PLL-1/31/2012-Q2


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
R
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended January 31, 2012
or
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to

Commission File Number: 001- 04311
PALL CORPORATION
(Exact name of registrant as specified in its charter)

New York
 
11-1541330
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
   
25 Harbor Park Drive, Port Washington, NY
 
11050
(Address of principal executive offices)
 
(Zip Code)

(516) 484-5400
(Registrant’s telephone number, including area code)
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 þ    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer þ
Accelerated filer o
 
 
 
 
 
Non-accelerated filer o
Smaller reporting company o
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares of the registrant’s common stock outstanding as of March 5, 2012 was 115,798,588.





Table of Contents

 
 
Page No.
 
 
 
 
 
 
 
 


2



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)

 
Jan 31, 2012
 
July 31, 2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
527,904

 
$
557,766

Accounts receivable
594,910

 
646,769

Inventories
445,631

 
444,842

Prepaid expenses
49,137

 
39,322

Other current assets
142,718

 
120,509

Total current assets
1,760,300

 
1,809,208

Property, plant and equipment
824,550

 
794,599

Goodwill
292,599

 
290,606

Intangible assets
79,143

 
61,735

Other non-current assets
249,594

 
276,268

Total assets
$
3,206,186

 
$
3,232,416

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Notes payable
$
139,970

 
$
214,957

Accounts payable and other current liabilities
495,508

 
519,883

Income taxes payable
78,261

 
34,531

Current portion of long-term debt
487

 
511

Dividends payable
24,280

 
20,125

Total current liabilities
738,506

 
790,007

Long-term debt, net of current portion
493,737

 
491,954

Income taxes payable – non-current
126,639

 
175,040

Deferred taxes and other non-current liabilities
273,470

 
285,594

Total liabilities
1,632,352

 
1,742,595

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, par value $.10 per share
12,796

 
12,796

Capital in excess of par value
264,225

 
246,665

Retained earnings
1,726,924

 
1,619,051

Treasury stock, at cost
(461,473
)
 
(483,705
)
Stock option loans

 
(133
)
Accumulated other comprehensive income/(loss):
 
 
 
Foreign currency translation
141,498

 
207,478

Pension liability adjustment
(114,046
)
 
(121,831
)
Unrealized investment gains
3,910

 
9,500

 
31,362

 
95,147

Total stockholders’ equity
1,573,834

 
1,489,821

Total liabilities and stockholders’ equity
$
3,206,186

 
$
3,232,416


See accompanying notes to condensed consolidated financial statements.


3



PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
Jan 31, 2012
 
Jan 31, 2011
 
Jan 31, 2012
 
Jan 31, 2011
Net sales
$
697,981

 
$
645,232

 
$
1,403,622

 
$
1,250,709

Cost of sales
337,696

 
312,747

 
687,081

 
609,551

Gross profit
360,285

 
332,485

 
716,541

 
641,158

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
215,194

 
197,100

 
429,090

 
379,398

Research and development
21,583

 
20,773

 
42,521

 
40,942

Restructuring and other charges, net
5,813

 
4,789

 
28,797

 
6,198

Interest expense, net
5,386

 
5,814

 
11,331

 
13,108

Earnings before income taxes
112,309

 
104,009

 
204,802

 
201,512

Provision for income taxes
27,580

 
28,345

 
50,618

 
54,439

Net earnings
$
84,729

 
$
75,664

 
$
154,184

 
$
147,073

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.73

 
$
0.65

 
$
1.33

 
$
1.26

Diluted
$
0.72

 
$
0.64

 
$
1.31

 
$
1.25

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.210

 
$
0.175

 
$
0.385

 
$
0.175

 
 
 
 
 
 
 
 
Average shares outstanding:
 
 
 
 
 
 
 
Basic
116,196

 
116,476

 
115,997

 
116,405

Diluted
117,914

 
118,266

 
117,555

 
118,102


See accompanying notes to condensed consolidated financial statements.


