UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the fiscal year ended August 3, 2002 or | ||
|
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the transition period from to |
Commission File Number 1-4311
PALL CORPORATION
(Exact name of registrant
as specified in its charter)
| New York | 11-1541330 |
| (State or other jurisdiction
of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| 2200 Northern Boulevard, East Hills, NY | 11548 |
| (Address of principal executive offices) | (Zip Code) |
(516) 484-5400
(Registrant's telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of exchange on which registered |
| Common Stock $.10 par value | New York Stock Exchange |
| Common Share Purchase Rights | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
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 registrant was required to file such reports),
and (2) has been subject to such filing requirement for the past 90 days.
Yes No
Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the registrant was $1,860,412,899, based on the closing price on October 4, 2002.
The number of common shares, $.10 par value, outstanding of the registrant was 122,835,795 shares on October 4, 2002.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s Proxy Statement for the 2002 annual meeting of shareholders, previously filed (hereinafter referred to as the “Proxy Statement”), are incorporated by reference into Part III.
TABLE OF CONTENTS
2
PART I
ITEM 1. BUSINESS.
(a) General development of business.
Pall Corporation, incorporated in July 1946, and its subsidiaries (hereinafter collectively called “the Company” or referred to as “we” or “our” unless the context requires otherwise) is a leading supplier of fine filters, principally made by the Company using its proprietary filter media, and other fluid clarification and separations equipment for the removal of solid, liquid and gaseous contaminants from a wide variety of liquids and gases.
We serve customers in two principal markets: Life Sciences and Industrial. The two principal markets are further divided into five segments: Blood and BioPharmaceutical (which comprise the Life Sciences business) and General Industrial, Aerospace and Microelectronics (which comprise the Industrial business).
During the past five years, we have continued our development and sale of fluid clarification and separations products in a wide variety of markets. Additionally, in fiscal 2002, we acquired the Filtration and Separations Group (“FSG”) from United States Filter Corporation (“US Filter”), significantly expanding our presence in the Industrial market. For additional information, see Acquisition and Related Matters in Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Acquisitions Note in the notes accompanying the consolidated financial statements.
(b) Financial information about market segments.
For financial information by market segment, please see the Market Segment Information and Geographies Note in the notes accompanying the consolidated financial statements and in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(c) Narrative description of business.
We are a specialty materials and engineering company with the broadest-based filtration, separations and purification capabilities in the world. Our proprietary products are used to discover, develop and produce pharmaceuticals, produce safe drinking water, protect hospital patients, remove white blood cells from blood, enhance the quality and efficiency of manufacturing processes, keep equipment running efficiently and protect the environment. Requirements for product quality, purity, environmental preservation, health and safety apply to a wide range of industries and across geographic borders. We have a 56-year history of commercializing successful products and continue to develop new materials and technologies for the Life Sciences and Industrial markets and their increasingly difficult fluid filtration, purification and separation challenges. We have an array of core materials and technologies that can be combined and manipulated in many ways to solve complex fluid separation challenges. These proprietary materials, coupled with our ability to engineer them into useful forms, are the foundations of our capabilities. Our proprietary materials enable us to provide customers with products that are well matched to their needs, to develop new products and to enter new markets. With the addition of FSG, we have enhanced our library of proprietary materials and technologies with sophisticated offerings such as asymmetric membranes, selective adsorption, melt-blown media, nano ceramic membranes and metallic fiber media.
We actively pursue only those applications in which Pall products can make a substantial difference to the customer and especially target projects that will result in real gains in performance and economics. The products sold are principally filters made with proprietary Pall filter media produced by chemical film casting, melt-blowing of polymer fibers, papermaking and metallurgical processes. Metal and plastic housings for our filters and a wide variety of appurtenant devices are also made. Competition is intense in all of our markets and includes many large and small companies in our global markets; however, no one company has a significant presence in all of our markets.
LIFE SCIENCES BUSINESS:
Our Life Sciences technologies facilitate the process of drug discovery and development and help ensure that drugs are produced to the highest standards. Many of the latest intravenous therapies require administration to patients through a Pall filter. Our capability in the life sciences industry is a unique competitive strength and an important element of our strategy going forward.
