UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended January 31, 2004 or
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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) |
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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 March 5, 2004 was 125,789,808.
Table of Contents
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
| Jan. 31, 2004 | Aug. 2, 2003 | |||||
| ASSETS | ||||||
| Current assets: | ||||||
| Cash and cash equivalents | $ | 166,696 | $ | 126,653 | ||
| Short-term investments | 25,313 | 23,100 | ||||
| Accounts receivable, net | 405,762 | 423,467 | ||||
| Inventories | 291,710 | 274,442 | ||||
| Other current assets | 99,436 | 90,772 | ||||
| Total current assets | 988,917 | 938,434 | ||||
| Property, plant and equipment, net | 607,305 | 600,153 | ||||
| Goodwill, net | 243,128 | 240,579 | ||||
| Intangible assets, net | 46,372 | 50,747 | ||||
| Other non-current assets | 201,785 | 186,813 | ||||
| Total assets | $ | 2,087,507 | $ | 2,016,726 | ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
| Current liabilities: | ||||||
| Accounts payable and other current liabilities | $ | 261,442 | $ | 307,835 | ||
| Income taxes | 39,327 | 49,870 | ||||
| Current portion of long-term debt | 30,509 | 44,914 | ||||
| Notes payable to banks | 26,524 | 18,877 | ||||
| Total current liabilities | 357,802 | 421,496 | ||||
| Long-term debt, net of current portion | 501,358 | 489,870 | ||||
| Deferred taxes and other non-current liabilities | 174,679 | 170,824 | ||||
| Total liabilities | 1,033,839 | 1,082,190 | ||||
| Stockholders’ equity: | ||||||
| Common stock, par value $.10 per share | 12,796 | 12,796 | ||||
| Capital in excess of par value | 110,099 | 109,616 | ||||
| Retained earnings | 907,279 | 884,690 | ||||
| Treasury stock, at cost | (34,704 | ) | (70,198 | ) | ||
| Stock option loans | (1,955 | ) | (1,955 | ) | ||
| Accumulated other comprehensive income (loss): | ||||||
| Foreign currency translation | 92,577 | 28,906 | ||||
| Minimum pension liability | (33,054 | ) | (33,054 | ) | ||
| Unrealized investment gains | 1,332 | 4,435 | ||||
| Unrealized losses on derivatives | (702 | ) | (700 | ) | ||
| 60,153 | (413 | ) | ||||
| Total stockholders’ equity | 1,053,668 | 934,536 | ||||
| Total liabilities and stockholders’ equity | $ | 2,087,507 | $ | 2,016,726 | ||
See accompanying notes to condensed consolidated financial statements.
3
PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF EARNINGS
(In thousands, except per share data)
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||
| Jan. 31, 2004 | Feb. 1, 2003 | Jan. 31, 2004 | Feb. 1, 2003 | |||||||||
| Net sales | $ | 428,085 | $ | 388,522 | $ | 802,371 | $ | 720,732 | ||||
| Cost of sales | 221,216 | 200,085 | 415,437 | 374,346 | ||||||||
| Gross profit | 206,869 | 188,437 | 386,934 | 346,386 | ||||||||
| Selling, general and | ||||||||||||
| administrative expenses | 143,638 | 128,837 | 275,545 | 245,697 | ||||||||
| Research and development | 13,785 | 12,415 | 27,493 | 25,460 | ||||||||
| Restructuring and other | ||||||||||||
| charges, net | 13,668 | 924 | 9,965 | 41,299 | ||||||||
| Interest expense, net | 5,091 | 6,207 | 10,243 | 13,473 | ||||||||
| Earnings before income | ||||||||||||
| taxes | 30,687 | 40,054 | 63,688 | 20,457 | ||||||||
| Income taxes | 5,831 | 8,675 | 14,164 | 12,216 | ||||||||
| Net earnings | $ | 24,856 | $ | 31,379 | $ | 49,524 | $ | 8,241 | ||||
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| Earnings per share: | ||||||||||||
| Basic | $ | 0.20 | $ | 0.26 | $ | 0.39 | $ | 0.07 | ||||
| Diluted | $ | 0.20 | $ | 0.25 | $ | 0.39 | $ | 0.07 | ||||
| Dividends declared per share | $ | 0.09 | $ | 0.09 | $ | 0.18 | $ | 0.18 | ||||
| Average shares outstanding: | ||||||||||||
| Basic | 126,288 | 122,948 | 125,886 | 122,893 | ||||||||
| Diluted | 127,422 | 123,551 | 127,025 | 123,612 | ||||||||
See accompanying notes to condensed consolidated financial statements.
