Summary of PALL CORP - Yahoo! Finance

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements and Risk Factors The following discussion should be read together with the accompanying condensed consolidated financial statements and notes thereto and other financial information in this Form 10-Q and in the Pall Corporation and its subsidiaries (hereinafter collectively called the "Company") Annual Report on Form 10-K for the fiscal year ended July 31, 2012 ("2012 Form 10-K"). The discussion under the subheading "Review of Operating Segments" below is in local currency (i.e., had exchange rates not changed year over year) unless otherwise indicated. Company management considers local currency change to be an important measure because by excluding the impact of volatility of exchange rates, underlying volume change is clearer. Dollar amounts discussed below are in thousands, unless otherwise indicated, except per share dollar amounts. In addition, per share dollar amounts are discussed on a diluted basis. The Company utilizes certain estimates and assumptions affecting the reported financial information as well as to quantify the impact of various significant factors that contribute to the changes in the Company's periodic results included in the discussion below. The matters discussed in this Quarterly Report contain "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that address activities, events or developments that the Company or management intends, expects, projects, believes or anticipates will or may occur in the future. All statements regarding future performance, earnings projections, earnings guidance, management's expectations about its future cash needs, dilution from the disposition or future allocation of capital and effective tax rate, and other future events or developments are forward-looking statements. Forward-looking statements are those that use terms such as "may," "will," "expect," "believe," "intend," "should," "could," "anticipate," "estimate," "forecast," "project," "plan," "predict," "potential," and similar expressions. Forward-looking statements contained in this and other written and oral reports are based on management's assumptions and assessments in light of past experience and trends, current conditions, expected future developments and other relevant factors.
The Company's forward-looking statements are subject to risks and uncertainties and are not guarantees of future performance, and actual results, developments and business decisions may differ materially from those envisaged by the Company's forward-looking statements. Such risks and uncertainties include, but are not limited to, those discussed in Part I-Item 1A.-Risk Factors in the 2012 Form 10-K, and other reports the Company files with the Securities and Exchange Commission, including: the impact of legislative, regulatory and political developments globally; the impact of the uncertain global economic environment; the extent to which adverse economic conditions may affect the Company's sales volume and results; demand for the Company's products and business relationships with key customers and suppliers, which may be impacted by their cash flow and payment practices; delays or cancellations in shipments; the Company's ability to develop and commercialize new technologies or to obtain regulatory approval or market acceptance of new technologies; increase in costs of manufacturing and operating costs; the Company's ability to achieve and sustain the savings anticipated from its structural cost initiatives; the Company's ability to meet its regulatory obligations; changes in product mix, market mix and product pricing, particularly relating to the expansion of the systems business; the Company's ability to successfully complete the Company's business improvement initiatives, which include supply chain enhancements and integrating and upgrading the Company's information systems; the effect of a serious disruption in the Company's information systems; fluctuations in the Company's effective tax rate; the Company's ability to enforce patents and protect proprietary products and manufacturing techniques; the Company's ability to successfully complete or integrate any acquisitions; volatility in foreign currency exchange rates, interest rates and energy costs and other macroeconomic challenges currently affecting the Company; the impact of pricing and other actions by competitors; the effect of litigation and regulatory inquiries associated with the restatement of the Company's prior period financial statements; the Company's ability to attract and retain management talent or the loss of members of its senior management team; and the effect of the restrictive covenants in the Company's debt facilities. Factors or events that could cause the Company's actual results to differ may emerge from time to time, and it is not possible for the Company to predict all of them. The Company makes these statements as of the date of this disclosure and undertakes no obligation to update them, whether as a result of new information, future developments or otherwise.