Sales in the Blood and BioPharmaceutical markets are made through direct sales and through distribution. Backlog information is omitted for these markets, as it is not considered meaningful to an understanding of these portions of the Company’s business.
3
We feel that safety, efficacy, ease
of use, technical support, as well as price, are the principal competitive
factors in this business, although economy of use is important. Our principal
competitors in the Blood segment include Baxter, Asahi Medical, Maco Pharma,
Terumo and Fresenius, and our principal competitors in the BioPharmaceutical
segment include Millipore, Sartorius and CUNO. We sell disposable blood filtration
and cardiovascular filtration products primarily to blood centers and hospitals.
Our products are used to remove leukocytes (white blood cells) from blood
used in transfusions and to filter out particulates, bacteria and viruses
in the course of open-heart surgery, organ transplants, dialysis, intravenous
feeding and breathing therapy. Leukocytes in donor blood can cause serious
medical complications. Filtering out white blood cells reduces transfusion-related
suppression of the immune system and helps protect against post-surgical infection.
Based on medical risk and clinical benefits of filtration, hospitals and blood
centers around the world have been converting to filtered blood. More than
twenty countries either already are filtering all of their donor blood or
are moving toward this as a goal. In the U.S., the Food and Drug Administration
recommends blood filtration, and we believe that it is becoming the standard
of care. BIOPHARMACEUTICALS: The BioPharmaceutical segment includes
sales of separation systems and disposable filters primarily to pharmaceutical,
biotechnology and laboratory companies. We provide a broad range of advanced
filtration solutions for each critical stage of drug development. Our product
lines start in the laboratory with drug discovery, gene manipulation and proteomics
applications. Our filtration systems and validation services allow drug manufacturers
the quickest and surest path through the regulatory process and on to the
market. We believe that our established
record of product performance and innovation is a particularly strong advantage
among biopharmaceutical customers, because of the high costs and safety risks
associated with drug development and production. INDUSTRIAL BUSINESS: We provide enabling and process
enhancing technologies throughout the industrial marketplace. This includes
the machinery and equipment, aerospace, microelectronics, municipal and industrial
water, fuels, chemicals, energy, and food and beverage industries. We have
the capability to provide customers with integrated solutions for all of their
process fluids. GENERAL INDUSTRIAL: Included in this diverse segment
are sales of filters, coalescers and separation systems for hydraulic, fuel
and lubrication systems on manufacturing equipment across many industries
as well as to producers of oil, gas, electricity, chemicals, food and beverages,
municipal and industrial water and paper. Virtually all of the raw materials,
process fluids and waste streams that course through industry are candidates
for multiple stages of filtration, separation and purification. We believe that technologies that
purify water for use and reuse represent an important opportunity. Governments
around the world are implementing stringent new regulations governing drinking
water standards and we believe that our filters and systems provide a solution
for these requirements. With the acquisition of FSG we have increased our
presence in the stable and growing food and beverage sector and we have enhanced
our ability to better serve our other industrial markets. Backlog at August 3, 2002 was approximately
$98,627,000. Our sales to General Industrial customers are made through our
personnel and through distributors and manufacturers’ representatives.
We believe that product performance and quality, and service to the customer,
as well as price, are the principal competitive factors in this market. Our
principal competitors in the General Industrial segment include CUNO, US Filter,
Sartorius and Parker Hannifin. AEROSPACE: The Aerospace segment 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. Our products
and systems are also used in ships and land-based military vehicles. Commercial
and Military sales each represented 50% of total Aerospace sales. 4 Our products are sold to customers
in this segment through a combination of direct sales and through distribution.
Backlog at August 3, 2002 was approximately $70,157,000. Competition varies
by product, and no single competitor competes with us across all sub-segments
of Aerospace; however, our principal competitors include Donaldson, ESCO Technologies
Inc. and FACET. The Company believes that performance
and quality of product and service, as well as price, are determinative in
most sales. MICROELECTRONICS: Included in this segment are sales
of disposable filtration products to producers of semiconductors, computer
terminals, fiber optics, disc drives, thin film rigid discs and photographic
film. The drive to shrink the size of computer components requires increasingly
fine levels of filtration and purification, sometimes down to the level of
parts per trillion. From the raw materials of silicon and water to the gases
and chemicals of chip manufacture, we have extensive engineered solutions
for the needs of this demanding industry. Our products are sold to customers
in this segment through our own personnel, distributors and manufacturers’
representatives. Backlog at August 3, 2002 was approximately $15,058,000.
