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PLL > SEC Filings for PLL > Form 10-Q on 3-Dec-2013All Recent SEC Filings

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Form 10-Q for PALL CORP


3-Dec-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 referred to as the "Company", "we" and "our") Annual Report on Form 10-K for the fiscal year ended July 31, 2013 ("2013 Form 10-K"). Certain information is presented below excluding the impact of foreign exchange translation ("FX") (i.e., had exchange rates not changed year over year). We consider year over year change excluding FX to be an important measure because by excluding the impact of volatility of exchange rates, underlying impact of volume and rate changes are evident. United States ("U.S.") 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. We utilize certain estimates and assumptions that affect the reported financial information as well as to quantify the impact of various significant factors that contribute to the changes in our periodic results included in the discussion below.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS 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 we intend, expect, project, believe or anticipate will or may occur in the future. All statements regarding future performance, earnings projections, earnings guidance, management's expectations about our future cash needs 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.
Our 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 our forward-looking statements. Such risks and uncertainties include, but are not limited to, those discussed in Part I-Item 1A.-Risk Factors in the 2013 Form 10-K, and other reports we file with the Securities and Exchange Commission, including: the impact of disruptions in the supply of raw materials and key components from suppliers, including limited or single source suppliers; the impact of terrorist acts, conflicts and wars or natural disasters; the extent to which special U.S. and foreign government laws and regulations may expose us to liability or impair our ability to compete in international markets; the impact of economic, political, social and regulatory instability in emerging markets, and other risks characteristic of doing business in emerging markets; fluctuations in foreign currency exchange rates and interest rates; the impact of a significant disruption in, or breach in security of, our information technology systems, or the failure to implement, manage or integrate new systems, software or technologies successfully; our ability to successfully complete or integrate acquisitions; our ability to develop innovative and competitive new products; the impact of global and regional economic conditions and legislative, regulatory and political developments; our ability to comply with a broad array of regulatory requirements; the loss of one or more members of our senior management team and our ability to recruit and retain qualified management personnel; changes in the demand for our products and the maintenance of business relationships with key customers; changes in product mix and product pricing, particularly with respect to systems products and associated hardware and devices for our consumable filtration products; product defects and unanticipated use or inadequate disclosure with respect to our products; our ability to deliver our backlog on time; increases in manufacturing and operating costs and/or our ability to achieve the savings anticipated from our structural cost improvement initiatives; the impact of environmental, health and safety laws and regulations and violations; our ability to enforce patents or protect proprietary products and manufacturing techniques; costs and outcomes of pending or future litigation and the availability of insurance or indemnification rights; changes in our effective tax rate; our ability to compete effectively in domestic and global markets; and the effect of the restrictive covenants in our debt facilities. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We make these statements as of the date of this disclosure and undertake no obligation to update them, whether as a result of new information, future developments or otherwise.

OVERVIEW
We are a leading supplier of filtration, separation and purification technologies. Our products are used to remove solid, liquid and gaseous contaminants from a variety of liquids and gases, and are principally made by us, using our engineering capability, fluid management expertise, proprietary filter media and manufacturing expertise. Our products primarily consist of consumable filtration products and filtration systems.


We serve customers through two businesses globally: Life Sciences and Industrial. The Life Sciences business group serves customers in the BioPharmaceutical, Food & Beverage and Medical markets. The Industrial business group serves customers in the Process Technologies, Aerospace and Microelectronics markets. We operate globally in three geographic regions: the Americas; Europe (in which we include the Middle East and Africa); and Asia. Our reporting currency is the U.S. Dollar. Because we operate through subsidiaries or branches that transact in over thirty foreign currencies around the world, our earnings are exposed to translation risk when the financial statements of the subsidiaries or branches, as stated in their functional currencies, are translated into the U.S. Dollar. We estimate that foreign exchange translation decreased earnings per share by approximately 2 cents in the first quarter of fiscal year 2014 when compared to the first quarter of fiscal year 2013.
On August 1, 2012, we sold our blood collection, filtration and processing product line (the "Blood Product Line") to Haemonetics Corporation for $550,000. We received a total of approximately $535,000 upon closing, with the balance payable upon transfer of related blood media manufacturing capabilities and assets. The Blood Product Line was a component of our Life Sciences segment and has been reported as a discontinued operation for all periods presented.