Discontinued Operations
On April 28, 2012, the Company entered into an asset purchase agreement ("APA") to sell certain assets of its blood collection, filtration and processing product line (the "Product Line") to Haemonetics Corporation ("Haemonetics") for approximately $550,000. The transaction involved the transfer of manufacturing facilities and equipment in Covina, California; Tijuana, Mexico; Ascoli, Italy and a portion of the Company's operations in Fajardo, Puerto Rico. In addition to the manufacturing facilities and related equipment, the Company transferred Product Line related inventory and intangible assets. Haemonetics also assumed certain employee-related liabilities. The sale closed on August 1, 2012, and approximately 1,400 employees transitioned to Haemonetics at that time. Separate from these manufacturing facilities, the Company also agreed to transfer related blood media manufacturing capabilities and assets to Haemonetics. The transfer of the related media lines is expected to be completed by calendar year 2016. Until that time, the Company will provide these media products to Haemonetics under a supply agreement. Under the terms of the APA, approximately $535,000 was paid upon closing, with the balance of the purchase price payable upon the Company's delivery of the aforementioned blood media manufacturing capability and related assets. Final determination of cash proceeds, gain on sale and tax impact are subject to working capital and certain other adjustments and final allocation of proceeds by jurisdiction. The Product Line, which was a component of the Company's Life Sciences segment, met the criteria for discontinued operations and held for sale presentation during the third quarter of fiscal year 2012 and has been reported as a discontinued operation in the Company's condensed consolidated financial statements. The Company did not allocate any portion of the Company's interest expense to discontinued operations.
Review of Consolidated Results from Continuing Operations Sales in the first quarter of fiscal year 2013 decreased 3.6% to $627,600 from $651,262 in the first quarter of fiscal year 2012. Exchange rates used to translate foreign subsidiary results into U.S. Dollars decreased reported sales by $22,875, primarily due to the strengthening of the U.S. Dollar against the Euro. In local currency, sales were flat compared to the first quarter of fiscal year 2012.
Life Sciences segment sales increased 3.8% (in local currency) in the first quarter, while Industrial segment sales decreased 3.5%. For a detailed discussion of sales by segment, refer to the section "Review of Operating Segments" below. Consumable filtration products sales (including appurtenant hardware) were flat in the first quarter, as an increase in Life Sciences of 4.0% was offset by a decline in Industrial of 3.4%. Increased pricing contributed $3,411, or 0.6% to consumables sales growth in the quarter, reflecting increases in both segments.
Systems sales declined 2.4% (in local currency) reflecting a decline in Industrial of 4.3%, partly offset by growth of 2.1% in Life Sciences. Systems sales represented 12.0% of total sales in the first quarter of fiscal year 2013 compared to 12.2% in the first quarter of fiscal year 2012.
The Company defines its emerging markets as high growth and/or developing areas of the world in which the Company has focused growth resources. In the Americas, emerging markets include Latin America, primarily the countries of Brazil, Argentina and Mexico. In Europe, emerging markets include Eastern European countries, primarily Russia, Turkey and Poland, as well as various countries in the Middle East and Africa. In Asia, emerging markets primarily include the countries of China, India, Philippines, Indonesia and Vietnam. Sales in emerging markets, which represented about 20% of total sales, declined approximately 5% in the first quarter. This reflects a decline in consumables sales as well as pressure on capital spending by customers.
Gross margin in the first quarter of fiscal year 2013 was 52.1%, compared to 51.5% in the first quarter of fiscal year 2012. This reflects an increase in gross margin in the Industrial segment of 110 basis points offset by a decline in the Life Sciences segment of 40 basis points. For a detailed discussion of the factors impacting gross margin by segment, refer to the section "Review of Operating Segments" below.
The Company has risks to gross margin from the fluctuation of the costs of products that are sourced in a currency different than the currency they are sold in (transactional impact). In the fourth quarter of fiscal year 2012, the Company began to use foreign exchange contracts for cash flow hedging of its forecasted transactional exposure. With the Company's current manufacturing footprint, a significant portion of products purchased by the Company in the Eurozone are sourced outside of the Eurozone. Sales in the Eurozone are approximately 25% of total Company sales. About 70% of the cost of goods on those sales are denominated in British pounds or U.S. Dollars.The Company currently estimates that the transactional impact of a 5% fluctuation in the U.S. Dollar or the Pound Sterling relationship to the Euro would impact the Company's consolidated gross margin by a range of approximately 40-60 basis points on an annualized basis, before the impact of the Company's cash flow hedging program.

Looking at these currency pairs weighted to Pall's sales, for the three months ended October 31, 2012 the Euro had depreciated approximately 9% against the U.S. Dollar and 9% against the Pound Sterling compared to the average exchange rates for the three months ended October 31, 2011.
Selling, general and administrative ("SG&A") expenses in the first quarter of fiscal year 2013 decreased by $12,215, or 5.9% (approximately $4,700, or 2%, in local currency). This reflects a decrease in the Industrial segment and the Corporate Services Group partly offset by an increase in the Life Sciences segment. Selling expenses decreased approximately 10% in the quarter, while general and administrative ("G&A") expenses were flat.
The decline in overall SG&A (in local currency) in the quarter reflects the savings generated by our structural cost improvement initiatives net of the following:
� increased expenses to structure the Company for future growth, and

� incremental costs related to the acquisition of ForteBio in the third quarter of fiscal year 2012 , impacting Life Sciences.