We believe that performance and quality of product and service, as well as
price, are determinative in most sales. The principal competitors in the Microelectronics
market include, Mykrolis, Parker Hannifin and Mott. The following comments relate to the five segments
discussed above: RAW MATERIALS: Most raw materials used by the Company
are available from multiple sources. A limited number of materials are proprietary
products of major chemical companies. The Company believes that it could find
satisfactory substitutes for these materials should they become unavailable,
as it has done several times in the past. PATENTS: The Company owns a broad range of
patents covering its filter media, filter designs and other products, but
it considers these to be mainly defensive, and relies on its proprietary manufacturing
methods and engineering skills. However, it does act against infringers when
it believes such action is economically justified. The following comments relate to the Company’s
business in general: (d) Financial information
about geographic areas. For financial information by geographic
area, please see the Segment Information and Geographies Note in the notes
accompanying the consolidated financial statements. 5 ITEM 2. PROPERTIES. The following represent the Company’s
significant facilities. In
the opinion of management, these premises are suitable and adequate to meet
the Company’s requirements. 6 ITEM 3. LEGAL PROCEEDINGS.
In February 1988, an action was
filed in the Circuit Court for Washtenaw County, Michigan (“Court”)
by the State of Michigan (“State”) against Gelman Sciences Inc.
(“Gelman”), a subsidiary acquired by the Company in February 1997.
The action sought to compel Gelman to investigate and remediate contamination
near Gelman’s Ann Arbor facility and requested reimbursement of costs
the State had expended in investigating the contamination, which the State
alleged was caused by Gelman’s disposal of waste water from its manufacturing
process. Pursuant to a consent judgment entered into by Gelman and the State
in October 1992 (amended September 1996 and October 1999), which resolved
that litigation, Gelman is remediating the contamination without admitting
wrongdoing. In February 2000, the State Assistant Attorney General filed a
Motion to Enforce Consent Judgment in the Court seeking approximately $4,900,000
in stipulated penalties for the alleged violations of the consent judgment
and additional injunctive relief. Gelman disputed these assertions. In July
2000, the Court took the matter of penalties “under advisement.”
The Court issued a Remediation Enforcement Order requiring Gelman to submit
and implement a detailed plan that will reduce the contamination to acceptable
levels within five years. The Company’s plan has been submitted to,
and approved by, both the Court and the State. In the opinion of management,
to date the Court has expressed its satisfaction with the Company’s
progress. More recently, the State asserted in correspondence dated June 5,
2001 that additional stipulated penalties in the amount of $141,500 were owed
for a separate alleged violation of the consent judgment. The Court found
that a “substantial basis” for Gelman’s position existed
and again took the State’s request under advisement, pending the results
of certain groundwater monitoring data. Finally, on August 9, 2001, the State
made a written demand for reimbursement of $227,462 it has allegedly incurred
for groundwater monitoring. Gelman considers this claim barred by the consent
judgment. The reserve of approximately $19,600,000 of accruals reflected in
the Company’s balance sheet at August 3, 2002 relates mainly to the
aforementioned cleanup. In the opinion of management, the Company is in substantial
compliance with applicable environmental laws and its current accruals for
environmental remediation are adequate. Reference is also made to the Contingencies and Commitments Note in the notes accompanying the consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of shareholders during the fourth quarter of fiscal year 2002. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. Pall Corporation’s Common Stock is listed on the New York and London stock exchanges. The table below sets forth quarterly data relating to the Company’s Common Stock prices and cash dividends declared per share for the past two fiscal years. In April 2002, the Company reduced the quarterly dividend to $0.09 from the previous $0.17 level. The approximately $40 million in cash conserved annually may be used for future investments, debt reduction or other means of creating shareholder value. There are approximately 5,300 holders of record of the Company’s Common Stock. 7 ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected financial data for the last five years. This selected financial data should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Form 10-K. On April 24, 2002, the Company acquired FSG. The acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141, Business Combinations (“SFAS No. 141”). The operating results of FSG are reported in the Company’s results of operations from April 28, 2002. Refer to the Acquisitions Note in the notes accompanying the consolidated financial statements for a discussion of this transaction, including pro forma information. 