<PAGE>
-1-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended May 1, 1999
Commission File No. 1- 4311
PALL CORPORATION
Incorporated in New York State I.R.S. Employer
Identification #11-1541330
2200 Northern Boulevard, East Hills, N.Y. 11548
Telephone Number (516) 484-5400
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 the Registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
At June 8, 1999, 124,097,307 shares of common stock
of the Registrant were outstanding.
<PAGE>
-2-
PALL CORPORATION
INDEX TO FORM 10-Q
--------------------
COVER SHEET 1
INDEX TO FORM 10-Q 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed consolidated balance sheets - May 1, 1999
and August 1, 1998 3
Condensed consolidated statements of operations -
three months and nine months ended May 1, 1999
and May 2, 1998 4
Condensed consolidated statements of cash flows -
nine months ended May 1, 1999 and May 2, 1998 5
Notes to condensed consolidated financial statements 6
Item 2. Management's discussion and analysis of financial condition
and results of operations 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 18
Item 6. Exhibits and reports on Form 8-K 21
SIGNATURES 21
EXHIBIT INDEX 22
<PAGE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(in thousands)
May 1, August 1,
ASSETS 1999 1998
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 87,601 $ 12,125
Short-term investments 29,500 16,800
Accounts receivable, net of allowances
for doubtful accounts of $6,867
and $5,879, respectively 289,203 291,535
Inventories - Note 2 201,570 227,254
Taxes receivable 5,898 6,941
Deferred income taxes 20,682 15,915
Other 36,875 31,919
----------- -----------
Total Current Assets 671,329 602,489
Property, plant and equipment, net of
accumulated depreciation of $421,168
and $399,821, respectively 504,276 520,592
Other assets 219,591 223,838
----------- -----------
Total Assets $ 1,395,196 $ 1,346,919
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ 249,831 $ 134,615
Accounts payable 54,460 66,773
Accrued liabilities:
Salaries and commissions 49,501 39,998
Other 89,456 61,271
----------- -----------
138,957 101,269
Income taxes 4,899 21,939
Current portion of long-term debt 53,804 50,292
Dividends payable 19,878 19,202
----------- -----------
Total Current Liabilities 521,829 394,090
Long-term debt, less current portion 103,496 111,469
Deferred income taxes 17,229 21,514
Other non-current liabilities 60,504 54,231
----------- -----------
Total Liabilities 703,058 581,304
----------- -----------
Stockholders' Equity:
Common stock, $.10 par value 12,796 12,796
Capital in excess of par value 92,893 92,893
Retained earnings 699,315 764,927
Treasury stock, at cost (84,052) (87,281)
Stock option loans (8,110) (7,140)
Accumulated other comprehensive (loss) income:
Foreign currency translation adjustment (12,839) (10,416)
Minimum pension liability (4,108) (4,062)
Unrealized investment (losses) gains (3,757) 3,898
----------- -----------
(20,704) (10,580)
----------- -----------
Total Stockholders' Equity 692,138 765,615
----------- -----------
Total Liabilities and
Stockholders' Equity $ 1,395,196 $ 1,346,919
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
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PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(in thousands, (in thousands,
except per share data) except per share data)
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
May 1, May 2, May 1, May 2,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 299,896 $ 289,171 $ 828,001 $ 785,526
Costs and expenses:
Cost of sales 159,529 122,791 410,633 343,786
Selling, general and
administrative expenses 103,502 101,630 306,073 290,243
Research and development 13,452 15,271 43,421 44,026
Restructuring and other charges, net 64,695 27,000 64,695 19,222
Interest expense, net 3,620 2,257 9,603 4,973
--------- --------- --------- ---------
Total costs and expenses 344,798 268,949 834,425 702,250
(Loss) earnings before income taxes (44,902) 20,222 (6,424) 83,276
Income taxes (16,579) 12,275 (7,536) 29,369
--------- --------- --------- ---------
Net (loss) earnings $ (28,323) $ 7,947 $ 1,112 $ 53,907
========= ========= ========= =========
(Loss) earnings per share:
Basic ($ 0.23) $ 0.06 $ 0.01 $ 0.43
Diluted ($ 0.23) $ 0.06 $ 0.01 $ 0.43
Average number of shares
outstanding:
Basic 124,515 124,186 124,380 125,373
Diluted 124,782 124,742 124,797 126,025
Dividends declared per share $ 0.160 $ 0.155 $ 0.475 $ 0.450
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
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PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(in thousands)
Nine Months Ended
----------------------------------
May 1, May 2,
1999 1998
--------- ---------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 104,395 $ 153,666
INVESTING ACTIVITIES:
Acquisition of Rochem, net of cash acquired -- (62,094)
Investments and licenses (9,376) (11,928)
Sale of Stratapac business 5,600 --
Capital expenditures (54,062) (60,840)
Disposals of fixed assets 2,015 2,032
Short-term investments (12,700) 12,700
Benefits protection trust (58) (4,095)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (68,581) (124,225)
FINANCING ACTIVITIES:
Net short-term borrowings 117,174 (12,422)
Long-term borrowings 3,703 119,959
Payments on long-term debt (17,364) (7,559)
Net proceeds from exercise of stock options 34,271 7,095
Purchase of treasury stock (39,256) (74,999)
Dividends paid (58,433) (37,028)
--------- ---------
NET CASH PROVIDED/ ( USED) BY FINANCING ACTIVITIES 40,095 (4,954)
--------- ---------
CASH FLOW FOR PERIOD 75,909 24,487
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,125 17,972
EFFECT OF EXCHANGE RATE CHANGES ON CASH (433) (1,083)
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 87,601 $ 41,376
========= =========
Supplemental disclosures:
Interest paid (net of amount capitalized) $ 12,688 $ 8,622
Income taxes paid (net of refunds) 17,881 29,875
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
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PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The financial information included herein is unaudited. However, such
information reflects all adjustments which are, in the opinion of management,
necessary to present fairly the Company's financial position, results of
operations and cash flows as of the dates and for the periods presented herein.
