the semiconductor industry,
sales in local currency for the balance of our business increased 6 1/2% in the
quarter. For a detailed discussion of sales, refer to paragraphs below under
"Review of Market Segments and Geographies".
In fiscal 2001, the Company adopted the provisions of Emerging Issues Task Force
("EITF") 00-10, Accounting for Shipping and Handling Fees. Accordingly, the
Company reclassified freight costs incurred to deliver products to customers,
which were historically included in selling, general and administrative expenses
to cost of sales. The amount of freight cost reclassified to cost of sales
approximated $1.8 million for the quarter ended October 28, 2000.
Cost of sales, as a percentage of sales, increased 2.7% to 49.3% from 46.6% last
year. The increase reflects the reduced pricing related to a contract with a
major blood customer that was signed in the fourth quarter of fiscal 2001. We
expect the contract to have a similar effect on margins for the balance of the
year.
Selling, general and administrative expenses and R&D, as a percentage of sales
for the quarter were 35.8% and 4.7%, respectively. In both dollars and as a
percentage of sales, selling, general and administrative expenses and R&D were
similar to the levels achieved in the first quarter of last year as we continue
to contain costs and use resources efficiently. Increased costs such as
compensation & benefits, insurance and utilities were offset by the savings
achieved as a result of the headcount reductions and restructuring implemented
in the fourth quarter of fiscal 2001.
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Net interest expense decreased $1 million compared to the first quarter of last
year. The reduction in interest expense reflects the benefits reaped from a
"receive fixed, pay variable" interest rate swap that we entered into on our
$100 million private placement fixed rate debt.
Due to increased sourcing from lower tax jurisdictions such as Puerto Rico and
Ireland, our underlying effective tax rate was reduced from 23% to 22% in the
second quarter of fiscal 2001. Management believes that a rate of 22% will be
sustained at least through the end of fiscal 2002.
Net earnings were $19.4 million, or 16 cents per share for the quarter, compared
with net earnings of $25.6 million, or 21 cents per share last year. It is
estimated that earnings per share in the quarter decreased approximately 1 cent
due to the negative effect of foreign currency exchange rates.
The Company implemented accounting standard SFAS No. 142, Goodwill and Other
Intangible Assets ("SFAS No. 142") in the first quarter of fiscal 2002. On a pro
forma basis, if SFAS No. 142 had been implemented in last year's first quarter,
earnings per share would have been unchanged from the 21 cents per share
reported. The full year effect was $3 million, after pro forma tax effect, or 2
cents per share.
Review of Market Segments and Geographies
The sales growth by segment and geographies discussion below is in local
currency unless indicated otherwise.
Life Sciences segment sales in the quarter grew 5% compared to the first quarter
of last year. Life Sciences represents approximately 48% of our total sales.
Overall Blood segment sales increased 1 1/2% in the quarter. The growth in sales
was attributable to a 15% increase in unit sales offset by a 13% decrease in
pricing that reflects the signing of a major long-term supply agreement with a
large blood bank customer in the Western Hemisphere that was effective May 1,
2001. Blood Center sales, which comprise 74% of our total Blood sales, grew by
1%. Blood segment sales excluding Blood Centers grew by 2%.
By geography, Western Hemisphere Blood sales, which represent about two-thirds
of worldwide sales held steady with last year. This was achieved despite the
pricing decrease in the aforementioned long-term supply agreement by achieving
increased volume. Strong growth in Blood sales in Asia, primarily to Hospitals,
was offset by a decline in Europe. In Europe, Blood sales declined 7 1/2%,
primarily related to a lower level of business in the United Kingdom.
-13-
BioPharmaceuticals sales grew 7 1/2% reflecting increases in the Pharmaceuticals
and BioSciences sub-markets of 12% and 3%, respectively. The strong sales growth
in Pharmaceuticals was driven by robust sales to the biotechnology sector.
Pharmaceuticals sales grew well in all geographies. In the BioSciences
sub-market, lower ordering activity for the weeks immediately following
September 11th, held sales growth to the low single digit range.
Sales in our Industrial segment, which accounts for 52% of total sales, declined
5% in the quarter compared to last year. Excluding Microelectronics, sales for
the balance of our Industrial business grew 7 1/2% in spite of a difficult
operating environment.