4



PALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Six Months Ended
 
Jan 31, 2012
 
Jan 31, 2011
Operating activities:
 
 
 
Net cash provided by operating activities
$
203,983

 
$
155,523

 
 
 
 
Investing activities:
 
 
 
Capital expenditures
(94,285
)
 
(59,945
)
Acquisition of business
(25,669
)
 

Purchases of retirement benefit assets
(22,388
)
 
(50,381
)
Proceeds from sale of retirement benefit assets
21,862

 
39,608

Proceeds from sale of assets
19,856

 
410

Other
(9,094
)
 
(3,642
)
Net cash used by investing activities
(109,718
)
 
(73,950
)
 
 
 
 
Financing activities:
 
 
 
Notes payable
(74,987
)
 
130,081

Dividends paid
(40,274
)
 
(36,976
)
Long-term borrowings
84

 
35,109

Repayments of long-term debt
(266
)
 
(298,252
)
Net proceeds from stock plans
16,662

 
28,289

Purchase of treasury stock

 
(29,538
)
Excess tax benefits from stock-based compensation
arrangements
2,057

 
6,488

Net cash used by financing activities
(96,724
)
 
(164,799
)
Cash flow for period
(2,459
)
 
(83,226
)
Cash and cash equivalents at beginning of year
557,766

 
498,563

Effect of exchange rate changes on cash and cash
equivalents
(27,403
)
 
19,924

Cash and cash equivalents at end of period
$
527,904

 
$
435,261

Supplemental disclosures:
 
 
 
Interest paid
$
11,913

 
$
14,057

Income taxes paid (net of refunds)
50,485

 
54,341


See accompanying notes to condensed consolidated financial statements.


5

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

NOTE 1 – BASIS OF PRESENTATION
The condensed consolidated financial information of Pall Corporation and its subsidiaries (hereinafter collectively called the “Company”) included herein is unaudited. Such information reflects all adjustments of a normal recurring nature, which are, in the opinion of Company management, necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows as of the dates and for the periods presented herein. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2011 (“2011 Form 10-K”). Certain prior year amounts have been reclassified to conform to the current year presentation.

NOTE 2 – BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
 
Jan 31, 2012
 
July 31, 2011
Accounts receivable:
 
 
 
Billed
$
514,976

 
$
553,500

Unbilled
89,781

 
101,652

Total
604,757

 
655,152

Less: Allowances for doubtful accounts
(9,847
)
 
(8,383
)
 
$
594,910

 
$
646,769

Unbilled receivables principally relate to long-term contracts recorded under the percentage-of-completion method of accounting.

 
Jan 31, 2012
 
July 31, 2011
Inventories:
 
 
 
Raw materials and components
$
101,720

 
$
102,745

Work-in-process
110,538

 
96,601

Finished goods
233,373

 
245,496

 
$
445,631

 
$
444,842


 
Jan 31, 2012
 
July 31, 2011

Property, plant and equipment:
 
 
 
Property, plant and equipment
$
1,750,427

 
$
1,705,559

Less: Accumulated depreciation and amortization
(925,877
)
 
(910,960
)
 
$
824,550

 
$
794,599



NOTE 3 – GOODWILL AND INTANGIBLE ASSETS
The following table presents goodwill, allocated by reportable segment.

 
Jan 31, 2012
 
July 31, 2011
Life Sciences
$
130,763

 
$
131,852

Industrial
161,836

 
158,754

 
$
292,599

 
$
290,606



6

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

Intangible assets, net, consist of the following:
 