These financial statements should be read in conjunction with the financial
statements and notes set forth in the Company's Annual Report on Form 10-K for
the fiscal year ended August 1, 1998.
NOTE 2 - INVENTORIES
The major classes of inventory are as follows:
(in thousands)
May 1, Aug. 1,
1999 1998
----------------------
Raw materials and components $80,513 $95,861
Work-in-process 27,145 24,168
Finished goods 93,912 107,225
-----------------------
Total inventory $201,570 $227,254
=======================
NOTE 3 - COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", which
requires that all components of comprehensive income and total comprehensive
income be reported and that changes be shown in a financial statement displayed
with the same prominence as other financial statements. Total comprehensive
income for the three months and nine months ended May 1, 1999 and May 2, 1998
was comprised of the following:
<TABLE>
<CAPTION>
(in thousands)
Three months ended Nine months ended
May 1, May 2, May 1, May 2,
1999 1998 1999 1998
-------- ------ ------ ------
<S> <C> <C> <C> <C>
Net (loss) earnings ($28,323) $ 7,947 $ 1,112 $53,907
Foreign currency translation adjustment (8,950) 4,822 (2,226) 233
Income taxes (308) (101) (197) (109)
-------- ------- ------- -------
Foreign currency translation adjustment, net (9,258) 4,721 (2,423) 124
Minimum pension liability adjustment (20) (15) (70) 649
Income taxes 7 5 24 (227)
-------- ------- ------- -------
Minimum pension liability adjustment, net (13) (10) (46) 422
Unrealized investment (losses) gains (4,928) 200 (11,776) 35
Income taxes 1,725 111 4,121 (16)
-------- ------- ------- -------
Unrealized investment (losses) gains, net (3,203) 311 (7,655) 19
Total comprehensive income ($40,797) $12,969 ($9,012) $54,472
======== ======= ======= =======
</TABLE>
<PAGE>
-7-
NOTE 4 - RESTRUCTURING AND OTHER CHARGES, NET
During the third quarter of fiscal 1999, the Company announced and implemented
a plan to restructure its operations with targeted payroll and expense cost
reductions of over $50 million per annum. The Company initiated the
restructuring to bring operating costs in line with lower than anticipated
gross margins. The major restructuring details are as follows:
o Consolidation of European inventory warehousing and distribution functions
o Restructuring of Japanese operations
o Relocation and consolidation of certain manufacturing
o Rationalization of the research and development and scientific and laboratory
services resources
o Realignment of the Medical division sales forces
o Discontinuance of certain non-strategic product lines
As a result of the restructuring the Company's global work force will be reduced
by approximately 500 people. Through the end of the third quarter more than 300
employees have been terminated with most of the remaining terminations expected
to occur before the end of the year. Upon consolidation of the European
inventory warehousing and distribution functions and restructuring of the
Japanese operations, the Company identified excess inventory that could not be
sold within the normal product life cycle. Consequently, the Company wrote-off
and will scrap inventory of approximately $14 million. The total cost related to
all restructuring related activities resulted in a charge of $44 million in the
current quarter.
Along with the restructuring, the Company performed a comprehensive review of
its business. Across all business lines, the review identified instances where
certain products have been superseded by newer products and some excess
inventory that resulted from competitive conditions and adverse changes in
product demand. As a result, the Company wrote-off and will scrap approximately
$7 million in inventory and provide an incremental reserve of approximately $4
million to reflect current market conditions and shorter product life cycles.
The review also identified write-downs of $27 million on certain fixed and other
assets, principally to provide for the impairment of certain patents and
licenses that are not fully recoverable due to lower than anticipated market
potential; and, to reflect further impairment of land and building held for sale
and write-off certain redundant fixed assets that will no longer be used.