General Industrial sales increased 10% fueled by double-digit growth in all of
our sub-markets with the exception of Machinery & Equipment. Reflecting some
softness in its marketplace, Machinery & Equipment sales declined 7%. By
geography, the sales growth was driven by Fuels and Chemicals in Europe and Asia
where sales increased overall by 14 1/2% and 19 1/2%, respectively. In the
Western Hemisphere we continued to be affected by the slowdown in the U.S.
Industrial arena and as a result sales declined 4% in the quarter.
Aerospace sales increased 3% in the quarter, in spite of the commercial airline
slump and a difficult comparison to last year's first quarter when sales grew
21%. Military sales grew by 46 1/2%, while Commercial sales declined 20%. In the
Western Hemisphere, where over two-thirds of the Aerospace business is
generated, a similar trend in sales was evident. In Europe, sales decreased by
1% overall as declines in Commercial and Marine Water sales more than offset an
increase in Military sales.
Microelectronics sales declined 38% in the quarter due to the continued slump in
the semiconductor industry and a difficult comparison to the first quarter of
last year when sales grew 43 1/2%. All geographies reported double-digit
declines in Microelectronics sales. In dollars, the Western Hemisphere and Asia
were hit the hardest. It is believed the recovery in the semiconductor industry
is more likely to start in our fiscal 2002 fourth quarter, rather than the third
quarter as originally expected.
The consolidated operating profit as a percentage of sales for the first quarter
declined to 15.9% compared to 19.2% last year. In Life Sciences, overall
operating profit declined to 16.3% from 20.6% last year. Within Life Sciences,
Blood operating profit of 7.7% declined from 23.0% last year primarily because
of a price decrease to a major blood bank customer as mentioned above. Operating
profit in BioPharmaceuticals increased to 21.9% from 18.9% last year,
attributable to strong sales in Pharmaceuticals and fewer systems sales as
compared to last year.
-14-
Operating profit in Industrial decreased to 15.4% from 18.0% last year,
reflecting the effect of lower overall sales in the quarter. In General
Industrial, operating profit declined to 13.1% compared to 17.5% last year.
Contributing to the profit decline were increased systems business in the Water
Processing and Food & Beverage sub-markets in the current quarter and a large
sale for a nuclear power plant in the Power Generation sub-market last year.
Aerospace operating profit increased to 30.5% from 26.5% last year attributable
to improved margins on Military sales and the change in mix with higher Military
sales and lower Commercial sales. Microelectronics broke even as operating
profit declined compared to last year reflecting the effects of the continued
slump in the semiconductor industry as mentioned above.
General corporate expenses were flat compared to last year reflecting our cost
containment programs.
By geography, Western Hemisphere sales decreased 5% compared to last year, while
operating profit declined to 11.9% from 18.7% last year. The decline in
operating profit reflects the reduced pricing in the Blood Bank contract
mentioned above as well as the effects of lower General Industrial sales.
In Europe, sales increased 7% on a reported basis reflecting the recent
improvement in the Euro, which added $1.9 million, or 2% to sales. Operating
profit in Europe declined slightly to 14.5% from 15.2%.
Asia's sales increased 2 1/2% compared to last year. A weakening of the Yen
reduced sales by $4.8 million turning local currency sales growth into a 6%
reduction in Asian sales, as reported. Operating profit in Asia declined to
16.3% from 17.3% primarily due to the effects of the weakening Yen.
II. Liquidity and Capital Resources
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 to
those at the end of fiscal 2001, the Asian currencies (especially the Yen) have
weakened against the U.S. dollar, while the European currencies (especially the
Euro) have strengthened.
Compared to the first quarter of fiscal 2001, net cash provided by operating
activities has decreased by approximately $22 million primarily due to the
decrease in earnings as well as the payment of a rebate to a major blood bank
customer in the first quarter of fiscal 2002.
The Company purchased approximately $10 million of treasury stock during the
first quarter leaving $140 million of the $200 million authorized by the Board
of Directors in January 2000. Partially offsetting the cash outlays to purchase
stock were proceeds of $3.2 million from stock plans. Capital expenditures and
depreciation and amortization expense for the quarter were $19.4 million and
$17.5 million, respectively. The Company anticipates that it will spend in the
range of $80 - 90 million for capital expenditures in fiscal 2002.