Jan 31, 2012
 
Gross
 
Accumulated
Amortization
 
Net
Patents and unpatented technology
$
100,550

 
$
68,351

 
$
32,199

Customer-related intangibles
51,439

 
9,036

 
42,403

Trademarks
6,946

 
4,925

 
2,021

Other
5,254

 
2,734

 
2,520

 
$
164,189

 
$
85,046

 
$
79,143

 
July 31, 2011
 
Gross
 
Accumulated
Amortization
 
Net
Patents and unpatented technology
$
102,372

 
$
64,921

 
$
37,451

Customer-related intangibles
26,478

 
6,598

 
19,880

Trademarks
6,802

 
4,684

 
2,118

Other
4,685

 
2,399

 
2,286

 
$
140,337

 
$
78,602

 
$
61,735


The changes in both goodwill and intangible assets relate to an acquisition in Brazil in the first quarter of fiscal year 2012. In connection with the acquisition, the Company recorded the fair value of the intangible assets acquired (approximately $20,000, with the majority recorded as customer-related intangibles), which were valued using the income approach. The amount of goodwill recorded in connection with this acquisition was approximately $10,000. In addition, the carrying amounts were also impacted by changes in foreign exchange rates used to translate the goodwill and intangible assets contained in the financial statements of foreign subsidiaries using the rates at each respective balance sheet date.
Amortization expense for intangible assets for the three and six months ended January 31, 2012 was $4,598 and $8,790, respectively. Amortization expense for intangible assets for the three and six months ended January 31, 2011 was $3,313 and $6,509, respectively. Amortization expense, excluding any impact of the acquisition of ForteBio®, Inc., for which a valuation has not yet been completed (see Note 16, Subsequent Event, for further details), is estimated to be approximately $9,129 for the remainder of fiscal year 2012, $12,394 in fiscal year 2013, $10,295 in fiscal year 2014, $8,637 in fiscal year 2015, $7,509 in fiscal year 2016 and $7,419 in fiscal year 2017.

NOTE 4 – TREASURY STOCK
On October 16, 2008, the board authorized an expenditure of $350,000 to repurchase shares. On September 26, 2011, the board authorized an additional $250,000. The Company’s shares may be purchased over time, as market and business conditions warrant. There is no time restriction on these authorizations. There were no share repurchases during the six months ended January 31, 2012. As of January 31, 2012, $453,037 remains to be expended under the current board repurchase authorizations. Repurchased shares are held in treasury for use in connection with the Company’s stock plans and for general corporate purposes.
During the six months ended January 31, 2012, 613 shares were issued under the Company’s stock-based compensation plans. At January 31, 2012, the Company held 12,350 treasury shares.

7

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)


NOTE 5 – CONTINGENCIES AND COMMITMENTS
With respect to the matters described in Note 14, Contingencies and Commitments, to the Company’s consolidated financial statements included in the 2011 Form 10-K, under the heading Federal Securities Class Actions, Shareholder Derivative Lawsuits and Other Proceedings, the Company has reached an agreement with the lead plaintiff to settle the consolidated putative securities class-action lawsuit originally filed in August 2007 in the United States District Court for the Eastern District of New York. Under the terms of the proposed settlement, the lawsuit will be dismissed with prejudice, and the Company and all individual defendants do not admit any liability and will receive a full and complete release of all claims asserted against them in the litigation, in exchange for the payment of an aggregate of $22,500. Of the monetary payment to be made on behalf of the Company and the individual defendants, substantially all will be funded from insurance proceeds. The agreement is subject to the execution of definitive settlement documents and court approval after the class has been notified of its terms. The Company has reflected appropriate costs, contingent liabilities and related insurance recoveries in the condensed consolidated financial statements as of January 31, 2012 and July 31, 2011.
The Company and its subsidiaries are subject to certain other legal actions that arise in the normal course of business. Other than those legal proceedings and claims discussed below and in the 2011 Form 10-K, the Company did not have any current other legal proceedings and claims that would individually or in the aggregate have a reasonably possible materially adverse affect on its financial condition or operating results. As such, any reasonably possible loss or range of loss, other than those legal proceedings discussed in this note and in the 2011 Form 10-K, is immaterial. However, the results of legal proceedings cannot be predicted with certainty. If the Company failed to prevail in several of these legal matters in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.
Environmental Matters:
The Company’s condensed consolidated balance sheet at January 31, 2012 includes liabilities for environmental matters of approximately $13,487, which relate primarily to the environmental proceedings discussed in the 2011 Form 10-K. In the opinion of management, the Company is in substantial compliance with applicable environmental laws and its current accruals for environmental remediation are adequate. However, as regulatory standards under environmental laws are becoming increasingly stringent, there can be no assurance that future developments, additional information and experience gained will not cause the Company to incur material environmental liabilities or costs beyond those accrued in its condensed consolidated financial statements.