The Company continues the clean up of contaminated water at its Ann Arbor,
Michigan facility that began in fiscal 1998. Costs incurred during this year
indicate that the anticipated future costs for remediation will exceed the
estimate originally established. As a result, the reserve for future
environmental remediation costs has been increased.
<PAGE>
-8-
A summary of the restructuring and other charges included in the third quarter
of fiscal 1999 are presented below.
Other
Restructuring Charges Total
------------- ------- -----
Severance $18,243 $ -- $18,243
Fixed asset write-offs 4,977 14,208 19,185
Other asset write-offs -- 12,753 12,753
Lease termination costs 2,877 -- 2,877
Environmental -- 6,000 6,000
Other 4,004 1,633 5,637
------- ------- -------
Sub-totals 30,101 34,594 64,695
Inventory write-down 13,811 10,927 24,738 (@)
------- ------- -------
Total pretax charges $43,912 $45,521 $89,433
------- ------- -------
Cash $25,124 $ 7,633 $32,757
Non-cash 18,788 37,888 56,676
------- ------- -------
Total $43,912 $45,521 $89,433
------- ------- -------
(@) Amounts included in cost of sales; approximately $21 million of the
inventory will be scrapped
During the third quarter of 1999, the Company adopted the AICPA's Statement of
Position 98-5, "Reporting the Costs of Start-Up Activities," retroactive to the
beginning of the fiscal year. As a result, previously capitalized start-up costs
of approximately $5.7 million have been expensed. The effect of adopting this
statement resulted in a charge of $1.5 million and $4.2 million in the first and
second quarters of fiscal 1999, respectively. Such amounts are included in cost
of sales in the accompanying condensed consolidated statements of operations.
The accompanying statements of operations reflect the restructuring and other
charges and the adoption of SOP 98-5 discussed above in the following line
items:
Three Months Ended Restructuring/
May 1, 1999: Other Charges
------------------ -------------
Cost of Sales $24,738
Restructuring and
other charges 64,695
-------
$89,433
=======
Nine Months Ended Restructuring/ Start-Up
May 1, 1999: Other Charges Costs Total
- ------------------ ------------- -------- -----
Cost of Sales $24,738 $5,767 $30,505
Restructuring and
other charges 64,695 -- 64,695
------ ------ ------
$89,433 $5,767 $95,200
------- ------ -------
<PAGE>
-9-
Other charges, net for the third quarter last year, represents a $27 million
write-off of in-process research and development acquired in connection with the
Company's purchase of Rochem. For the nine months, other charges, net includes
the $27 million write-off related to Rochem's acquired research and development
and non-recurring income of $13.5 million related to the payment by MSI to Pall
in settlement of patent litigation, net of certain one-time costs.
NOTE 5 - OTHER MATTERS
The Company completed the sale of its Well Technology Division to Oiltools
International Limited (OilTools) during the third quarter. Coincident with this
transaction, Oiltools was recapitalized. The recapitalization resulted in a loss
of control and, as such, the Company no longer accounts for its investment in
OilTools under the equity method. The sales transaction was not material to the
Company's financial statements.
The Company purchased an additional $9 million of its shares in the current
quarter. To date, in the current fiscal year, it has purchased $40 million of
its shares. The Company expects to purchase the remaining $25 million authorized
under the current buy-back program during 1999.
<PAGE>
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's discussion and analysis may contain "forward looking statements" as
defined in the Private Securities Litigation Reform Act of 1995. These
statements are based on current Company expectations and are subject to risks
and uncertainties which could cause actual results to differ materially. In
addition to foreign exchange rates, such risks and uncertainties include, but
are not limited to, regulatory approval, market acceptance of new technologies,
economic conditions and market demand.
Results of Operations
- ---------------------
Sales for the quarter were up 3 1/2% at $300 million compared to $289 million in
last year's third quarter. Foreign exchange rates increased sales 1/2% or $2.5
million. In local currency, sales were up 3%. Sales for the nine months grew
5 1/2% to $828 million compared to $786 million reported for the comparable
period last year. Foreign exchange added $8 million or 1% to sales for the nine
months. Price reductions decreased sales by 1% each during the quarter and for
the nine months; this was principally due to a 5% price reduction in the Medical
subsegment. A detailed summary of sales by industry and geographic segments is
given below.