RESULTS FROM CONTINUING OPERATIONS

Net Sales
                        Three Months Ended
By Segment       Oct 31, 2013        Oct 31, 2012
Life Sciences   $      318,946      $      299,951
Industrial             310,833             327,649
Total Sales     $      629,779      $      627,600

Three Months Ended

By Product     Oct 31, 2013        Oct 31, 2012
Consumables   $      550,669      $      552,430
Systems               79,110              75,170
Total Sales   $      629,779      $      627,600

The percentage change in sales quarter-over-quarter by segment, with and without the impact of foreign currency translation ("FX") are presented below:

                                 Three Months
By Segment    % Change excluding FX       FX     Total % Change
Life Sciences                   6.7     (0.4 )              6.3
Industrial                     (3.1 )   (2.0 )             (5.1 )
Total                           1.6     (1.3 )              0.3

The percentage change in sales quarter-over-quarter by product, with and without the impact of FX are presented below:

                               Three Months
By Product  % Change excluding FX      FX     Total % Change
Consumables                   1.1    (1.4 )             (0.3 )
Systems                       5.1     0.1                5.2
Total                         1.6    (1.3 )              0.3

Sales increased approximately 2% (excluding FX) reflecting growth in all markets in the Life Sciences segment and in the Aerospace and Microelectronics markets in the Industrial segment, partly offset by weakness in the Process Technologies market


in the Industrial segment. More details regarding sales by segment can be found in the discussions under the section "Segment Review." The approximate 1% increase in consumables sales (excluding FX) reflects solid growth in the Life Sciences segment, in all markets and in the Aerospace and Microelectronics markets in the Industrial segment, largely offset by weakness in the Process Technologies market in the Industrial segment. Increased pricing contributed approximately $3,100, or about 60 basis points to consumables sales growth quarter-over-quarter, reflecting increases in both segments. The increase in system sales reflects timing of capital projects, principally in the Fuels & Chemicals submarket, which is part of the Process Technologies market in the Industrial segment.

Gross Margin
                                        Three Months Ended
                                 Oct 31, 2013        Oct 31, 2012
Gross Profit                    $     325,714       $      327,083
% of sales                               51.7                 52.1

% Change quarter-over-quarter            (0.4 )

The decrease in overall gross margin of 40 basis points primarily reflects unfavorable market mix not only in systems versus consumables, but also product mix within consumables. This was partly offset by improved pricing. More details regarding gross margin can be found in the discussions under the section

"Segment Review."
Selling, General and Administrative
                                              Three Months Ended
                                      Oct 31, 2013         Oct 31, 2012
Selling, general and administrative   $     194,884       $      195,965
% of sales                                     30.9                 31.2

% Change quarter-over-quarter                  (0.6 )

The decrease in selling, general and administrative expenses ("SG&A") of 30 basis points reflects savings generated by our structural cost improvement initiative. These decreases were partly offset by:
? select investments in high growth markets; and

? inflationary increases in payroll and related costs.

Research & Development
                                        Three Months Ended
                                 Oct 31, 2013        Oct 31, 2012
Research and development        $       23,267      $       22,575
% of sales                                 3.7                 3.6

% Change quarter-over-quarter              3.1

The small increase in research and development expenses ("R&D"), reflects the earlier announced strategy to increase innovation investment in the Life Sciences and Industrial segments. This was driven by our focus on new product development and development of our media and instrumentation capabilities.

Restructuring and Other Charges, Net
                                               Three Months Ended
                                        Oct 31, 2013        Oct 31, 2012
Restructuring and other charges, net   $    9,198          $       4,274


In fiscal year 2012, we announced a multi-year strategic cost reduction initiative ("structural cost improvement initiative"). This initiative impacts both segments as well as the Corporate Services Group. Our goal is to properly position our cost structure globally to perform in the current economic environment without adversely impacting our growth or innovation potential. Key components of the structural cost improvement initiative include:
the strategic alignment of our manufacturing, sales and R&D facilities to cost-effectively deliver high-quality products and superior service to our customers worldwide,

creation of regional shared financial services centers for the handling of accounting transaction processing and other accounting functions,

reorganization of sales functions, to more cost- efficiently deliver superior service to our customers globally, and

reductions in headcount across all functional areas, enabled by efficiencies gained through our ERP systems as well as in order to align to economic conditions.

The structural cost improvement initiative is expected to generate $100,000 in annualized cost savings over a three year period, which will allow us to invest in resources where needed. Approximately half of the targeted $100,000 annualized savings were achieved by the end of fiscal year 2013. We expect to achieve the remainder of our target savings ratably in fiscal years 2014 and 2015.We expect to fund these restructuring activities with cash flows generated from operating activities.
Restructuring and other charges ("ROTC") in the three months ended October 31, 2013 and October 31, 2012 primarily reflect the expenses incurred in connection with our structural cost improvement initiative, as discussed above, including severance costs of approximately $3,100 and $3,300 in the three months ended October 31, 2013 and October 31, 2012, respectively. In addition, the three months ended October 31, 2013 includes an increase of $4,440 to our previously established environmental reserves related to a matter in Pinellas Park, Florida.
The details of ROTC, as well as the activity related to restructuring liabilities that were recorded related to our structural cost improvement initiative, can be found in Note 6, Restructuring and Other Charges, Net, to the accompanying condensed consolidated financial statements.