NOTE 6 – RESTRUCTURING AND OTHER CHARGES, NET
The following tables summarize the restructuring and other charges (“ROTC”) recorded for the three and six months ended January 31, 2012 and January 31, 2011:

 
Three Months Ended Jan 31, 2012
 
Six Months Ended Jan 31, 2012
 
Restructuring
(1)
 
Other
(Gains)/
Charges
(2)
 
Total
 
Restructuring
(1)
 
Other
(Gains)/
Charges
(2)
 
Total
Severance benefits and other employment contract obligations
$
2,894

 
$
862

 
$
3,756

 
$
28,302

 
$
8,832

 
$
37,134

Gain on sale of assets

 

 

 
(1,515
)
 
(9,196
)
 
(10,711
)
Professional fees, legal settlements and other costs, net of receipt of insurance claim payments
591

 
1,466

 
2,057

 
1,366

 
1,054

 
2,420

Reversal of excess restructuring reserves

 

 

 
(46
)
 

 
(46
)
 
$
3,485

 
$
2,328

 
$
5,813

 
$
28,107

 
$
690

 
$
28,797

 
 
 
 
 
 
 
 
 
 
 
 
Cash
$
3,485

 
$
1,959

 
$
5,444

 
$
28,107

 
$
(1,847
)
 
$
26,260

Non-cash(a)

 
369

 
369

 

 
2,537

 
2,537

 
$
3,485

 
$
2,328

 
$
5,813

 
$
28,107

 
$
690

 
$
28,797


8

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

 
Three Months Ended Jan 31, 2011
 
Six Months Ended Jan 31, 2011
 
Restructuring
(1)
 
Other
(Gains)/
Charges
(2)
 
Total
 
Restructuring
(1)
 
Other
(Gains)/
Charges
(2)
 
Total
Severance benefits
$
3,453

 
$

 
$
3,453

 
$
3,453

 
$

 
$
3,453

Professional fees and other costs, net of receipt of insurance claim payments
1,709

 
(1,023
)
 
686

 
2,720

 
(619
)
 
2,101

Environmental matters

 
650

 
650

 

 
650

 
650

Reversal of excess restructuring reserves

 

 

 
(6
)
 

 
(6
)
 
$
5,162

 
$
(373
)
 
$
4,789

 
$
6,167

 
$
31

 
$
6,198

 
 
 
 
 
 
 
 
 
 
 
 
Cash
$
5,162

 
$
(373
)
 
$
4,789

 
$
6,167

 
$
31

 
$
6,198

Non-cash

 

 

 

 

 

 
$
5,162

 
$
(373
)
 
$
4,789

 
$
6,167

 
$
31

 
$
6,198

(a) Reflects non-cash stock based compensation expense.
(1) Restructuring:
Restructuring charges recorded in the three and six months ended January 31, 2012 and January 31, 2011 reflect the expenses incurred in connection with the Company’s cost reduction initiatives.
Severance benefits recorded in the three and six months ended January 31, 2012 primarily relate to global restructuring activities in the Industrial segment. The most significant restructuring activities include:
the realignment of sales and marketing management of certain of the Company’s markets,
the reorganization of the global management structure that supports the Company’s systems product line, and
shifting resources from mature country markets to emerging regions.
Restructuring charges/(income) in the six months ended January 31, 2012 also includes a gain of $1,515 on the divestiture of a non-strategic asset group.
Severance benefits recorded in the three and six months ended January 31, 2011 primarily relate to the closure of an Industrial manufacturing facility in Europe.
(2) Other (Gains) / Charges:
Employment contract obligations and other severance benefits:
In the three and six months ended January 31, 2012, the Company recorded charges related to certain employment contract obligations.
Gain on sale of assets:
The six months ended January 31, 2012 includes a gain of $9,196 on the sale of the Company's investment in Satair A/S.
Professional fees and other costs:
In the three and six months ended January 31, 2012 and January 31, 2011, the Company recorded legal and other professional fees related to the Federal Securities Class Actions, Shareholder Derivative Lawsuits and Other Proceedings (see Note 5, Contingencies and Commitments) which pertain to matters that had been under audit committee inquiry as discussed in Note 2, Audit Committee Inquiry and Restatement, to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2007 (“2007 Form 10-K”). Furthermore, in the three months ended January 31, 2012, the Company recorded costs related to the settlement of the Federal Securities Class Actions (see Note 5, Contingencies and Commitments). The receipt of insurance claim payments partly offset the costs discussed above in the three and six months ended January 31, 2012 and more than offset such costs in the three and six months ended January 31, 2011.

9

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

The following table summarizes the activity related to restructuring liabilities that were recorded in the six months ended January 31, 2012 and in fiscal years 2011, 2010 and 2009.
 