Sales by Market
($ = 000)
THIRD QUARTER ENDED
------------------- EXCHANGE % CHANGE
MAY 1, MAY 2, % RATE IN LOCAL
1999 1998 CHANGE DIFFERENCE CURRENCY
- ---------------------------------------------------------------------------
Medical $ 68,362 $ 70,071 (2 1/2) $ 732 (3 1/2)
BioPharmaceuticals 90,006 77,993 15 1/2 617 14 1/2
-------- -------- ------
Total Health Care 158,368 148,064 7 1,349 6
Aerospace 36,881 32,538 13 1/2 (138) 14
Industrial Hydraulics 32,471 34,224 (5) 181 (5 1/2)
-------- -------- ------
Total Aeropower 69,352 66,762 4 43 4
Microelectronics 17,936 23,214 (22 1/2) 612 (25 1/2)
Industrial Process 54,240 51,131 6 499 5
-------- -------- ------
Total
Fluid Processing 72,176 74,345 (3) 1,111 (4 1/2)
-------- -------- ------
Total $299,896 $289,171 3 1/2 $2,503 3
-------- -------- ------
<PAGE>
11
NINE MONTHS ENDED
----------------- EXCHANGE % CHANGE
MAY 1, MAY 2, % RATE IN LOCAL
1999 1998 CHANGE DIFFERENCE CURRENCY
- --------------------------------------------------------------------------
Medical $194,451 $187,253 4 $1,992 3
BioPharmaceuticals 243,407 214,292 13 1/2 2,304 12 1/2
-------- -------- ------
Total Health Care 437,858 401,545 9 4,296 8
Aerospace 98,843 89,286 10 1/2 695 10
Industrial Hydraulics 95,493 97,200 (2) 990 (3)
-------- -------- ------
Total Aeropower 194,336 186,486 4 1,685 3 1/2
Microelectronics 43,836 68,461 (36) 695 (37)
Industrial Process 151,971 129,034 18 1,254 17
-------- -------- ------
Total
Fluid Processing 195,807 197,495 (1) 1,949 (2)
-------- -------- ------
Total $828,001 $785,526 5 1/2 $7,930 4 1/2
-------- -------- ------
Sales by Geographic Region
($ = 000)
THIRD QUARTER ENDED
------------------- EXCHANGE % CHANGE
MAY 1, MAY 2, % RATE IN LOCAL
1999 1998 CHANGE DIFFERENCE CURRENCY
- -----------------------------------------------------------------------
Asia $ 46,538 $ 45,099 3 $2,646 (2 1/2)
Europe 119,789 108,116 11 4 11
Western
Hemisphere 133,569 135,956 (2) (147) (1 1/2)
-------- -------- -------
Total $299,896 $289,171 3 1/2 $2,503 3
-------- -------- ------
NINE MONTHS ENDED
----------------- EXCHANGE % CHANGE
MAY 1, MAY 2, % RATE IN LOCAL
1999 1998 CHANGE DIFFERENCE CURRENCY
- ----------------------------------------------------------------------
Asia $129,247 $132,635 (2 1/2) $ 394 (3)
Europe 331,501 279,309 18 1/2 8,185 16
Western
Hemisphere 367,253 373,582 (1 1/2) (649) (1 1/2)
-------- -------- -------
Total $828,001 $785,526 5 1/2 $7,930 4 1/2
-------- -------- ------
For the quarter, the growth in the Health Care segment was again led by a strong
BioPharmaceuticals subsegment, which grew 14 1/2% in local currency. Within this
subsegment, Pharmaceuticals grew 17% and Food and Beverage was up 14%. In the
Medical subsegment, sales reduced 3 1/2%, mainly due to the Critical Care area.
Overall, blood filter sales were relatively flat as the 2% increase in sales to
blood centers was offset by a 4% decline in sales to hospitals. The volume of
blood filter sales continues to increase, however the 5% pricing reduction based
upon the continuing growth of units shipped to blood banks partially offsets the
unit shipment growth. Even with the 2% decrease, sales to hospitals of $23
million represent 49% of total blood filter sales this quarter.
<PAGE>
12
Sales in the Aeropower segment grew 4% in local currency, led by the Aerospace
subsegment, which increased 14%. Sales to the commercial aerospace sector were
relatively flat, while there was strong double-digit growth in Military sales,
continuing a trend that began in the first quarter. Revenues in the Industrial
Hydraulics subsegment declined 5 1/2%, somewhat offsetting this increase.
Fluid Processing, excluding Microelectronics, grew 5% in local currency.
Included in the sales last year were about $3.2 million in sales of Stratapac(R)
products, a business the Company sold during this quarter. Excluding
Stratapac(R) sales last year, sales grew 11%. Microelectronics' sales were down
25 1/2%; sequentially this decline is an improvement from the previous quarters
this year.
By geography, Europe was again a strong performer, showing 11% growth led by
growth in Health Care 13%, Fluid Processing 12% and Aeropower 6%. Sales in Asia
reduced 2 1/2%, due to the economic downturn in Japan. Outside of Japan, sales
in Asia increased 14%. Sales in the Western Hemisphere were down 1 1/2%, largely
due to reductions in Medical, Microelectronics and the Industrial Process
portion of Fluid Processing.
