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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 31, 2003 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
    
(I.R.S. Employer
 
incorporation or organization)
    
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)

     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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No

     The number of shares of the registrant’s common stock outstanding as of December 5, 2003 was 125,725,000.

 

 

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     Table of Contents

Page No.

PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements (Unaudited)
   
   
   
   
Notes to Condensed Consolidated Financial Statements.
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
   
Item 4. Controls and Procedures.
 
 
PART II. OTHER INFORMATION
   
Item 1. Legal Proceedings.
   
Item 6. Exhibits and Reports on Form 8-K. 
   
SIGNATURES

     

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)

      Oct. 31, 2003     Aug. 2, 2003  
ASSETS
              
Current assets:              
Cash and cash equivalents
   $ 134,081   $ 126,653  
Short-term investments
     27,000     23,100  
Accounts receivable, net
     388,991     423,467  
Inventories
     291,855     274,442  
Other current assets
     94,954     90,772  
Total current assets
     936,881     938,434  
Property, plant and equipment, net     601,656     600,153  
Goodwill, net     241,886     240,579  
Intangible assets, net     48,292     50,747  
Other non-current assets     190,514     186,813  
Total assets
  $ 2,019,229   $ 2,016,726  
LIABILITIES AND STOCKHOLDERS’ EQUITY
              
Current liabilities:              
Accounts payable and other current liabilities
   $ 278,381   $ 307,835  
Income taxes
     44,750     49,870  
Current portion of long-term debt
     39,790     44,914  
Notes payable to banks
     15,743     18,877  
Total current liabilities
     378,664     421,496  
Long-term debt, net of current portion     495,552     489,870  
Deferred taxes and other non-current liabilities     160,168     170,824  
Total liabilities
     1,034,384     1,082,190  
Stockholders’ equity:              
Common stock, par value $.10 per share
     12,796     12,796  
Capital in excess of par value
    110,507     109,616  
Retained earnings
    896,832     884,690  
Treasury stock, at cost
    (59,885 )   (70,198 )
Stock option loans
    (1,859 )   (1,955 )
Accumulated other comprehensive income (loss):
              
Foreign currency translation
     55,155     28,906  
Minimum pension liability
     (33,054 )   (33,054 )
Unrealized investment gains
    5,054     4,435  
Unrealized losses on derivatives
     (701 )   (700 )
      26,454     (413 )
Total stockholders’ equity     984,845     934,536  
Total liabilities and stockholders’ equity   $ 2,019,229   $ 2,016,726  

See accompanying notes to condensed consolidated financial statements.

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PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

      Three Months Ended  
   
 
      Oct. 31, 2003     Nov. 2, 2002  
Net sales   $ 374,286   $ 332,210  
Cost of sales     194,221     174,261  
Gross profit     180,065     157,949  
               
Selling, general and administrative expenses     131,907     116,860  
Research and development     13,708     13,045  
Restructuring and other charges, net     (3,703 )   40,375  
Interest expense, net     5,152     7,266  
Earnings (loss) before income taxes     33,001     (19,597 )
Income taxes     8,333     3,541  
Net earnings (loss)   $ 24,668   $ (23,138 )
Earnings (loss) per share:              
Basic
   $ 0.20   $ (0.19 )
Diluted
   $ 0.19   $ (0.19 )
               
Dividends declared per share   $ 0.09   $ 0.09  
               
Average shares outstanding:              
Basic
     125,436     122,825  
Diluted
     126,507     122,825  

     See accompanying notes to condensed consolidated financial statements.