As a percentage of sales, SG&A expenses declined to 31.2% from 32.0% in the first quarter of fiscal year 2012. The selling and G&A expense components of SG&A as a percentage of sales in the quarter were as follows:
� selling expenses were 16.8% compared to 18.1% in the first quarter of fiscal year 2012, primarily due to the rationalization of sales management, and

�            G&A expenses were 14.4% compared to 13.9% in the first quarter of
             fiscal year 2012, primarily due to incremental costs related to the
             acquisition of ForteBio as well as incremental depreciation expense
             resulting from the go-live of the the last significant phase of the
             Company's global ERP system implementation.

For a discussion of SG&A by business, refer to the section "Review of Operating Segments" below.
Research and development ("R&D") expenses were $22,575 in the first quarter of fiscal year 2013 compared to $19,521 in the first quarter of fiscal year 2012, an increase of $3,054, or 15.6% ($3,400, or 17% in local currency). The increase in R&D expenses in local currency in the quarter reflects increased spending in the Life Sciences segment partly offset by a decline in the Industrial segment. As a percentage of sales, R&D expenses were 3.6% in the quarter compared to 3.0% in the first quarter of fiscal year 2012. For a discussion of R&D expenses by business, refer to the section "Review of Operating Segments" below. In the first quarter of fiscal year 2013, the Company recorded restructuring and other charges ("ROTC") of $4,274, primarily comprised of severance costs related to the Company's structural cost improvement initiatives.
In the first quarter of fiscal year 2012, the Company recorded ROTC of $22,984. ROTC in the quarter was primarily comprised of severance, professional fees and other costs related to the Company's cost reduction initiatives, primarily in the Industrial segment as well as charges related to certain employment contract obligations. Such charges were partly offset by a gain on the sale of an investment.
The details of ROTC for the three months ended October 31, 2012 as well as the activity related to restructuring liabilities that were recorded related to the Company's structural cost improvement initiatives and Industrial cost reduction initiatives, can be found in Note 6, Restructuring and Other Charges, Net, to the accompanying condensed consolidated financial statements.
Earnings before interest and income taxes ("EBIT") were $104,269 in the first quarter of fiscal year 2013, an increase of 23.2% compared to $84,667 in the first quarter of fiscal year 2012. The impact of foreign currency translation decreased EBIT by approximately $4,400, or 5% in the first quarter of fiscal year 2013. As a percentage of sales, EBIT were 16.6% compared to 13.0% in the first quarter of fiscal year 2012.
Net interest income in the first quarter of fiscal year 2013 was $568 compared to net interest expense of $5,945 in the first quarter of fiscal year 2012. Net interest income in the quarter reflects the reversal of of $6,704 of accrued interest related to the resolution of a U.S. tax audit. Excluding this benefit, net interest expense increased $191 compared to the first quarter of fiscal year 2012.

The Company's effective tax rate for the first quarter of fiscal years 2013 and 2012 was 14.9% and 24.2%, respectively. The effective tax rate for the first quarter of fiscal year 2013 reflects a net tax benefit of $7,757 primarily from the resolution of a U.S. tax audit partly offset by the establishment of deferred tax liabilities for the repatriation of foreign earnings. Excluding these impacts, as well as the impact of ROTC discussed above, the effective tax rate for the first quarter of fiscal years 2013 and 2012 would have been 23.3% and 23.9%, respectively. The Company expects its effective tax rate for the full fiscal year 2013 to be approximately 24.0%, exclusive of the impact of ROTC and discrete items in future periods. The actual effective tax rate for the full fiscal year 2013 may differ materially based on several factors, including the geographical mix of earnings in tax jurisdictions, enacted tax laws, the resolution of tax audits, the timing and amount of foreign dividends, state and local taxes, the ratio of permanent items to pretax book income, and the implementation of various global tax strategies as well as other factors. Net earnings in the first quarter of fiscal year 2013 were $89,165, or 77 cents per share, compared with net earnings of $59,652, or 51 cents in the first quarter of fiscal year 2012. Company management estimates that foreign currency translation decreased earnings per share by 3 cents in the first quarter of fiscal year 2013.
Review of Operating Segments from Continuing Operations The following table presents sales and segment profit by business segment, reconciled to earnings before income taxes, for the three months ended October 31, 2012 and October 31, 2011.

