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PLL > SEC Filings for PLL > Form 10-Q on 2-Jun-2014All Recent SEC Filings

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Form 10-Q for PALL CORP


2-Jun-2014

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 ("translational FX") (i.e., had exchange rates not changed year over year). We consider year over year change excluding translational 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. Our gross margin is impacted by the fluctuation of the costs of products that are sourced in a currency different from the currency they are sold in ("transactional FX") and our discussion of gross margin below may include references to this. 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 translational FX decreased sales by approximately $600 and earnings per share by approximately 1 cent in the three months ended April 30, 2014 when compared to the three months ended April 30, 2013. We estimate that translational FX decreased sales by approximately $21,400 and earnings per share by approximately 7 cents in the nine months ended April 30, 2014 when compared to the nine months ended April 30, 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. During the first and second quarters of fiscal 2014, we completed two acquisitions - Medistad Holding BV ("Medistad"), a European manufacturing entity, and SoloHill Engineering, Inc. ("SoloHill"), a U.S. technology company. The aggregate consideration for these acquisitions was approximately $31 million, net of cash acquired, and included $3 million of contingent consideration. On February 20, 2014 (the "Closing Date"), we acquired the Life Sciences business of ATMI, Inc. ("ATMI LifeSciences"). ATMI LifeSciences is a technology leader in the field of single-use bioprocess equipment and consumables for the biopharmaceutical and biotechnology industries. On the Closing Date, the Company paid a cash purchase price, inclusive of working capital adjustments, of approximately $191 million. The acquisition of ATMI LifeSciences complements our upstream presence in bioprocessing and complements our established downstream capabilities. Combined with the aforementioned acquisitions, both innovators in the single-use market, and our already solid portfolio of biopharmaceutical solutions, the addition of the ATMI LifeSciences assets positions us well to capitalize on opportunities in the rapidly growing single-use market segment. These acquisitions did not have a material impact on our results from operations or financial position. See Note 17, Acquisitions, to the accompanying condensed consolidated financial statements for further detail.

RESULTS FROM CONTINUING OPERATIONS
Net Sales
                         Three Months Ended                       Nine Months Ended
By Segment       Apr 30, 2014        Apr 30, 2013        Apr 30, 2014        Apr 30, 2013
Life Sciences   $      368,835      $      326,097      $    1,041,011      $      955,230
Industrial             313,610             315,093             948,182             976,015
Total Sales     $      682,445      $      641,190      $    1,989,193      $    1,931,245



                       Three Months Ended                       Nine Months Ended
By Product     Apr 30, 2014        Apr 30, 2013        Apr 30, 2014        Apr 30, 2013
Consumables   $      603,872      $      571,029      $    1,743,842      $    1,695,683
Systems               78,573              70,161             245,351             235,562
Total Sales   $      682,445      $      641,190      $    1,989,193      $    1,931,245


The percentage change in sales for the three and nine months ended April 30, 2014 compared to the three and nine months ended April 30, 2013 by segment, with and without the impact of translational FX, are presented below:

                                               Three Months                                         Nine Months
                                   % Change                                            % Change
                                  excluding                           Total           excluding
                              translational                               %       translational                          Total %
By Segment                               FX     Translational FX     Change                  FX     Translational FX      Change
Life Sciences                          12.3                  0.8       13.1                 9.2                 (0.2 )       9.0
Industrial                              0.5                 (1.0 )     (0.5 )              (0.8 )               (2.1 )      (2.9 )
Total                                   6.5                 (0.1 )      6.4                 4.1                 (1.1 )       3.0

The percentage change in sales for the three and nine months ended April 30, 2014 compared to the three and nine months ended April 30, 2013 by product, with and without the impact of translational FX, are presented below:

                                              Three Months                                         Nine Months
                                  % Change                                            % Change
                                 excluding                           Total           excluding
                             translational                               %       translational                          Total %
By Product                              FX     Translational FX     Change                  FX     Translational FX      Change
Consumables                            5.7                  0.1        5.8                 3.9                 (1.1 )       2.8
Systems                               13.0                 (1.0 )     12.0                 5.7                 (1.5 )       4.2
Total                                  6.5                 (0.1 )      6.4                 4.1                 (1.1 )       3.0