Severance
 
Other
 
Total
2012
 
 
 
 
 
Original charge
$
28,302

 
$
1,367

 
$
29,669

Utilized
(9,703
)
 
(842
)
 
(10,545
)
Translation
151

 
8

 
159

Balance at Jan 31, 2012
$
18,750

 
$
533

 
$
19,283

 
Severance
 
Other
 
Total
2011
 
 
 
 
 
Original charge
$
4,863

 
$
5,507

 
$
10,370

Utilized
(1,817
)
 
(5,225
)
 
(7,042
)
Translation
272

 
68

 
340

Balance at Jul 31, 2011
$
3,318

 
$
350

 
$
3,668

Utilized
(3,147
)
 
(350
)
 
(3,497
)
Translation
(119
)
 

 
(119
)
Balance at Jan 31, 2012
$
52

 
$

 
$
52

 
Severance
 
Other
 
Total
2010
 
 
 
 
 
Original charge (a)
$
6,034

 
$
5,581

 
$
11,615

Utilized
(2,031
)
 
(5,441
)
 
(7,472
)
Translation
1

 
(9
)
 
(8
)
Balance at Jul 31, 2010
$
4,004

 
$
131

 
$
4,135

Utilized
(1,356
)
 
(135
)
 
(1,491
)
Translation
2

 
4

 
6

Balance at Jul 31, 2011
$
2,650

 
$

 
$
2,650

Utilized
(1,182
)
 

 
(1,182
)
Translation

 

 

Balance at Jan 31, 2012
$
1,468

 
$

 
$
1,468



10

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

 
Severance
 
Other
 
Total
2009
 
 
 
 
 
Original charge
$
18,938

 
$
4,734

 
$
23,672

Utilized
(12,757
)
 
(4,133
)
 
(16,890
)
Translation
412

 
20

 
432

Balance at Jul 31, 2009
6,593

 
621

 
7,214

Utilized
(4,902
)
 
(588
)
 
(5,490
)
Reversal of excess reserves
(143
)
 

 
(143
)
Translation
(86
)
 
(27
)
 
(113
)
Balance at Jul 31, 2010
$
1,462

 
$
6

 
$
1,468

Utilized
(845
)
 
(6
)
 
(851
)
Reversal of excess reserves
(6
)
 

 
(6
)
Translation
120

 

 
120

Balance at Jul 31, 2011
$
731

 
$

 
$
731

Utilized
(228
)
 

 
(228
)
Reversal of excess reserves
(46
)
 

 
(46
)
Translation
(52
)
 

 
(52
)
Balance at Jan 31, 2012
$
405

 
$

 
$
405


(a) Excludes stock-based compensation expense of $603

NOTE 7 – INCOME TAXES
The Company’s effective tax rate for the six months ended January 31, 2012 and January 31, 2011 was 24.7% and 27.0%, respectively. For the six months ended January 31, 2012 and January 31, 2011, the effective tax rate varied from the U.S. federal statutory rate primarily due to the benefits of foreign operations.
At January 31, 2012 and July 31, 2011, the Company had gross unrecognized income tax benefits of $196,243 and $188,380, respectively. During the six months ended January 31, 2012, the amount of gross unrecognized tax benefits increased by $7,863, primarily due to tax positions taken during the fiscal year, partially offset by the impact of foreign currency translation and the expiration of various statutes of limitations. As of January 31, 2012, the amount of net unrecognized income tax benefits that, if recognized, would impact the effective tax rate was $136,397.
At January 31, 2012 and July 31, 2011, the Company had liabilities of $30,503 and $29,652, respectively, for potential payment of interest and penalties.
Based on recent discussion with various tax authorities and due to the expiration of various statutes of limitations, the Company believes that it is reasonably possible that the gross amount of unrecognized tax benefits may decrease within the next twelve months by a range of zero to $61,496. As a result, the Company has reclassified $57,126 of income taxes payable and $17,870 of interest payable from non-current liabilities to current liabilities, respectively.