                                                   %                          %         %
Three Months Ended              Oct 31, 2012     Margin    Oct 31, 2011     Margin   Change
SALES:
Life Sciences                  $     299,951              $      301,754              (0.6 )
Industrial                           327,649                     349,508              (6.3 )
Total                          $     627,600              $      651,262              (3.6 )
SEGMENT PROFIT :
Life Sciences                  $      69,842       23.3   $       79,717      26.4   (12.4 )
Industrial                            52,766       16.1           43,635      12.5    20.9
Total segment profit                 122,608       19.5          123,352      18.9    (0.6 )
Corporate Services Group              14,065                      15,701             (10.4 )
Operating profit                     108,543       17.3          107,651      16.5     0.8
ROTC, net                              4,274                      22,984
Interest (income)/expense, net          (568 )                     5,945
Earnings before income taxes   $     104,837              $       78,722

Life Sciences:
Presented below are Summary Statements of Segment Profit for the Life Sciences
segment for the three months ended October 31, 2012 and October 31, 2011:
                                     % of                      % of       %
Three Months Ended  Oct 31, 2012     Sales    Oct 31, 2011     Sales   Change
Sales              $      299,951            $      301,754             (0.6 )
Cost of sales             123,997     41.3          123,541     40.9     0.4
Gross margin              175,954     58.7          178,213     59.1    (1.3 )
SG&A                       90,905     30.3           87,066     28.9     4.4
R&D                        15,207      5.1           11,430      3.8    33.0
Segment profit     $       69,842     23.3   $       79,717     26.4   (12.4 )

The tables below present sales by market and region within the Life Sciences segment for the three months ended October 31, 2012 and October 31, 2011, including the effect of exchange rates for comparative purposes.

                                                                                    %
                                                                   Exchange     Change in
                                                           %         Rate         Local
Three Months Ended   Oct 31, 2012      Oct 31, 2011     Change      Impact       Currency
By Market
BioPharmaceuticals  $      202,577    $      196,012      3.3     $  (8,916 )        7.9
Food & Beverage             49,586            56,019    (11.5 )      (2,602 )       (6.8 )
Medical                     47,788            49,723     (3.9 )      (1,871 )       (0.1 )
Total Life Sciences $      299,951    $      301,754     (0.6 )   $ (13,389 )        3.8
By Region
Americas            $       97,798    $       90,724      7.8     $    (736 )        8.6
Europe                     143,665           153,878     (6.6 )     (11,459 )        0.8
Asia                        58,488            57,152      2.3        (1,194 )        4.4
Total Life Sciences $      299,951    $      301,754     (0.6 )   $ (13,389 )        3.8

Life Sciences segment sales increased 3.8% in the first quarter compared to the first quarter of fiscal year 2012, reflecting growth consumables sales of 4.0% and growth in systems sales of 2.1%. Sales in emerging markets grew approximately 1% while sales in mature markets grew about 5%. Increased pricing (in the BioPharmaceuticals and Food & Beverage markets) contributed $1,740, or about 0.6% to consumables sales growth in the first quarter and the volume related increase to consumables sales was 3.4%. Systems sales represented 7.9% of total Life Sciences sales in the first quarter, on par with the first quarter of fiscal year 2012. Life Sciences sales represented approximately 48% of total Company sales in the first quarter compared to 46%, in the same period of fiscal year 2012.
Sales in the BioPharmaceuticals market, which is comprised of two submarket groupings (Pharmaceuticals and Laboratory), and represented approximately 70% of total Life Sciences sales, increased 7.9% in the quarter. The sales results by the submarkets are discussed below:
� Sales in the Pharmaceuticals submarket, which represented about 60% of total Life Sciences sales, increased 9.5% in the quarter compared to the same period of fiscal year 2012, reflecting growth in all three regions. Consumables sales increased 8.6% in the quarter, while systems sales grew 20.3%. Continued strength in the biotech sector was a key growth driver. Furthermore, the ForteBio acquisition (acquired in the third quarter of fiscal year 2012), added approximately $6,300 million, or 4% in consumables sales growth in the quarter.

� Sales in the Laboratory submarket, which represented close to 10% of Life Sciences sales, were down 1.6%. Growth in this market was hampered by residual supply chain issues related to the implementation of the last phase of the Company's new Enterprise Resource Planning system in the latter part of fiscal year 2012, primarily impacting the Americas.