Three Months
Total sales increased approximately 7% (excluding translational FX) reflecting growth in all markets in the Life Sciences segment, including the benefit of acquisitions, and in the Microelectronics market in the Industrial segment, partly offset by a decline in the Aerospace market in the Industrial segment. Total sales in the Process Technologies market in the Industrial segment were essentially flat. The acquisitions of ATMI LifeSciences, Medistad and SoloHill contributed approximately 270 basis points to total sales growth compared to last year. More details regarding sales by segment can be found in the discussions under the section "Segment Review." The approximate 6% increase in consumables sales (excluding translational FX) reflects the same trend as total sales discussed above. Increased pricing contributed approximately $5,200, or about 90 basis points, to consumables sales growth, reflecting increases in both segments.
The 13% increase in system sales (excluding translational FX) reflects timing of capital projects in the Life Sciences segment, partly offset by a decline in the Fuels & Chemicals submarket of Process Technologies in the Industrial segment. Nine Months
Total sales increased approximately 4% (excluding translational FX) reflecting growth in all markets in the Life Sciences segment, including the benefit of acquisitions, and in the Microelectronics market in the Industrial segment, partly offset by declines in the Process Technologies and Aerospace markets in the Industrial segment. The acquisitions of ATMI LifeSciences, Medistad and SoloHill contributed approximately 140 basis points to total sales growth compared to last year.
The approximate 4% increase in consumables sales (excluding translational FX) reflects the same trend as total sales discussed above. Increased pricing contributed approximately $12,600, or about 70 basis points, to consumables sales growth, reflecting increases in both segments.
The increase in system sales of approximately 6% (excluding translational FX) reflects the same trend as the three months discussed above.


Gross Margin
                        Three Months Ended                       Nine Months Ended
                Apr 30, 2014        Apr 30, 2013        Apr 30, 2014        Apr 30, 2013
Gross Profit   $      348,074      $      334,079      $    1,018,047      $    1,003,125
% of sales               51.0                52.1                51.2                51.9

% Change                  4.2                                     1.5

Three Months
The decrease in overall gross margin of 110 basis points primarily reflects the impact of the following unfavorable factors:
transactional FX (principally related to the Yen and British pound),

a higher proportion of systems sales and lower margin systems projects in the current quarter,

lower gross margin rates from the Medistad and ATMI LifeSciences acquisitions, and

a purchase accounting adjustment related to the step-up of acquired inventory that was sold in the period.

These factors were partly offset by improved pricing and favorable customer mix. More details regarding gross margin can be found in the discussions under the section "Segment Review."
Nine Months
The decrease in overall gross margin of 70 basis points primarily reflects the same factors discussed above for the three months.

Selling, General and Administrative
                                                      Three Months Ended                        Nine Months Ended
                                              Apr 30, 2014         Apr 30, 2013        Apr 30, 2014         Apr 30, 2013
Selling, general and administrative         $      201,045       $      199,595       $     592,228       $      601,569
% of sales                                            29.5                 31.1                29.8                 31.1

% Change                                               0.7                                     (1.6 )

Three Months
The decrease in selling, general and administrative expenses ("SG&A") as a percent of sales of 160 basis points reflects savings generated by our structural cost improvement initiative and better fixed cost leverage. This was partly offset by:
select investments in high growth markets; and

inflationary increases in payroll and related costs.

Nine Months
The decrease in SG&A as a percent of sales of 130 basis points reflects the same
factors as discussed above in the three months.


                                       30
--------------------------------------------------------------------------------


Research & Development
                                                      Three Months Ended                        Nine Months Ended
                                             Apr 30, 2014         Apr 30, 2013         Apr 30, 2014         Apr 30, 2013
Research and development                    $      26,644       $       22,608       $       74,890       $       68,582
% of sales                                            3.9                  3.5                  3.8                  3.6

% Change                                             17.9                                       9.2

Three Months
The increase in research and development expenses ("R&D"), reflects our 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. Additionally, the increase in R&D
reflects ATMI LifeSciences related spend.
Nine Months
The increase in R&D reflects the same factors as discussed above in the three
months.
Restructuring and Other Charges, Net
                                                     Three Months Ended                        Nine Months Ended
                                            Apr 30, 2014         Apr 30, 2013         Apr 30, 2014         Apr 30, 2013
Restructuring and other charges, net       $      11,542       $       12,824       $       29,910       $       21,497