8 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. You should read the following discussion together with Pall’s Consolidated Financial Statements and Notes thereto and other financial information included elsewhere in this Form 10-K report. The discussions under the subheadings “Review of Market Segment and Geographies” below are in local currency unless indicated otherwise. As used below, “½%” indicates that we have rounded the relevant data up or down to the nearest one-half percentage point. Acquisition and Related Matters On April 24, 2002, we acquired FSG for total cash consideration of $360 million, subject to a post closing adjustment of the purchase price based on the net assets acquired as of April 27, 2002. The amount of the consideration was determined by our Board of Directors after review of the FSG business and its potential impact on our operations. FSG is a pioneer and global leader in the design, manufacture and sale of filtration products for the separation and purification of liquids and gases. FSG primarily serves the food & beverage, fuels & chemicals, machinery & equipment and microelectronics markets as well as the biotech and pharmaceutical industries. With a diversified portfolio of filter media, FSG provides end-users with an array of filter elements, housings and systems with high technology and superior performance. FSG complements our global franchise with outstanding branded products and technology, enabling us to provide the fullest range of integrated filtration products and services. This acquisition also broadens our exposure to the growth and stability of the food and beverage sector and enhances our ability to better serve our customers. The acquisition was initially funded with a 364-day variable rate (LIBOR plus 57.5 basis points) credit facility. On August 1, 2002, we issued $280 million of 10-year bonds at an annual interest rate of 6%. The proceeds were utilized to repay a portion of the interim acquisition credit facility. The remainder of the acquisition credit facility was financed on October 18, 2002, with a $100 million bank term loan at a rate based on LIBOR plus 100 basis points. As a result of the additional borrowing to fund the acquisition, waivers of certain non-financial covenants were obtained and the funded debt covenant of our existing senior revolving credit facility and private placement debt was amended. Additionally, as a result of the increased debt level, Standard & Poors lowered our credit rating to single ‘A’ minus from single ‘A’. The expected annual increase in interest expense as a result of the revised credit rating approximates $.7 million. FSG’s balance sheet has been consolidated with our balance sheet as of August 3, 2002 and its earnings for the fourth quarter of fiscal 2002 have been included in our consolidated operating results for the twelve months ended August 3, 2002. The acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141. SFAS No. 141 requires that the total cost of the acquisition be allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the date of acquisition. As such, the cost of the acquisition has been allocated in the accompanying consolidated balance sheet at August 3, 2002, with the exception of in-process research and development and patented and unpatented technology; the valuations of these items have not progressed to a stage where there is sufficient information to value them. The finalization of these valuations will affect future earnings as in-process research and development will be immediately charged to earnings and finite-lived amortizable intangible assets will be amortized over their estimated useful lives. The August 3, 2002 consolidated balance sheet reflec
ts the preliminary allocation of the purchase price and goodwill of $207.1 million. At the date of acquisition, management began formulating integration plans, which contemplate the closure of redundant facilities and the sale of certain businesses. In addition, the synergies created by joining the two organizations have resulted in employee terminations. The condensed consolidated balance sheet at August 3, 2002 reflects liabilities for such items; however, we will continue to finalize and announce other integration plans during fiscal 2003. The finalization of these integration plans concerning FSG’s facilities and employees, as well as the technology valuations will be reported in future periods as increases and decreases to goodwill and to the assets acquired and liabilities assumed. The financial statement impact of integration plans that concern Pall facilities and employees will be reflected in earnings. For more detail regarding the FSG acquisition, please refer to the Acquisitions Note in the notes accompanying the consolidated financial statements. 9 Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may differ from estimates. The following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results, and that require judgment. See also the notes accompanying the consolidated financial statements, which contain additional information regarding our accounting policies. Purchase Accounting The acquisition of FSG described above required us to use the purchase method in accordance with SFAS No. 141. Determining the fair value of certain assets and liabilities acquired is judgmental in nature and often involves the use of significant estimates and assumptions. As provided by SFAS No. 141, the Company has one year following the acquisition to finalize estimates of the fair value of assets and liabilities acquired. To assist in this process, the Company obtained appraisals from an independent valuation firm. As discussed above, valuations for all but the acquired technology are complete. There are various methods used to estimate the value of tangible and intangible assets acquired, such as discounted cash flow and market multiple approaches. Some of the more significant estimates and assumptions inherent in the two approaches include: projected future cash flows (including timing); discount rate reflecting the risk inherent in the future cash flows; perpetual growth rate; determination of appropriate market comparables; and the determination of whether a premium or a discount should be applied to comparables. There are also judgments made to determine the expected useful lives assigned to each class of assets and liabilities acquired. 