Cost of sales as a percentage of sales (before restructuring and other charges,
net - see below) increased by 2 1/2% for the quarter and 2% for the nine months
mainly due to lower gross margins on increased blood filter sales to blood
centers, and lower margins on Microelectronics and Industrial systems sales.
Sequentially, cost of sales improved 1.7% due to product mix and some
restructuring related savings.
Selling, general and administrative expenses and research and development
expenses, as a percentage of sales, have improved over the comparable quarter
last year and have reduced sequentially nearly $3.8 million, principally due to
the restructuring that was implemented during the quarter.
During the third quarter of fiscal 1999, the Company announced and implemented a
plan to restructure its operations with targeted payroll and expense cost
reductions of over $50 million per annum. The Company initiated the
restructuring to bring operating costs in line with lower than anticipated gross
margins. The major restructuring details are as follows:
o Consolidation of European inventory warehousing and distribution functions
o Restructuring of Japanese operations
o Relocation and consolidation of certain manufacturing
o Rationalization of the research and development and scientific and
laboratory services resources
o Realignment of the Medical division sales forces
o Discontinuance of certain non-strategic product lines
<PAGE>
13
As a result of the restructuring the Company's global work force will be reduced
by approximately 500 people. Through the end of the third quarter more than 300
employees have been terminated with most of the remaining terminations expected
to occur before the end of the year. Upon consolidation of the European
inventory warehousing and distribution functions and restructuring of the
Japanese operations, the Company identified excess inventory that could not be
sold within the normal product life cycle. Consequently, the Company wrote-off
and will scrap inventory of approximately $14 million. The total cost related to
all restructuring related activities resulted in a charge of $44 million in the
current quarter.
Along with the restructuring, the Company performed a comprehensive review of
its business. Across all business lines, the review identified instances where
certain products have been superseded by newer products and some excess
inventory that resulted from competitive conditions and adverse changes in
product demand. As a result, the Company wrote-off and will scrap approximately
$7 million in inventory and provide an incremental reserve of approximately $4
million to reflect current market conditions and shorter product life cycles.
The review also identified write-downs of $27 million on certain fixed and other
assets, principally to provide for the impairment of certain patents and
licenses that are not fully recoverable due to lower than anticipated market
potential; and, to reflect further impairment of land and building held for sale
and write-off of certain redundant fixed assets that will no longer be used.
The Company continues the clean up of contaminated water at its Ann Arbor,
Michigan facility that began in fiscal 1998. Costs incurred during this year
indicate that the anticipated future costs for remediation will exceed the
estimate originally established. As a result, the reserve for future
environmental remediation costs has been increased.
A summary of the restructuring and other charges included in the third quarter
of fiscal 1999 are presented below.
Other
Restructuring Charges Total
------------- ------- -----
Severance $18,243 $ -- $18,243
Fixed asset write-offs 4,977 14,208 19,185
Other asset write-offs -- 12,753 12,753
Lease termination costs 2,877 -- 2,877
Environmental -- 6,000 6,000
Other 4,004 1,633 5,637
------- ------- -------
Sub-totals 30,101 34,594 64,695
Inventory write-down 13,811 10,927 24,738 (@)
------- ------- -------
Total pretax charges $43,912 $45,521 $89,433
------- ------- -------
Cash $25,124 $ 7,633 $32,757
Non-cash 18,788 37,888 56,676
------- ------- -------
Total $43,912 $45,521 $89,433
------- ------- -------
(@) Amounts included in cost of sales; approximately $21 million of the
inventory will be scrapped
<PAGE>
14
During the third quarter of 1999, the Company adopted the AICPA's Statement of
Position 98-5, "Reporting the Costs of Start-Up Activities," retroactive to the
beginning of the fiscal year. As a result, previously capitalized start-up costs
of approximately $5.7 million have been expensed. The effect of adopting this
statement resulted in a charge of $1.5 million and $4.2 million in the first and
second quarters of fiscal 1999, respectively. Such amounts are included in cost
of sales in the accompanying condensed consolidated statements of operations.
The accompanying statements of operations reflect the restructuring and other
charges and the adoption of SOP 98-5 discussed above in the following line
items:
Three Months Ended Restructuring/
May 1, 1999: Other Charges
------------------ -------------
Cost of Sales $24,738
Restructuring and
other charges 64,695
-------
$89,433
-------
Nine Months Ended Restructuring/ Start-Up
May 1, 1999: Other Charges Costs Total
- ------------------ ------------- ----- -----
Cost of Sales $24,738 $5,767 $30,505
Restructuring and
other charges 64,695 -- 64,695
------ ------ ------
$89,433 $5,767 $95,200
------- ------ -------
Other charges, net for the third quarter last year represents a $27 million
write-off of in-process research and development acquired in connection with the
Company's purchase of Rochem. For the nine months, other charges, net includes
the $27 million write-off related to Rochem's acquired research and development
and non-recurring income of $13.5 million related to the payment by MSI to Pall
in settlement of patent litigation, net of certain one-time costs.