11

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)


NOTE 8 – COMPONENTS OF NET PERIODIC PENSION COST
Net periodic pension benefit cost for the Company’s defined benefit pension plans includes the following components:
 
Three Months Ended
 
U.S. Plans
 
Foreign Plans
 
Total
 
Jan 31, 2012
 
Jan 31, 2011
 
Jan 31, 2012
 
Jan 31, 2011
 
Jan 31, 2012
 
Jan 31, 2011
Service cost
$
2,231

 
$
2,015

 
$
1,181

 
$
1,302

 
$
3,412

 
$
3,317

Interest cost
3,051

 
3,032

 
4,481

 
4,538

 
7,532

 
7,570

Expected return on plan assets
(2,303
)
 
(2,203
)
 
(3,855
)
 
(3,524
)
 
(6,158
)
 
(5,727
)
Amortization of prior service cost
374

 
456

 
(34
)
 
73

 
340

 
529

Recognized actuarial loss
1,546

 
967

 
1,297

 
1,403

 
2,843

 
2,370

Gain due to curtailments and
settlements

 

 

 
(24
)
 

 
(24
)
Net periodic benefit cost
$
4,899

 
$
4,267

 
$
3,070

 
$
3,768

 
$
7,969

 
$
8,035


 
Six Months Ended
 
U.S. Plans
 
Foreign Plans
 
Total
 
Jan 31, 2012
 
Jan 31, 2011
 
Jan 31, 2012
 
Jan 31, 2011
 
Jan 31, 2012
 
Jan 31, 2011
Service cost
$
4,462

 
$
4,030

 
$
2,391

 
$
2,589

 
$
6,853

 
$
6,619

Interest cost
6,647

 
6,064

 
9,116

 
9,054

 
15,763

 
15,118

Expected return on plan assets
(4,606
)
 
(4,406
)
 
(7,819
)
 
(7,036
)
 
(12,425
)
 
(11,442
)
Amortization of prior service cost
1,031

 
912

 
(67
)
 
144

 
964

 
1,056

Recognized actuarial loss
5,000

 
1,934

 
2,632

 
2,802

 
7,632

 
4,736

Gain due to curtailments and
settlements

 

 

 
(47
)
 

 
(47
)
Net periodic benefit cost
$
12,534

 
$
8,534

 
$
6,253

 
$
7,506

 
$
18,787

 
$
16,040


NOTE 9 – STOCK–BASED PAYMENT
The Company currently has four stock-based employee and director compensation award types (Restricted Stock Unit, Stock Option Plans, Management Stock Purchase Plan (“MSPP”), and Employee Stock Purchase Plan (“ESPP”)), which are more fully described in Note 15, Common Stock, to the consolidated financial statements included in the 2011 Form 10-K.
On December 14, 2011, the Company’s shareholders approved the Pall Corporation 2012 Stock Compensation Plan (the “2012 Stock Plan”). The Board adopted the 2012 Stock Plan on September 26, 2011, subject to shareholder approval. The 2012 Stock Plan replaced the Pall Corporation 2005 Stock Compensation Plan (the “2005 Stock Plan”).
Similar to the 2005 Stock Plan, the 2012 Stock Plan permits the Company to grant to its employees, including the Company’s “named executive officers”, a variety of equity compensation (that is, stock options, restricted shares, restricted units, performance shares and performance units). In addition, the 2012 Stock Plan provides that (i) in January of each calendar year, each member of the board of directors who is not on such grant date an employee of the Company will be granted a number of annual award units as determined by the board of directors, (ii) each person who is elected a director of the Company for the first time at an annual meeting and who is not an employee of the Company on the date of such annual meeting will receive a number of annual award units as determined by the board of directors, and (iii) at the discretion of a non-employee director, 100% of the cash fees paid to such director in a calendar year may be deferred in additional units which will be paid out either in one lump sum or in five equal annual installments upon the director ceasing to be a member of the board. Up to 7,100 shares are issuable under the 2012 Stock Plan. The number of shares available for awards under the 2012 Stock Plan will be reduced by one share for every one share subject to a stock option granted under the 2012 Stock Plan and will be reduced by 2.31 shares for every one share subject to a Full Value Award (i.e., restricted shares, restricted units, performance shares and performance units).