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 them. The cumulative impact of revisions to total estimated costs is reflected in the period of the change, including anticipated losses. Allowance for Doubtful Accounts We evaluate our ability to collect outstanding receivables and provide allowances when collection becomes doubtful. In performing this evaluation, significant estimates are involved, including an analysis of specific risks on a customer-by-customer basis. Based upon this information, management reserves an amount believed to be uncollectible. If the historical data we use to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected. Inventories Inventories are valued at the lower of cost (principally on the first-in, first-out method) or market. The Company records adjustments to the carrying value of inventory based upon assumptions about historic usage, future demand and market conditions. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future conditions, customer inventory levels or competitive conditions differ from our expectations. Pension Plans The company sponsors pension plans
in various forms covering substantially all employees who meet eligibility
requirements. Several statistical and other factors that attempt to anticipate
future events are used in calculating the expense and liability related to
the plans. These factors include assumptions about the discount rate, expected
return on plan assets and rate of future compensation increases as determined
by the Company, within certain guidelines. In addition, the Company’s actuarial
consultants also use subjective factors, such as withdrawal and mortality
rates, to estimate these factors. The actuarial assumptions used by the Company
may differ materially from actual results due to changing market and economic
conditions, higher or lower withdrawal rates or longer or shorter life spans
of 10 the participants. These differences may have a significant effect on the amount of pension expense recorded by the Company. Accrued Expenses The Company estimates certain material expenses in an effort to record those expenses in the period incurred. The most material accrued estimates relate to environmental proceedings and insurance-related expenses, including self-insurance. Environmental accruals are recorded based upon historical costs incurred and estimates for future costs of remediation and on-going legal expenses. Workers’ compensation and general liability insurance accruals are recorded based on insurance claims processed including applied loss development factors. Employee medical insurance accruals are recorded based on medical claims processed as well as historical medical claims experience for claims incurred but not yet reported. Differences in estimates and assumptions could result in an accrual requirement materially different from the calculated accrual. Income Taxes Significant judgment is required in determining our worldwide income tax expense provision. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and cost reimbursement arrangements among related entities, the process of identifying items of revenue and expense that qualify for preferential tax treatment and segregation of foreign and domestic income and expense to avoid double taxation. Although we believe that our estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and net income in the period in which such a determination is made. We record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, there is no assurance that the valuation allowance would not need to be increased to cover additional deferred tax assets that may not be realizable. Any increase in the valuation allowance could have a material adverse impact on our income tax provision and net income in the period in which such determination is made. We provide for United States income taxes on the earnings of foreign subsidiaries unless they are considered permanently invested outside the United States. At August 3, 2002, the cumulative earnings upon which United States income taxes have not been provided are approximately $327 million. If these earnings were repatriated to the United States, they would generate foreign tax credits that could reduce the Federal tax liability associated with the foreign dividend; however, a determination of any residual U.S. tax on such repatriation is not practicable. Results of Operations 2002 Compared with 2001 Review of Consolidated Results Sales for fiscal 2002 were $1,290.8 million as compared with $1,235.4 million in fiscal 2001. Exchange rates reduced reported sales for the year by $7.7 million, or ½%, primarily due to the weakness of the Yen and to a lesser extent the Argentine Peso, partly offset by the strengthening of the Euro. In local currency (i.e., had exchange rates not changed period over period), sales increased 5% year over year. Pricing was flat as compared with fiscal 2001. FSG, which was acquired at the end of the third quarter of fiscal 2002, contributed $72.9 million to sales for the year. Excluding FSG, sales in local currency declined 1%. We were pleased with our top line performance in light of the difficult environment we have been operating in all year. Our full year sales reflected an approximate $45 million reduction on a reported basis in Microelectronics (excluding the impact of FSG), the effect of pricing reductions for blood filters in the first three quarters