Net interest expense in the quarter and for the nine months is higher on a
comparable basis as the Company's average debt, net of cash and short-term
investments, was also higher for the same comparable periods. Pretax margins for
the nine months have declined by about 2.5% for the reasons cited above.
The underlying tax rate for the nine months is 23% compared to 26% last year.
The reduction in the tax rate reflects reductions in the statutory tax rates in
the United Kingdom, Germany and Japan, as well as the increase in products
manufactured in Puerto Rico and Ireland, which have lower tax rates. The Company
expects to at least maintain this rate through fiscal year 2000.
<PAGE>
15
For the third quarter, net earnings, excluding restructuring and other charges,
were $35.2 million or 28 cents per share, as compared to $35 million or 28 cents
last year. The earnings per share effect of the restructuring and other charges
is equal to 51 cents per share (after pro forma tax effect); for the comparable
quarter last year the effect was 22 cents per share. Including restructuring and
other charges, the Company incurred a net loss for this year's third quarter of
$28.3 million or 23 cents per share, compared to net earnings of $7.9 million or
6 cents per share in last year's third quarter.
For the nine months, net earnings, excluding restructuring and other charges and
the effect of adopting the new accounting standard this year, were $68.4 million
or 55 cents per share compared to $75.9 million or 60 cents per share last year.
After restructuring and other charges and the adoption of the new accounting
principle for start-up costs, the Company's net earnings amounted to $1.1
million or 1 cent per share this year compared to net earnings of $53.9 million
or 43 cents per share last year. The reported earnings for this year's nine
months include a charge of 51 cents per share (after pro forma tax effect)
related to the restructuring and other charges mentioned above, as well as, a
charge of 3 cents per share (after pro forma tax effect) to write-off previously
capitalized start-up costs pursuant to the adoption of the AICPA's Statement of
Position 98-5, "Reporting the Costs of Start-Up Activities," retroactive to the
beginning of this fiscal year. As SOP 98-5 requires retroactive restatement in
the year of adoption, the prior quarters of this fiscal year will be restated to
include a charge of 1 cent in the first quarter and 2 cents in the second
quarter. The earnings for the nine months of last year include a charge of 17
cents per share (after pro forma tax effect) for other charges, net.
When the Company released its second quarter results it expected earnings per
share for the fiscal year to be lower by 10% and 15% compared to the 92 cents it
earned last year (before restructuring and other charges, net). The Company now
expects that it will do better than this with the earnings per share reduction
being in the 5% to 10% range (before the effects of restructuring and other
charges, net).
Liquidity and Capital Resources
- -------------------------------
The Company's balance sheet is affected by spot exchange rates used at the end
of the third quarter for translating local currency amounts into US dollars. In
relation to the spot exchange rates at the end of last year, the European
currencies have weakened against the US dollar whereas the Asian currencies have
strengthened against the US dollar.
Net cash provided by operating activities decreased by $50 million mainly
because last year's amounts included the accrual for the Rochem acquisition.
During the year the Company acquired the assets of its distributors in Argentina
and South Africa for approximately $7 million. The Company purchased an
additional $9 million of its shares in the current quarter. To date, in the
current fiscal year, it has purchased $40 million of its shares. The proceeds
for these buybacks were principally funded through stock option exercises.
Capital expenditures and depreciation and amortization for the nine months were
$54 million and $57 million, respectively. In local currency, debt and
short-term borrowings, net of cash and short-term investments, increased $14
million. At the end of the quarter approximately $18 and $15 million in accruals
related to restructuring and environmental matters are reflected on the balance
sheet.
<PAGE>
16
Other Matters
- -------------
Year 2000 Readiness
Since 1996, the Company has been assessing the impact that the Year 2000 (Y2K)
issue will have on its information systems. In March 1998, a formal Y2K
Committee was established. The Y2K Committee is chaired by the Company's Chief
Financial Officer. The Committee has developed a comprehensive plan to enable
the Company to achieve Y2K compliance and is responsible to regularly determine
that training, guidance and resources, both human and financial, are available
to carry out the overall plan on a consistent basis worldwide. Throughout the
process, the Committee has utilized the Company's internal audit department and
a team of geographic leaders (that report directly to the Committee) and support
personnel to visit numerous global locations to conduct training and assess the
progress being made toward site readiness.