Interest (Income)/Expense, Net
                                         Three Months Ended
                                  Oct 31, 2013        Oct 31, 2012
Interest expense/(income), net   $    5,977          $      (568 )

Interest income, net, in the three months ended October 31, 2012 reflects the reversal of accrued interest of $6,704, related to the resolution of a U.S. tax audit. Excluding this benefit, interest expense, net, in the three months ended October 31, 2012 would have been $6,136. The resulting quarter-over-quarter decrease in net interest expense of $159 was primarily driven by a reduction in other income tax related interest expense (excluding the item referenced above).

Income Taxes
                                 Three Months Ended
                          Oct 31, 2013        Oct 31, 2012
Income taxes             $       20,875      $       15,672
Effective tax rate (%)             22.6                14.9

The effective tax rate for the three months ended October 31, 2012 reflects a net benefit of $7,757 primarily from the resolution of a U.S. tax audit partially offset by the establishment of deferred tax liabilities for the repatriation of foreign earnings. Excluding these impacts, as well the impact of ROTC discussed above, the effective tax rates for the three months ended October 31, 2013 and October 31, 2012 would have been 22.2% and 23.3%, respectively. We expect our effective tax rate for the full fiscal year 2014 to be approximately 23%, exclusive of the impact of ROTC and discrete items. The actual effective tax rate for the full fiscal year 2014 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
                                     Three Months Ended
                              Oct 31, 2013        Oct 31, 2012
Net Earnings                 $       71,513      $       89,165
Diluted earnings per share   $         0.63      $         0.77

We estimate that foreign currency translation decreased earnings per share by approximately 2 cents in the three months ended October 31, 2013 when compared to the three months ended October 31, 2012. The decrease in share count quarter-over-quarter increased diluted earnings per share in the three months ended October 31, 2013 by approximately 1 cent.

RESULTS FROM DISCONTINUED OPERATIONS
                                     Three Months Ended
                              Oct 31, 2013       Oct 31, 2012
Sales                        $     -            $        3,027
Net Earnings                 $     -            $      250,307
Diluted Earnings per share   $     -            $         2.15

Net earnings in the three months ended October 31, 2012 reflects the gain on the sale of the Blood Product Line. More details regarding discontinued operations can be found in Note 16, Discontinued Operations, to the accompanying condensed consolidated financial statements.

SEGMENT REVIEW
                                                                         Three Months Ended
                                                                  Oct 31, 2013        Oct 31, 2012
Sales:
Life Sciences                                                   $      318,946       $     299,951
Industrial                                                             310,833             327,649
Total                                                           $      629,779       $     627,600
Segment profit:
Life Sciences segment profit                                    $       73,045       $      69,842
Industrial segment profit                                               50,482              52,766
Total segment profit                                                   123,527             122,608
Corporate Services Group                                                15,964              14,065
ROTC                                                                     9,198               4,274
Interest expense/(income), net                                           5,977                (568 )
Earnings before income taxes from continuing operations         $       92,388       $     104,837


Life Sciences
                              Three Months Ended
                                 % of                      % of
                Oct 31, 2013     Sales    Oct 31, 2012     Sales
Sales          $      318,946            $      299,951
Cost of sales         136,867     42.9          123,997     41.3
Gross margin          182,079     57.1          175,954     58.7
SG&A                   94,091     29.5           90,905     30.3
R&D                    14,943      4.7           15,207      5.1
Segment profit $       73,045     22.9   $       69,842     23.3




                                 Three Months Ended
SALES:                     Oct 31, 2013      Oct 31, 2012
By Market and Product
BioPharmaceuticals        $      196,118    $      187,241
Food & Beverage                   43,569            41,546
Medical                           55,717            47,582
Total Consumables sales   $      295,404    $      276,369
Systems Sales                     23,542            23,582
Total Life Sciences Sales $      318,946    $      299,951

By Region
Americas                  $       97,776    $       97,798
Europe                           161,930           143,665
Asia                              59,240            58,488
Total Life Sciences Sales $      318,946    $      299,951

The percentage change in sales quarter-over-quarter, with and without the impact of foreign currency translation ("FX") are presented below:

                                              Three Months
SALES % CHANGE            % Change excluding FX        FX     Total % Change
By Market and Product
BioPharmaceuticals                          5.3      (0.6 )              4.7
Food & Beverage                             6.2      (1.3 )              4.9
Medical                                    16.5       0.6               17.1
Total Consumables sales                     7.3      (0.4 )              6.9
Systems Sales                              (1.2 )     1.0               (0.2 )
Total Life Sciences Sales                   6.7      (0.4 )              6.3

By Region
Americas                                    1.2      (1.2 )                -
Europe                                      8.3       4.4               12.7
Asia                                       11.8     (10.5 )              1.3
Total Life Sciences Sales                   6.7      (0.4 )              6.3

The acquisition of Medistad contributed approximately 230 basis points to Life Sciences consumables sales growth quarter-over-quarter.