fiscal 2002, as well as the effect of the downturn in the commercial aerospace market and the malaise in the U.S. industrial markets. We have ended this fiscal year on an upbeat note and in the fourth quarter we achieved record sales with and without FSG. For a detailed discussion of sales, refer to “Review of Market Segments and Geographies.” Cost of sales, as a percentage of sales, increased 2.5% to 50.3% (before a one-time purchase accounting adjustment of $6 million, discussed below) from 47.8% last year. The increase in cost of sales reflects the reduced pricing related to multiple long-term contracts with large blood center customers, most of which took effect in the fourth quarter of fiscal 2001; inventory write-downs in Asia, and the effect of a change in product mix. Additionally, 11 the acquisition of FSG, which historically operated at lower gross margins than Pall, had the effect of increasing cost of sales by .6% in fiscal 2002. Selling, general and administrative expenses as a percentage of sales increased 1.4% to 34.1% from 32.7% in fiscal 2001. The year over year comparison of selling, general and administrative expenses as a percentage of sales was negatively impacted by a $2.5 million property tax refund that reduced last year’s expenses and by $3.1 million in costs incurred in the current year to integrate FSG. Excluding these factors, selling, general and administrative expenses as a percentage of sales would have increased .9%, reflecting severance payments unrelated to acquisitions, and inflationary increases in certain costs such as salaries, pension expense and insurance. FSG added $21.8 million to selling, general and administrative expenses in the year. We have identified $30 million in annualized cost synergies (of which we expect to realize $15 million in fiscal year 2003 and $15 million in fiscal year 2004) as a result of our integration of FSG and we are continuing to evaluate other potential cost savings. In fiscal 2003, we expect an increase in pension costs of approximately $4 million in light of the current rates of return and discount rates. In addition, we expect an increase in insurance premiums of approximately $3.5 million. We will continue efforts to hold down controllable costs to offset the impact of these increased costs. Research and Development (“R&D”) expenses declined to 4.2% of sales from 4.5% in fiscal 2001, reflecting our efforts to hold down controllable costs. FSG added $1.7 million to R&D expenses in the year. The fourth quarter of fiscal 2002 included our final R&D payment to V.I. Technologies (“VITEX”) as a result of the modification of our partnership agreement to eliminate shared research costs. We have worked successfully with VITEX on the development of pathogen-reduced red blood cells and have brought this technology to pivotal Phase III clinical trials. In fiscal 2002, we incurred $6 million in R&D costs as a result of this agreement. Going forward, we will share in VITEX’s success through royalties on sales as well as stock ownership in the company, but will not have further responsibility for R&D. Our products are assured access to the VITEX platform wherever it is commercialized. In t
he coming months, we expect to fund a final $4 million milestone payment for equity, provided VITEX enrolls the first patient in the Phase III clinical trials on or before December 31, 2002. Reference is also made to the Other Current and Non-Current Assets Note in the notes accompanying the consolidated financial statements. In fiscal years 2002 and 2001, we recorded restructuring, other charges and adjustments of $32.8 million and $17.2 million, respectively. The fiscal 2002 charges reflect severance costs related to the FSG acquisition, a one-time purchase accounting adjustment of $6 million included in cost of sales, an addition of $7 million to a previously established environmental remediation reserve and a $15 million write-down of two strategic investments. The fiscal 2001 restructuring charge primarily related to a reduction in workforce as part of our continued cost control efforts. The details of the fiscal 2002 and fiscal 2001 charges can be found in the Restructuring and Other Charges Note in the notes accompanying the consolidated financial statements. We expect to recover the costs of the restructuring-related charges within two years from the date of each charge. Net interest expense for the year declined $2.3 million compared with fiscal 2001. The reduction in interest expense reflects decreased interest rates, lower average debt levels (during the first three quarters of fiscal 2002) compared with last year, and the benefits from a “receive fixed, pay variable” interest rate swap that we entered into on our $100 million private placement fixed rate debt at the end of the fourth quarter of fiscal 2001. The above positive benefits were partly offset by increased interest expense in the fourth quarter as a result of the interim borrowings to fund the acquisition of FSG. The underlying effective tax rate for fiscal 2002 was 24% compared with 22% last year. The increase in the underlying effective tax rate reflects a change in the geographic distribution of profits compar
BLOOD:
1)
With few exceptions,
research activities conducted by the Company are company-sponsored. Such
expenditures totaled $54,778,000 in 2002, $56,041,000 in 2001 and $51,434,000
in 2000.