Sales in the Food & Beverage market, which represented close to 20% of total Life Sciences sales, decreased 6.8%. Consumables sales were down 3.1%. Excluding the impact of a divestiture in Italy, consumables sales were up slightly. This reflects strong consumables sales growth in the Americas, due in part to Latin America, largely offset by weakness in Europe related to sluggishness in beer and wine production levels. Overall systems sales declined 22.5%, reflective of weak capital spending in the Americas.
Sales in the Medical market, which is comprised of patient protection products sold to hospitals, original equipment manufacturers ("OEM") and cell therapy developers, represented about 15% of total Life Sciences sales. Sales were flat in the first quarter compared to the first quarter of fiscal year 2012:
� OEM sales, which represented less than 10% of total Life Sciences sales, decreased 6.6% in the quarter primarily reflecting timing of shipments in the prior year.

� Sales to Hospitals, which represented less than 10% of total Life Sciences sales, were up about 1% reflecting increased point of use water filtration sales in the Americas and Europe.

Life Sciences gross margin in the first quarter of fiscal year 2013 decreased 40 basis points to 58.7% from 59.1% in the first quarter of fiscal year 2012. The major drivers impacting gross margin quarter over quarter are as follows:

� the detrimental effect of the weakening Euro on British Pound and U.S. dollar denominated goods sourced in the Eurozone, that decreased gross margin by approximately 140-160 basis, and

� favorable mix primarily related to the increase in Pharmaceuticals consumables sales which increased gross margin by approximately 90-110 basis points.

SG&A expenses in the first quarter of fiscal year 2013, increased by $3,839, or 4.4% (an increase of approximately $8,000, or 9% in local currency) compared to the first quarter of fiscal year 2012. Selling expenses declined approximately 4% in the quarter, while G&A expenses increased approximately 19%. The overall increase in SG&A (in local currency) principally reflects incremental costs related to the acquisition of ForteBio and investments the Company is making to structure it for future growth. SG&A as a percentage of sales increased to 30.3% from 28.9% in the first quarter of fiscal year 2012. The selling and G&A expense components of SG&A as a percentage of sales in the quarter were as follows:
�selling expenses were 17.5% compared to 18.2% in the first quarter of fiscal year 2012, and
�G&A expenses were 12.8% compared to 10.7% in the first quarter of fiscal year 2012. R&D expenses in the first quarter of fiscal year 2013 were $15,207, an increase of $3,777, or 33.0% (approximately $4,000, or 35% in local currency). The increase in R&D expenses reflects increased focus on development of our instrumentation capabilities, including spend related to the Company's ForteBio product lines. As a percentage of sales, R&D expenses were 5.1% compared to 3.8% in the first quarter of fiscal year 2012. Segment profit dollars were $69,842, a decrease of $9,875, or 12.4% (approximately $6,600, or 8% in local currency) compared to the first quarter of fiscal year 2012. Segment profit margin declined to 23.3% from 26.4% in the first quarter of fiscal year 2012.

Industrial:
Presented below are summary Statements of Segment Profit for the Industrial
segment for the three months ended October 31, 2012 and October 31, 2011:
                                 % of                      % of       %
                Oct 31, 2012     Sales    Oct 31, 2011     Sales   Change
Sales          $      327,649            $      349,508             (6.3 )
Cost of sales         176,520     53.9          192,369     55.0    (8.2 )
Gross margin          151,129     46.1          157,139     45.0    (3.8 )
SG&A                   90,995     27.8          105,413     30.2   (13.7 )
R&D                     7,368      2.2            8,091      2.3    (8.9 )
Segment profit $       52,766     16.1   $       43,635     12.5    20.9

The tables below present sales by market and region within the Industrial segment for the three months ended October 31, 2012 and October 31, 2011, including the effect of exchange rates for comparative purposes.

                                                                                    %
                                                                    Exchange    Change in
                                                            %         Rate        Local
                      Oct 31, 2012      Oct 31, 2011     Change      Impact      Currency
By Market
Process Technologies $      198,534    $      214,285     (7.4 )   $ (7,074 )       (4.0 )
Aerospace                    58,435            56,633      3.2       (1,051 )        5.0
Microelectronics             70,680            78,590    (10.1 )     (1,361 )       (8.3 )
Total Industrial     $      327,649    $      349,508     (6.3 )   $ (9,486 )       (3.5 )
By Region
Americas             $      104,673    $      109,065     (4.0 )   $   (737 )       (3.4 )
Europe                       98,677            99,113     (0.4 )     (7,730 )        7.4
Asia                        124,299           141,330    (12.1 )     (1,019 )      (11.3 )
Total Industrial     $      327,649    $      349,508     (6.3 )   $ (9,486 )       (3.5 )

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