4
PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF
CASH FLOWS
(In thousands)
(Unaudited)
| Six Months Ended | ||||||
| Jan. 31, 2004 | Feb. 1, 2003 | |||||
| Net cash provided by operating activities | $ | 57,792 | $ | 75,097 | ||
| Investing activities: | ||||||
| Acquisitions of businesses, net of cash acquired | (764 | ) | (8,125 | ) | ||
| Dispositions of businesses | 1,794 | — | ||||
| Capital expenditures | (25,161 | ) | (28,235 | ) | ||
| Disposals of fixed assets | 1,850 | 2,707 | ||||
| Short-term investments | (2,213 | ) | 19,200 | |||
| Net cash used by investing activities | (24,494 | ) | (14,453 | ) | ||
| Financing activities: | ||||||
| Notes payable | 5,101 | (373,339 | ) | |||
| Long-term borrowings | 14,449 | 445,004 | ||||
| Repayments of long-term debt | (32,675 | ) | (130,921 | ) | ||
| Net proceeds from stock plans | 31,830 | 3,868 | ||||
| Proceeds from termination of interest rate swaps | — | 7,533 | ||||
| Dividends paid | (22,462 | ) | (22,105 | ) | ||
| Net cash used by financing activities | (3,757 | ) | (69,960 | ) | ||
| Cash flow for period | 29,541 | (9,316 | ) | |||
| Cash and cash equivalents at beginning of year | 126,653 | 105,224 | ||||
| Effect of exchange rate changes on cash | 10,502 | 6,277 | ||||
| Cash and cash equivalents at end of period | $ | 166,696 | $ | 102,185 | ||
| Supplemental disclosures: | ||||||
| Interest paid | $ | 6,346 | $ | 6,742 | ||
| Income taxes paid (net of refunds) | 32,794 | 10,038 | ||||
See accompanying notes to condensed consolidated financial statements.
5
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except per share data)
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The consolidated 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 consolidated financial position, results of operations and cash flows as of the dates and for the periods presented herein. These consolidated financial statements should be read in conjunction with the consolidated 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 charges/(income) recorded for the three and six months ended January 31, 2004 and February 1, 2003:
| Three Months Ended Jan. 31, 2004 |
Six Months Ended Jan. 31, 2004 |
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| Restructuring | Other Charges |
Total | Restructuring | Other Charges/ (Income) |
Total | |||||||||||||
| Environmental (a) | $ | — | $ | 11,500 | $ | 11,500 | $ | — | $ | 11,500 | $ | 11,500 | ||||||
| German pension liability (b) | — | 13 | 13 | — | (5,276 | ) | (5,276 | ) | ||||||||||
| Severance (c) | 1,546 | — | 1,546 | 3,116 | — | 3,116 | ||||||||||||
| Other exit costs (c) | 186 | — | 186 | 186 | — | 186 | ||||||||||||
| Loss on sale of assets (c) | 119 | 291 | 410 | 119 | 291 | 410 | ||||||||||||
| Other | — | 13 | 13 | — | 29 | 29 | ||||||||||||
| $ | 1,851 | $ | 11,817 | $ | 13,668 | $ | 3,421 | $ | 6,544 | $ | 9,965 | |||||||
| Cash | $ | 1,732 | $ | 11,500 | * | $ | 13,232 | $ | 3,302 | $ | 11,500 | * | $ | 14,802 | ||||
| Non-cash | 119 | 317 | 436 | 119 | (4,956 | ) | (4,837 | ) | ||||||||||
| $ | 1,851 | $ | 11,817 | $ | 13,668 | $ | 3,421 | $ | 6,544 | $ | 9,965 | |||||||
| * The $11,500 increase to the environmental liability has been classified as long-term in the accompanying condensed consolidated balance sheet. | ||||||||||||||||||
| Three Months Ended Feb. 1, 2003 |
Six Months Ended Feb. 1, 2003 |
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| Restructuring | Other Charges |
Total | Restructuring | Other Charges |
Total | |||||||||||||
| In-process research and development (d) | $ | — | $ | — | $ | — | $ | — | $ | 37,600 | $ | 37,600 | ||||||