-15-
The Company continues to work with its partner V.I. Technologies on a pathogen
inactivation co-funded R&D program. Phase II clinical trials have been completed
and FDA approval to begin Phase III is pending. Phase III is expected to
commence by early calendar year 2002 at which time the Company will make a
milestone investment of $4 million through the purchase of VITEX stock. R&D
costs for this project are currently running at about $1.5 million per quarter.
When operating the business day-to-day, including funding capital expenditures
and buying back common stock, the Company's guideline is to keep net debt (debt,
net of cash and cash equivalents) at 25% to 30% of total capitalization (net
debt plus equity). Debt and short-term borrowings, net of cash and short-term
investments, increased by $36.4 million compared to year-end fiscal 2001.
Overall, net debt, as a percentage of total capitalization, was 27% at the end
of the first quarter of fiscal 2002 as compared to 24% at year-end fiscal 2001.
The Company considers its existing lines of credit along with the cash it
generates from operations to be sufficient for future growth.
III. Other Matters
In October 2001, the Financial Accounting Standards Board issued SFAS No.144,
"Accounting for the Impairment or Disposal of Long-Lived Assets " effective for
fiscal years beginning after December 15, 2001. SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and provides a single accounting model for long-lived
assets to be disposed of. The Company will adopt the statement in fiscal year
2003, which begins August 4, 2002. We are currently assessing the impact of this
new statement on our consolidated financial position and results of operations
and have not yet determined the impact of adoption.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Information about market risks for the three months ended October 27, 2001 does
not differ materially from that discussed under Quantitative and Qualitative
Disclosure About Market Risk in the Company's Annual Report on form 10-K for
2001.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In February 1988, an action was filed in the Circuit Court for Washtenaw County,
Michigan ("Court") by the State of Michigan ("State") against Gelman Sciences
Inc. ("Gelman") (a subsidiary acquired by the Company in February 1997)
requesting reimbursement of costs the State had expended in investigating
contamination near Gelman's Ann Arbor facility, 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 Judgement in the Court seeking approximately $4.9 million in stipulated
penalties for alleged violations of the consent judgment and additional
injunctive relief. Gelman disputed these assertions and in July 2000, the Court
took the matter of penalties "under advisement" and held that Gelman was not in
violation of the Consent Judgement. The Court issued a Remediation Enforcement
Order requiring Gelman to complete the cleanup within five years under a Court
approved plan. In the opinion of management, the Company is in substantial
compliance with applicable environmental laws and its current accruals for
environmental remediation are adequate.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
See the Index to Exhibits for a list of exhibits filed
herewith.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the three
months ended October 27, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PALL CORPORATION
December 11, 2001 /s/ John Adamovich, Jr.
- ----------------- -------------------------------------
Date John Adamovich, Jr.
Chief Financial Officer and Treasurer
December 11, 2001 /s/ Lisa Kobarg
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Date Lisa Kobarg
Chief Corporate Accountant
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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 on October 5, 1999,
filed as Exhibit 3 (ii) to the Registrant's Annual Report
on Form 10-K for the fiscal year ended July 31, 1999.
4* Credit Agreement dated as of August 30, 2000 by and among
the Registrant and Fleet Bank, National Association as
Administrative Agent, The Chase Manhattan Bank as
Syndication Agent, Wachovia Bank, N.A. as Documentation
Agent and The Lenders Party Thereto, filed as Exhibit 4 to
the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended October 28, 2000.
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 (a) Pall Corporation Supplementary Profit-Sharing Plan as
amended and restated December 4, 2000 effective as of
January 1, 1999.
10.2 (a) Pall Corporation Supplementary Pension Plan as amended and
restated on July 11, 2000 and July 17, 2001.
10.3 (a) Pall Corporation 2001 Stock Option Plan for Non-Employee
Directors.
10.4 (a) Pall Corporation Executive Incentive Bonus Plan.
* Incorporated herein by reference.
(a) Management contract or compensatory plan or arrangement.