2)
No one customer provided 10%
or more of the Company’s consolidated sales in fiscal 2002, 2001 or
2000.
3)
The Company is in substantial
compliance with federal, state and local laws regulating the discharge of
materials into the environment or otherwise relating to the protection of
the environment. To date, compliance with environmental matters has not
had a material effect upon the Company’s capital expenditures or competitive
position.
4)
For a further description of
environmental issues see Item 3, Legal Proceedings and the Contingencies
and Commitments Note in the notes accompanying the consolidated financial
statements.
5)
At August 3, 2002, the Company
employed approximately 10,700 persons.
Location
Type
Markets
Square Feet
OWNED:
Western Hemisphere
Cortland, NY
Plant & office
Life Sciences & Industrial
338,000
East Hills, NY
Office, plant & warehouse
Headquarters & all markets
326,000
DeLand, FL
Plant
Industrial
275,000
Fajardo, Puerto Rico
Plants, warehouse & laboratory
Life Sciences & Industrial
259,000
Pt. Washington, NY
Office, laboratory & training
center
Life Sciences & Industrial
215,000
Ann Arbor, MI
Plant, office & warehouse
Life Sciences
180,000
New Port Richey, FL
Plant & office
Industrial
166,000
Timonium, MD
Plant & office
Industrial
160,000
Covina, CA
Plant, office & laboratory
Life Sciences
134,000
Ft. Myers, FL
Plant, office & warehouse
Industrial
111,000
Hauppauge, NY
Plant & office
Life Sciences
75,000
Pensacola, FL
Plant
Life Sciences
73,000
Putnam, CT
Plant
Life Sciences & Industrial
62,000
Europe
Bad Kreuznach, Germany
Plant & office
Life Sciences & Industrial
470,000
Waldstetten, Germany
Plant & office
Industrial
420,000
Portsmouth, U.K.
Plant, office, warehouse &
laboratory
Life Sciences & Industrial
248,000
Tipperary, Ireland
Plant
Life Sciences & Industrial
178,000
Redruth, U.K.
Plant, office & warehouse
Industrial
163,000
Crailsheim, Germany
Plant & office
Industrial
120,000
Ilfracombe, U.K.
Plant & office
Life Sciences & Industrial
112,000
Newquay, U.K.