To date, the Company has inventoried critical systems that may be impacted by
Y2K and inquired of those vendors that support its critical systems. Many of the
vendors have acknowledged that their current systems are Y2K compliant. In
addition, the Company is currently testing certain critical systems to ensure
Y2K compliance (the Company does not plan to test systems of service providers
such as banks, the New York Stock Exchange, utility services and similar service
providers as it does not have the resources to test their systems). The Company
expects to finish the testing during its fourth quarter. Non-critical systems
have also been inventoried and, in many cases, tested with a goal of completing
the testing of these non-critical systems by the end of the Company's fourth
quarter. If these systems are found to be Y2K deficient, then contingency plans
call for replacements, upgrades and/or migrating to other available systems. At
the current time, the Company expects that its systems will be compliant by the
end of fiscal 1999 and it estimates that the expenditures necessary to achieve
compliance will not be material to its financial statements.
The Company has also surveyed critical suppliers, service providers and
distributors to determine the status of their Y2K compliance programs. The
Company's reliance on suppliers, service providers and distributors, and
therefore, proper functioning of their products, information systems and
software means that failure by such suppliers, service providers and
distributors to address their own Y2K issues could have a material impact on the
Company's plan to achieve Y2K compliance.
The failure to correct a material Y2K problem could result in an interruption
in, or a failure of, certain normal business activities or operations. Such
failures could materially and adversely affect the Company's results of
operations. Due to the uncertainty inherent in the Y2K problem, the Company is
unable to determine, at this time, whether the consequences of Y2K failures will
have a material impact on the Company's results of operations. The Y2K project
is expected to reduce the Company's level of uncertainty about the Y2K problem
and, in particular, about the Y2K compliance and readiness of its suppliers,
service providers and distributors. The Company believes that, with the
completion of the project as scheduled, the possibility of a material
interruption of normal operations should be reduced.
<PAGE>
17
New European Currency
A new European currency (Euro) was introduced in January 1999 to replace the
separate currency of eleven individual countries. This will entail changes in
our operations as we modify systems and commercial arrangements to deal with the
new currency. Modifications will be necessary in operations such as payroll,
benefits and pension systems, contracts with suppliers and customers and
internal financial reporting systems. A three-year transition period is expected
during which transactions can be made in the legacy currencies. This may require
dual currency processes for our operations. We have identified issues involved
and are developing and implementing solutions. The cost of this effort is not
expected to have a material effect on our business or results of operations.
There is no guarantee, however, that all problems will be foreseen and
corrected, or that no material disruption of our business will occur. The
conversion to the Euro may have competitive implications on our pricing and
marketing strategies; however, any such impact is not known at this time.
<PAGE>
18
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Material Modifications
At the Annual Meeting of the Shareholders of Pall Corporation
(the "Registrant") held on November 17, 1989, a proposal was adopted by majority
vote advising the Board to adopt a Shareholder Rights Plan. At a meeting of the
Board of Directors held following said Annual Meeting, the Board adopted a
Rights Agreement dated as of November 17, 1989, between the Registrant and
United States Trust Company of New York, as Rights Agent (the "Prior Rights
Agreement"), and pursuant thereto declared a dividend of one Common Share
Purchase Right (a "Right") for each outstanding share of the Registrant's Common
Stock, par value $.25 per share (the "Common Stock").* The dividend distribution
was made to the holders of record of Common Stock outstanding on December 1,
1989, and the Registrant has continued and is continuing to issue Rights with
all shares of Common Stock issued after December 1, 1989, until the earliest to
occur of the "Distribution Date," the date on which the Rights are redeemed, and
the expiration date of the Rights.
The "Distribution Date" is defined as the earlier to occur of (i) 10
days following a public announcement that a person or group of affiliated or
associated persons (other than the Registrant, any subsidiary of the Registrant,
any employee benefit plan of the Registrant or of any subsidiary of the
Registrant, or any entity holding Common Stock for or pursuant to the terms of
such plan) has acquired beneficial ownership of 20% or more of the outstanding
Common Stock (such person or group being defined as an "Acquiring Person"), or
(ii) 10 business days (or such later date as may be determined by action of the
Registrant's Board prior to such time as any person or group becomes an
Acquiring Person) following the commencement of, or announcement of an intention
to make, a tender offer or exchange offer the consummation of which would result
in the beneficial ownership by a person or group (other than the Registrant, any
subsidiary of the Registrant, any employee benefit plan of the Registrant or of
any subsidiary of the Registrant, or any entity holding Common Stock for or
pursuant to the terms of such plan) of 20% or more of such outstanding Common
Stock.
Until the Distribution Date, the Rights (i) will not be exercisable,
(ii) will be evidenced by the certificates for the Common Stock registered in
the names of the holders thereof and not by separate Right certificates, and
(iii) will be transferable with and only with the Common Stock, and one Right
will be associated with each share of Common Stock, subject to adjustment in
certain events. Each Right, when it becomes exercisable, will entitle the
registered holder to purchase from the Registrant one share of Common Stock at a
price of $80, which price is subject to adjustment in certain events (the
"Purchase Price").
- ----------
* In November 1993, the par value of the Common Stock was reduced from
$.25 per share to $.10 per share.