| Severance (d) | 652 | — | 652 | 3,427 | — | 3,427 | ||||||||||||
| Asset write-offs (d) | 205 | 205 | 205 | 205 | ||||||||||||||
| Lease termination liabilities and other (d) | 67 | — | 67 | 67 | — | 67 | ||||||||||||
| $ | 924 | $ | — | $ | 924 | $ | 3,699 | $ | 37,600 | $ | 41,299 | |||||||
| Cash | $ | 719 | $ | — | $ | 719 | $ | 3,494 | $ | — | $ | 3,494 | ||||||
| Non-cash | 205 | — | 205 | 205 | 37,600 | 37,805 | ||||||||||||
| $ | 924 | $ | — | $ | 924 | $ | 3,699 | $ | 37,600 | $ | 41,299 | |||||||
| (a) | In the second quarter of fiscal 2004, the Company increased its environmental liabilities by $11,500 as a result of a change in the estimated duration and costs of the remediation effort at the Ann Arbor, Michigan facility of the Company’s subsidiary Gelman Sciences. |
6
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
(Unaudited)
| (b) | Reflects an adjustment to pension liabilities in Germany due to an overstatement of pension expense that occurred during the preceding five-year period, the effect of which was not significant in any period. | |
| (c) | 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. | |
| Furthermore, during the second quarter of fiscal 2004, the Company continued its plan to streamline manufacturing operations. This resulted in headcount reductions in the United Kingdom and Germany as well as the sale of certain insignificant non-core manufacturing businesses in Germany. | ||
| (d) | At the date of the FSG acquisition, management began formulating integration plans and identifying synergistic opportunities. During the fourth quarter of fiscal 2002 and during the first and second quarters 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. In addition, the Company’s consolidation of its routes to market in the United States and Europe resulted in the termination of 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 terminated employees to reduce costs by reorganizing its Life Sciences business such that the Company’s hospital and medical OEM sub-segments were combined with the former Blood segment to form the segment now known as Pall Medical. |
The following table summarizes the activity for the six months ended January 31, 2004 related to restructuring liabilities that were recorded in fiscal 2004, 2003 and 2002:
| Severance | Lease Termination Liabilities & Other |
Total | |||||||
| Fiscal 2004 | |||||||||
| Balance at Aug. 2, 2003 | $ | — | $ | — | $ | — | |||
| Additions | 3,116 | 186 | 3,302 | ||||||
| Utilized | (1,558 | ) | (68 | ) | (1,626 | ) | |||
| Balance at Jan. 31, 2004 | $ | 1,558 | $ | 118 | $ | 1,676 | |||
| Fiscal 2003 | |||||||||
| Balance at Aug. 2, 2003 | $ | 6,657 | $ | 2,530 | $ | 9,187 | |||
| Additions | — | — | — | ||||||
| Utilized | (4,468 | ) | (259 | ) | (4,727 | ) | |||
| Balance at Jan. 31, 2004 | $ | 2,189 | $ | 2,271 | $ | 4,460 | |||
| Fiscal 2002 | |||||||||
| Balance at Aug. 2, 2003 | $ | 1,447 | $ | 303 | $ | 1,750 | |||
| Additions | — | — | — | ||||||
| Utilized | (464 | ) | (151 | ) | (615 | ) | |||
| Balance at Jan. 31, 2004 | $ | 983 | $ | 152 | $ | 1,135 | |||
7
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
(Unaudited)
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, to account for its stock based compensation plans.
The following table illustrates the effect on net earnings and earnings per share if the Company had accounted for its stock based compensation plans using the Black-Scholes option pricing model to determine the fair value of stock based compensation under SFAS No. 123, as amended by SFAS No. 148:
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