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 more than 30% of the targeted savings in fiscal year 2014 with the balance achieved in fiscal year 2015. We expect to fund these restructuring activities with cash flows generated from operating activities. Restructuring and other charges ("ROTC") in the three and nine months ended April 30, 2014 primarily reflect the expenses incurred in connection with our structural cost improvement initiative, as discussed above, including severance costs of $8,289 and $18,751 in the three and nine months ended April 30, 2014, respectively. The three and nine months ended April 30, 2014 also includes the impairment of assets of $3,986 related to the discontinuance of a specific manufacturing line due to excess capacity as a result of recent acquisitions. In addition, the nine months ended April 30, 2014 includes an increase of $4,440 to our previously established environmental reserves related to a matter in Pinellas Park, Florida.
ROTC in the three and nine months ended April 30, 2013 primarily reflect the expenses incurred in connection with our structural cost improvement initiative, as discussed above, including severance costs of $5,701 and $10,896 in the three and nine months ended April 30, 2013, respectively. In addition, the three and nine months ended April 30, 2013 includes an increase of $2,715 to our previously established environmental reserves related to a matter in Glen Cove, New York.


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 Expense, Net
                                Three Months Ended                      Nine Months Ended
                         Apr 30, 2014       Apr 30, 2013       Apr 30, 2014        Apr 30, 2013
Interest expense, net   $    4,747         $       5,298      $       15,919      $       10,747

Three Months
Interest expense, net, in the three months ended April 30, 2014 reflects the reversal of accrued interest of $1,478, related to the resolution of foreign tax audits. Excluding this benefit, interest expense, net, in the three months ended April 30, 2014 would have been $6,225. The resulting increase in net interest expense of $927 was primarily driven by an increase in other income tax related interest expense (excluding the item referenced above), increased interest expense related to higher commercial paper borrowings and a decrease in interest income.
Nine Months
Interest expense, net, in the nine months ended April 30, 2014 reflects the reversal of accrued interest of $1,478, related to the resolution of foreign tax audits. Interest expense, net, in the nine months ended April 30, 2013 reflects the reversal of accrued interest of $6,704, related to the resolution of a U.S. tax audit. Excluding these benefits, interest expense, net, in the nine months ended April 30, 2014 and April 30, 2013 would have been $17,397 and $17,451, respectively. The resulting decrease in net interest expense of $54 was primarily driven by a reduction in other income tax related interest expense (excluding the items referenced above) partly offset by increased interest expense related to higher commercial paper borrowings and a decrease in interest income.

Income Taxes
                                                     Three Months Ended                        Nine Months Ended
                                            Apr 30, 2014         Apr 30, 2013         Apr 30, 2014         Apr 30, 2013
Income taxes                               $      15,405       $       19,483       $       61,230       $       56,975
Effective tax rate (%)                              14.8                 20.8                 20.1                 18.9

The effective tax rate for the three and nine months ended April 30, 2014 reflects a net tax benefit of $10,054 from the resolution of tax audits. The effective tax rate for the nine months ended April 30, 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 and inventory step-up in cost of sales discussed above, the effective tax rate for the three months ended April 30, 2014 and April 30, 2013 would have been 22.5% and 21.6%, respectively. The effective tax rate for the nine months ended April 30, 2014 and April 30, 2013 would have been 22.2% and 22.2%, respectively. We expect our effective tax rate for the full fiscal year 2014 to be approximately 22.5%, 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                        Nine Months Ended
                                           Apr 30, 2014         Apr 30, 2013         Apr 30, 2014         Apr 30, 2013
Net Earnings                              $      88,691       $       74,271       $      243,870       $      243,755
Diluted earnings per share                $        0.80       $         0.65       $         2.17       $         2.13

Three Months
We estimate that translational FX decreased earnings per share by approximately 1 cent in the three months ended April 30, 2014 when compared to the three months ended April 30, 2013. The decrease in share count increased diluted earnings per share by approximately 1 cent.


Nine Months
We estimate that translational FX decreased earnings per share by approximately 7 cents in the nine months ended April 30, 2014 when compared to the nine months ended April 30, 2013. The decrease in share count increased diluted earnings per share by approximately 4 cents.

RESULTS FROM DISCONTINUED OPERATIONS
                                                  Three Months Ended                       Nine Months Ended
                                          Apr 30, 2014       Apr 30, 2013         Apr 30, 2014          Apr 30, 2013
Sales                                     $         -       $        344       $         -            $        8,867
Net Earnings                              $         -       $     (1,206 )     $         -            $      245,552
Diluted Earnings per share                $         -       $      (0.01 )     $         -            $         2.15

Net earnings in the nine months ended April 30, 2013 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. . . .

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