Plant & office
Life Sciences & Industrial
106,000
Bazet, France
Plant
Industrial
111,000
Frankfurt, Germany
Office & warehouse
Life Sciences & Industrial
72,000
Ascoli, Italy
Plant, office & warehouse
Life Sciences
71,000
Paris, France
Office & warehouse
Life Sciences & Industrial
65,000
Lyon, France
Plant
Industrial
26,000
Asia
Tsukuba, Japan
Plant, laboratory & warehouse
Life Sciences & Industrial
120,000
LEASED:
Western Hemisphere
Timonium, MD
Plant
Industrial
71,000
Covina, CA
Plant & warehouse
Life Sciences
66,000
Cortland, NY
Warehouse
Industrial
40,000
Tijuana, Mexico
Plant
Life Sciences
40,000
Europe
Frankfurt & Hamburg, Germany
Office & warehouse
Life Sciences & Industrial
100,000
Milan, Italy
Office & warehouses
Life Sciences & Industrial
54,000
Vienna, Austria
Office & warehouse
Life Sciences & Industrial
100,000
Madrid, Spain
Office & warehouse
Life Sciences & Industrial
28,000
Asia
Beijing, China
Plant, office & warehouse
Life Sciences & Industrial
137,000
Tokyo, Osaka, Nagoya, Japan
Offices
Life Sciences & Industrial
39,000
2002
2001
Cash
dividends
declared per share
Price per share
High
Low
High
Low
2002
2001
Quarter:
First
$
24.74
$
17.50
$
23.31
$
19.06
$
0.170
$
0.165
Second
25.00
20.16
24.88
17.94
0.170
0.170
Third
23.40
16.75
26.25
20.20
0.090
0.170
Fourth
23.42
15.90
24.35
22.25
0.090
0.170
(In
millions, except per share data and number of employees)
2002
2001
2000
1999
1998
RESULTS
FOR THE YEAR:
Sales
$
1,290.8
$
1,235.4
$
1,224.1
$
1,147.1
$
1,087.3
Costs of Sales
654.9
591.2
565.5
555.3
480.8
Selling, general and administrative
expenses
440.0
404.0
396.1
398.7
385.9
Research
and development
54.8
56.1
51.4
56.5
58.5
Restructuring
and other charges, net
26.8
17.2
8.6
64.7
19.2
Interest expense, net
14.3
16.6
14.1
13.0
7.9
Earnings
before taxes
100.0
(b)
150.3
(c)
188.4
(d)
58.9
(e)
135.0
(f)
Income taxes
26.8
32.3
41.8
7.4
41.4
Net
earnings
$
73.2
$
118.0
$
146.6
$
51.5
$
93.6
Earnings
per share:
Basic
0.60
0.96
1.18
0.41
0.75
Diluted
0.59
0.95
1.18
0.41
0.75
Pro
forma diluted earnings per share: (a)
0.82
1.08
1.26
0.94
0.94
Dividends
declared per share
0.52
0.68
0.66
0.64
0.61
Capital
expenditures
69.9
77.8
66.5
71.2
85.1
Depreciation
and amortization
74.0
71.5
72.0
74.8
73.1
YEAR-END
POSITION:
Working
capital
$
477.8
$
465.1
$
329.7
$
199.3
$
201.8
Property,
plant and equipment, net
605.1
503.0
503.8
507.0
520.6
Total
assets
2,027.2
1,548.5
1,507.3
1,488.3
1,363.2
Long-term
debt
619.7
359.1
223.9
116.8
111.5
Total
liabilities
1,207.5
778.5
746.0
757.6
597.6
Stockholders’
equity
819.7
770.0
761.3
730.7
765.6
(a)
Pro forma earnings per share for fiscal years 2002, 2001, 2000, 1999 and 1998 ignores the restructuring and other charges described in notes (b) through (f) below and includes a pro forma adjustment to increase earnings (after pro forma tax effect) by $3.0, $2.7, $2.5 and $2.0 million, respectively (2 cents per share in fiscal years 2001, 2000 and 1999 and 1 cent per share in 1998), due to the adoption of SFAS 142, “Goodwill and Other Intangible Assets.”
(b)
Includes Restructuring and other charges of $32.8 million (including a $6.0 million one-time purchase accounting adjustment contained in cost of sales) or 23 cents per share (after pro forma tax effect).
(c)
Includes Restructuring and other charges of $17.2 million or 11 cents per share (after pro forma tax effect).
(d)
Includes Restructuring and other charges, net, of $12.0 million (including $3.4 million contained in cost of sales) or 6 cents per share (after pro forma tax effect).
(e)
Includes Restructuring and other charges of $89.4 million (including $24.7 million contained in cost of sales) or 51 cents per share (after pro forma tax effect).
(f)
Includes a one-time charge of $27.0 million or 22 cents per share (after pro forma tax effect) to write-off in process research and development related to the Rochem acquisition, offset by $7.8 million or 4 cents per share (after pro forma tax effect) of other income, net.