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PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

      Three Months Ended  
   
 
      Oct. 31, 2003     Nov. 2, 2002  
Net cash provided by operating activities   $ 31,542   $ 34,767  
               
Investing activities:              
Acquisitions of businesses, net of cash acquired     (679 )   (7,999 )
Capital expenditures     (10,521 )   (14,456 )
Disposals of fixed assets     524     1,118  
Short-term investments     (3,900 )   17,600  
Net cash used by investing activities     (14,576 )   (3,737 )
Financing activities:              
Notes payable     (3,941 )   (379,099 )
Long-term borrowings     13,237     380,004  
Repayments of long-term debt     (22,394 )   (37,208 )
Net proceeds from stock plans     10,073     1,148  
Dividends paid     (11,210 )   (11,049 )
Net cash used by financing activities     (14,235 )   (46,204 )
Cash flow for period     2,731     (15,174 )
Cash and cash equivalents at beginning of year     126,653     105,224  
Effect of exchange rate changes on cash     4,697     457  
Cash and cash equivalents at end of period   $ 134,081   $ 90,507  
Supplemental disclosures:              
Interest paid
  $ 5,079   $ 5,125  
Income taxes paid (net of refunds)
    15,779     8,234  

     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 August 2, 2003 (“2003 Form 10-K”).

NOTE 2 – RESTRUCTURING AND OTHER CHARGES, NET

     The following table summarizes the restructuring related items and other (income)/charges recorded in the first quarters of fiscal 2004 and 2003:

Three Months Ended Oct. 31, 2003     Restructuring     Other
(Income)/
Charges		     Total  
 
 
 
 
Severance (a)   $ 1,570   $ —   $ 1,570  
German pension liability (b)           (5,289 )   (5,289 )
Other     —     16     16  
    $ 1,570   $ (5,273 ) $ (3,703 )
                     
Cash   $ 1,570   $ —   $ 1,570  
Non-cash     —     (5,273 )   (5,273 )
    $ 1,570   $ (5,273 ) $ (3,703 )
Three Months Ended Nov. 2, 2002                    
                   
In-process research and development (c)   $ —   $ 37,600   $ 37,600  
Severance (c)     2,775     —     2,775  
    $ 2,775   $ 37,600   $ 40,375  
                     
Cash   $ 2,775   $ —   $ 2,775  
Non-cash     —     37,600     37,600  
    $ 2,775   $ 37,600   $ 40,375  
(a) In the first quarter of fiscal 2004, the Company implemented a plan to reorganize and streamline its operations in Japan. The plan, which affects both sales and support personnel, is expected to increase productivity and result in a more efficient, sales focused operation. As a result, the Company recorded severance liabilities for the termination of certain employees.
   
(b) Reflects non-recurring income related to a decrease of pension liabilities in Germany due to an overstatement of pension expense that occurred during a five-year period, the effect of which was not significant in any period.
   
(c) At the date of the FSG acquisition (refer to the Acquisitions note that accompanies the consolidated financial statements included in the Company’s 2003 Form 10-K), management began formulating integration plans and identifying synergistic opportunities. During the fourth quarter of fiscal 2002 and during the first quarter of fiscal 2003, the Company announced and implemented plans to eliminate redundant employees and facilities and to consolidate certain manufacturing lines with other Pall facilities. The Company also consolidated its United States and European sales routes to market. As a result of the consolidation of routes to market, the Company terminated certain sales employees worldwide. During the first quarter of fiscal 2003, the Company also recorded a charge of $37,600 to write-off in-process research and development acquired in the acquisition of FSG.
   
  Furthermore, during the first quarter of fiscal 2003, the Company reorganized its Life Sciences business such that the Company’s hospital and medical OEM sub-segments were combined with the former Blood segment to form a new segment called Pall Medical. This reorganization, which is expected to reduce costs, included employee terminations.