<PAGE>
19
In the event that the Registrant is acquired by any person in a merger
or other business combination transaction, or 50% or more of its consolidated
assets or earning power are sold, each holder of a Right will thereafter have
the right to receive, upon the exercise of the Right at the then current
Purchase Price of the Right, that number of shares of the most powerful voting
capital stock of the acquiring company which at the time of such business
combination or sale had a market value of two times the Purchase Price. In the
event that (i) any person becomes an Acquiring Person, or (ii) during such time
as there is an Acquiring Person, there shall be a reclassification of securities
or a recapitalization or a reorganization of the Registrant or other transaction
or series of transactions involving the Registrant which has the effect of
increasing by more than 1% the proportionate share of the outstanding shares of
any class of equity securities of the Registrant or any of its subsidiaries
beneficially owned by the Acquiring Person, each holder of a Right, other than
Rights beneficially owned by the Acquiring Person (which Rights will thereafter
be void), will thereafter have the right to receive upon exercise that number of
shares of Common Stock (or other securities, cash or property) which at the time
of such event had a market value of two times the Purchase Price of the Right.
At any time after any person becomes an Acquiring Person and prior to
the acquisition by a person or group (other than the Registrant, any employee
benefit plan of the Registrant or of any subsidiary of the Registrant, or any
entity holding Common Stock for or pursuant to the terms of such plan) of
beneficial ownership of 50% or more of the outstanding Common Stock (other than
Common Stock into which nonvoting securities of the Registrant beneficially
owned by such person or group can be converted), the Board of Directors of the
Registrant may exchange the Rights (other than Rights beneficially owned by an
Acquiring Person, which Rights will thereafter be void), in whole or in part, at
an exchange ratio of one share of Common Stock per Right (subject to adjustment
in certain events).
At any time prior to such time as any person or group becomes an
Acquiring Person, the Board of Directors of the Registrant may redeem the Rights
in whole, but not in part, at a price of one-third of a cent per Right, which
price has been adjusted to reflect stock splits declared since the date of the
Prior Rights Agreement, and is subject to further adjustment in certain events
(the "Redemption Price"). The redemption of the Rights may be made effective at
such time, on such basis and with such conditions as the Board of Directors in
its sole discretion may establish. Immediately upon any redemption of the
Rights, the right to exercise the Rights will terminate and the only right of
the holders of Rights will be to receive the Redemption Price.
On April 20, 1999, the Board of Directors of the Registrant adopted
amendments to the Prior Rights Agreement, which amendments are set forth in
Amendment No. 1, dated as of April 20, 1999, to the Prior Rights Agreement (the
"Amendment"). The only substantive amendments to the Prior Rights Agreement
effected by the Amendment were (i) the extension of the expiration date of the
Rights from December 1, 1999, to December 1, 2009, and (ii) the increase of the
Purchase Price from $60 to $80, effective April 20, 1999.
<PAGE>
20
Additional information concerning the Rights and the Prior Rights
Agreement as amended by the Amendment appears in Amendment No. 1, dated April
20, 1999, to the Registrant's Registration Statement on Form 8-A for the
registration of the Rights pursuant to Section 12(b) of the Securities Exchange
Act of 1934.
<PAGE>
-21-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
See the Exhibit Index on the next page.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the three months ended
May 1, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PALL CORPORATION
June 10, 1999 /s/ John Adamovich, Jr.
- ----------------------- -------------------------------
Date John Adamovich, Jr.
Chief Financial Officer
and Treasurer
June 10, 1999 /s/ Viraj J. Patel
- ----------------------- -------------------------------
Date Viraj J. Patel
Chief Corporate Accountant
<PAGE>
-22-
Exhibit Index
-------------
Exhibit
Number Description of Exhibit
- ------- ----------------------
3.1* Restated Certificate of Incorporation of the Registrant
as amended through November 23, 1993, filed as
Exhibit 3.1 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended July 30, 1994.
3.2* By-Laws of the Registrant as amended on October
9, 1998, filed as Exhibit 3.2 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
August 2, 1998.
4.1* Rights Agreement dated as of November 17, 1989, between
the Registrant and United States Trust Company of New
York, as Rights Agent, filed as Exhibit I to the Registrant's
Registration Statement on Form 8-A dated September 10,
1992, for the registration of the Rights pursuant to Section
12(b) of the Securities Exchange Act of 1934 (the "Form 8-A").
4.2* Amendment No. 1, dated as of April 20, 1999, to the above
Rights Agreement (the "Amendment"), filed as Exhibit III to
Amendment No. 1, dated April 20, 1999, to the Form 8-A.
4.3* Form of Right Certificate, filed as Exhibit A to the Amendment.
Pursuant to the Rights Agreement, as amended, separate
Right Certificates will not be issued until as soon as
practicable after the Distribution Date.
27 Financial Data Schedule (only filed electronically).
* Incorporated herein by reference.
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