BioPharmaceuticals consumables sales growth reflect strong demand in Asia as well as in the mature markets in Europe, augmented by the acquisition of Medistad as discussed above. Sales in the Americas were down slightly primarily due to timing of key customer requirements.
Food & Beverage consumables sales growth was primarily driven by strength in the alcohol-free beverage, food and dairy sectors, augmented by strength in the wine sector in several European countries.
Medical consumables sales growth reflects an increase in sales to OEMs in all three regions, augmented by the acquisition of Medistad as discussed above. Life Sciences systems sales were down primarily due to weak capital spending by Food & Beverage customers in Europe. BioPharmaceuticals capital spending was up slightly.
Life Sciences segment profit grew 5% quarter-over-quarter on revenue growth of 6% (the translation impact of FX reduced segment profit by approximately 130 basis points). Segment profit margin declined 40 basis points driven by a decline in gross margin, partly offset by the benefit from increased leverage of fixed cost SG&A on an increasing sales base and decreased R&D spend. The 160 basis point decline in gross margin is primarily due to unfavorable market mix and unfavorable product mix within consumables for all three markets. This was partly offset by the benefit of favorable pricing.

Industrial
                              Three Months Ended
                                 % of                      % of
                Oct 31, 2013     Sales    Oct 31, 2012     Sales
Sales          $      310,833            $      327,649
Cost of sales         167,198     53.8          176,520     53.9
Gross margin          143,635     46.2          151,129     46.1
SG&A                   84,829     27.3           90,995     27.8
R&D                     8,324      2.7            7,368      2.2
Segment profit $       50,482     16.2   $       52,766     16.1




                               Three Months Ended
SALES:                   Oct 31, 2013      Oct 31, 2012
By Market and Product
Process Technologies    $      125,078    $      149,969
Aerospace                       58,771            55,910
Microelectronics                71,416            70,182
Total Consumables sales $      255,265    $      276,061
Systems Sales                   55,568            51,588
Total Industrial Sales  $      310,833    $      327,649

By Region
Americas                $      100,575    $      104,673
Europe                          98,696            98,677
Asia                           111,562           124,299
Total Industrial Sales  $      310,833    $      327,649


The percentage change in sales quarter-over-quarter, with and without the impact of foreign currency translation ("FX") are presented below:

                                           Three Months
SALES % CHANGE:         % Change excluding FX       FX     Total % Change
By Market and Product
Process Technologies                    (15.4 )   (1.2 )            (16.6 )
Aerospace                                 4.8      0.3                5.1
Microelectronics                          8.7     (6.9 )              1.8
Total Consumables sales                  (5.2 )   (2.3 )             (7.5 )
Systems Sales                             8.0     (0.3 )              7.7
Total Industrial Sales                   (3.1 )   (2.0 )             (5.1 )

By Region
Americas                                 (3.1 )   (0.8 )             (3.9 )
Europe                                   (3.1 )    3.1                  -
Asia                                     (3.1 )   (7.1 )            (10.2 )
Total Industrial Sales                   (3.1 )   (2.0 )             (5.1 )

Process Technologies consumables sales decreased with the Fuels & Chemicals submarket having the most significant impact. The sales results by key submarkets are discussed below:
? Consumables sales in the Machinery & Equipment submarket, which represented approximately 20% of total Industrial consumables sales in the quarter, decreased almost 9% quarter-over-quarter. This reflects weakness in the mining mobile OEM sector as well as an increase in back orders resulting from some manufacturing line moves.

? Consumables sales in the Fuels & Chemicals submarket, which represented approximately 15% of total Industrial consumables sales in the quarter, were down about 21% quarter-over-quarter on low-entering backlog and softness in emerging markets particularly China, Venezuela and Russia.

? Consumables sales in the Power Generation submarket, which represented close to 10% of total Industrial consumables sales in the quarter, declined approximately 18% reflecting low-entering backlog.

Aerospace consumables sales growth was driven by increased Commercial Aerospace sales.
? Sales to the Commercial Aerospace submarket, which represented approximately 10% of total Industrial consumables sales, increased about 9%, driven by increased aftermarket sales.

. . .

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