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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
(Unaudited)    

 The following table summarizes the activity for the quarter ended October 31, 2003 related to restructuring liabilities that were recorded in fiscal 2004, 2003 and fiscal 2002:

      Severance     Lease Termination Liabilities & Other     Total  
   
 
 
 
Fiscal 2004                    
Balance at Aug. 2, 2003   $ —   $ —   $ —  
Additions     1,570     —     1,570  
Utilized     (159 )   —     (159 )
Balance at Oct 31, 2003   $ 1,411   $ —   $ 1,411  
                     
Fiscal 2003                    
Balance at Aug. 2, 2003   $ 6,657   $ 2,530   $ 9,187  
Additions     —     —     —  
Utilized     (1,169 )   (204 )   (1,373 )
Balance at Oct 31, 2003   $ 5,488   $ 2,326   $ 7,814  
                     
Fiscal 2002                    
Balance at Aug. 2, 2003   $ 1,447   $ 303   $ 1,750  
Additions     —     —     —  
Utilized     (121 )   (107 )   (228 )
Balance at Oct 31, 2003   $ 1,326   $ 196   $ 1,522  

     With respect to the Gelman environmental matter, it has recently been determined that a certain aquifer and related plume are larger than originally anticipated. In light of this development, we are currently evaluating various remediation alternatives, which may result in an adjustment to our environmental remediation reserves.

NOTE 3 – STOCK BASED COMPENSATION PLANS

     The Company has elected to continue to apply Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees in accounting for its stock based compensation plans. The fair value of options granted is calculated using the Black-Scholes option-pricing model.

     The following table illustrates the effect on net earnings (loss) and earnings (loss) per share if the Company had accounted for its stock based compensation plans under the fair value method of accounting under SFAS No. 123, as amended by SFAS No. 148:

      Three Months Ended  
   
 
      Oct. 31, 2003     Nov. 2, 2002  
   
 
 
Net earnings (loss), as reported   $ 24,668   $ (23,138 )
Pro forma stock compensation expense, net of tax benefit     2,848     2,577  
Pro forma net earnings (loss)   $ 21,820   $ (25,715 )
Earnings (loss) per share:              
Basic—as reported   $ .20   $ (.19 )
Basic—pro forma   $ .17   $ (.21 )
Diluted—as reported   $ .19   $ (.19 )
Diluted—pro forma   $ .17   $ (.21 )

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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
(Unaudited)

NOTE 4 – EARNINGS (LOSS) PER SHARE

     The consolidated statements of operations present basic and diluted earnings (loss) per share. Basic earnings (loss) per share is determined by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share considers the potential effect of dilution on basic earnings (loss) per share assuming potentially dilutive securities, such as stock options, that meet certain criteria were outstanding since issuance. The treasury stock method is used to determine the dilutive effect of potentially dilutive securities. Employee stock options of 180 shares were not included in the computation of diluted shares for the three months ended October 31, 2003 because their effect would have been antidilutive. For the three months ended November 2, 2002, basic and diluted shares are the same because a net loss was reported.

     The following is a reconciliation between basic shares outstanding and diluted shares outstanding:

      Three Months Ended  
   
 
      Oct. 31, 2003     Nov. 2, 2002  
   
 
 
Basic shares outstanding     125,436     122,825  
Effect of dilutive securities:              
Stock option plans
    1,067     —  
Other
     4     —  
Diluted shares outstanding     126,507     122,825  

NOTE 5 – BALANCE SHEET DETAILS

The following tables provide details of selected balance sheet items:

      Oct. 31, 2003     Aug. 2, 2003  
   
 
 
Accounts receivable, net:              
Accounts receivable
   $ 401,342   $ 435,167  
Less: Allowances for doubtful accounts
    12,351     11,700  
  $ 388,991   $ 423,467  
               
Inventories:              
Raw materials and components
  $ 90,556   $ 86,302  
Work-in-process
    50,842     39,676  
Finished goods
    150,457     148,464  
  $ 291,855   $ 274,442  
               
Property, plant and equipment, net:              
Property, plant and equipment
  $ 1,189,671   $ 1,163,418  
Less: Accumulated depreciation and amortization
    588,015     563,265  
  $ 601,656   $ 600,153  

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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
(Unaudited)

NOTE 6 – GOODWILL AND INTANGIBLE ASSETS

     The following table presents goodwill, net of accumulated amortization, allocated by reportable segment in accordance with SFAS No. 142:

      Oct. 31, 2003     Aug. 2, 2003  
   
 
 
Medical   $ 27,652   $ 27,290  
BioPharmaceuticals     28,900     28,697  
Life Sciences     56,552     55,987  
General Industrial     157,069     156,414  
Aerospace     6,126     6,125  
Microelectronics     22,139     22,053  
Industrial     185,334     184,592  
    $ 241,886   $ 240,579  

     The change in the carrying amount of goodwill is primarily attributable to the changes in foreign exchange rates used to translate the goodwill contained in the financial statements of foreign subsidiaries using the rates at each respective balance sheet date.

     Intangible assets, net, consist of the following:

      Oct. 31, 2003     Aug. 2, 2003  
   
 
 
      Gross     Accumulated
Amortization		     Gross     Accumulated
Amortization		  
   
 
 
 
 
Patents and unpatented technology   $ 77,906   $ 34,066   $ 78,574   $ 32,588  
Trademarks     3,548     1,212     3,529     1,139  
Other     5,733     3,617     5,729     3,358  
    $ 87,187   $ 38,895   $ 87,832   $ 37,085  

     Patents and trademarks include costs to register new patents and trademarks. Patents also include expenditures to successfully defend certain patents as well as for paid-up licenses for third-party patents.

     Amortization expense for these intangible assets for the three months ended October 31, 2003 and November 2, 2002 was $2,003 and $1,957, respectively. Amortization expense is estimated to be approximately $5,000 for the remainder of fiscal 2004 and $5,800 in 2005, $5,700 in 2006, $5,600 in 2007, $4,600 in 2008 and $4,200 in 2009.

NOTE 7 – OTHER NON-CURRENT ASSETS

     The Company owns 6,400 of V.I. Technologies, Inc. (“VITEX”) shares at an adjusted cost basis (original cost less any impairment losses previously recorded) of $1.27 per share, or $8,101. The Company’s investment in VITEX has been recorded at the October 31, 2003 fair market value of $2.09 per share, or $13,376, in the accompanying Condensed Consolidated Balance Sheet. The market price of VITEX shares has been extremely volatile since October 31, 2003 with a price as low as $.55 and as high as $2.57 per share. This volatility would appear to be related to the setback of one of two Phase III clinical trials and VITEX’s cash position. On December 5, 2003, VITEX management announced that they had entered into agreements to sell approximately 3,700 shares of their common stock for gross proceeds of $3,400. Based upon these facts and circumstances, the Company determined that an impairment charge was not appropriate.

NOTE 8 – PRODUCT WARRANTY

     The Company warrants its products against defect in design, materials and workmanship over various time periods. Warranty costs are recorded based upon experience. The warranty accrual as of October 31, 2003 and August 2, 2003 is immaterial to the consolidated financial position of the Company and the change in the accrual for the current quarter of fiscal 2003 is immaterial to the Company's consolidated results of operations, cash flows or financial position.

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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
(Unaudited)

NOTE 9 – COMPREHENSIVE INCOME (LOSS)

     Comprehensive income (loss) was comprised of the following for the three months ended October 31, 2003 and November 2, 2002.

<
      Oct. 31, 2003     Nov. 2, 2002  
   
 
 
Net earnings (loss)   $ 24,668   $ (23,138 )
Unrealized translation adjustment     23,683     3,764  
Income taxes     2,566     (103 )
Unrealized translation adjustment, net     26,249     3,661  
Minimum pension liability adjustment     —     7  
Income taxes     —     (3 )
Minimum pension liability adjustment, net     —     4  
Change in unrealized accumulated investment gains (losses)     698     (2,330 )
Income taxes     (79 )   (139 )
Change in unrealized accumulated investment gains (losses), net     619     (2,469 )
Unrealized (losses) gains on derivatives     (2 )   408  
Income taxes     1     (143 )
Unrealized (losses) gains on derivatives, net     (1 )