12

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

The fair value of stock options is estimated using a Black-Scholes-Merton option pricing formula and are charged to earnings over the service periods during which the options are deemed to be earned; which is generally four years. The forms of options currently approved for use in awarding options provide that the options may not be exercised within one year from the date of grant, and expire if not fully exercised within seven years from the date of grant. Generally, in any year after the first year, the options can be exercised with respect to only up to 25% of the shares subject to the option, computed cumulatively.
The fair value of the restricted unit awards is determined by reference to the closing price of the Company’s common stock on the date of the award, and are charged to earnings over the service periods during which the awards are deemed to be earned; four years, in the case of units awarded to employees and upon grant, in the case of the annual award units to non-employee directors. The annual award units granted to non-employee directors of the Company (and any related dividends paid in the form of additional units) are converted to shares once the director ceases to be a member of the board of directors, other than removal for cause. Restricted stock units granted to employees vest after the fourth anniversary of the date of grant. Dividends on unvested restricted stock units vest at the same time as the restricted units for which the dividends were recorded and are forfeitable if the participant does not vest in the original award.
The detailed components of stock-based compensation expense recorded in the condensed consolidated statements of earnings for the three and six months ended January 31, 2012 and January 31, 2011 are reflected in the table below.
 
Three Months Ended
 
Six Months Ended
 
Jan 31,
2012
 
Jan 31,
2011
 
Jan 31,
2012
 
Jan 31,
2011
Restricted stock units
$
4,724

 
$
3,761

 
$
9,510

 
$
6,155

Stock options
1,344

 
984

 
3,226

 
1,994

ESPP
1,479

 
1,168

 
2,682

 
2,156

MSPP
1,117

 
931

 
2,116

 
1,955

       Total
$
8,664

 
$
6,844

 
$
17,534

 
$
12,260


NOTE 10 – EARNINGS PER SHARE
The condensed consolidated statements of earnings present basic and diluted earnings per share. Basic earnings per share is determined by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share considers the potential effect of dilution on basic earnings per share assuming potentially dilutive shares that meet certain criteria, such as those issuable upon exercise of stock options, were outstanding. The treasury stock method reduces the dilutive effect of potentially dilutive securities as it assumes that cash proceeds (from the issuance of potentially dilutive securities) are used to buy back shares at the average share price during the period. Employee stock options and restricted stock units aggregating 829 and 136 shares were not included in the computation of diluted shares for the three months ended January 31, 2012 and January 31, 2011, respectively, because their effect would have been antidilutive. For the six months ended January 31, 2012 and January 31, 2011, 1,339 and 658 antidilutive shares, respectively, were excluded. The following is a reconciliation between basic shares outstanding and diluted shares outstanding:
 
Three Months Ended
 
Six Months Ended
 
Jan 31, 2012
 
Jan 31, 2011
 
Jan 31, 2012
 
Jan 31, 2011
Basic shares outstanding
116,196

 
116,476

 
115,997

 
116,405

Effect of stock plans
1,718

 
1,790

 
1,558

 
1,697

Diluted shares outstanding
117,914

 
118,266

 
117,555

 
118,102


13

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)


NOTE 11 – FAIR VALUE MEASUREMENTS
The Company records certain of its financial assets and liabilities at fair value, which is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
The current authoritative guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). Authoritative guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Use of observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Use of inputs other than quoted prices included in Level 1, which are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3: Use of inputs that are unobservable.
The following table presents, for each of these hierarchy levels, the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of January 31, 2012:
 
Fair Value Measurements
 
As of
 
 
 
 
 
 
 
Jan 31, 2012
 
Level 1
 
Level 2
 
Level 3
Financial assets carried at fair value
 
 
 
 
 
 
 
Money market funds
$
3,662

 
$
3,662

 
$

 
$

Available-for-sale securities:
 
 
 
 
 
 
 
Equity securities
1,014

 
1,014

 

 

Debt securities:
 
 
 
 
 
 
 
Corporate
31,710

 

 
31,710

 

U.S. Treasury
9,694

 

 
9,694

 

Federal agency
28,962

 

 
28,962

 

Mortgage-backed
6,340

 

 
6,340

 

Municipal government
1,000

 

 
1,000

 

Derivative financial instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
2,968

 

 
2,968

 

Financial liabilities carried at fair value
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
934

 

 
934

 



14

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

The following table presents, for each of these hierarchy levels, the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of July 31, 2011:
 
Fair Value Measurements
 
As of
 
 
 
 
 
 
 
Jul 31, 2011
 
Level 1
 
Level 2
 
Level 3
Financial assets carried at fair value
 
 
 
 
 
 
 
Money market funds
$
4,575

 
$
4,575

 
$

 
$

Available-for-sale securities:
 
 
 
 
 
 
 

Equity securities
12,064

 
12,064

 

 

Debt securities:
 
 
 
 
 
 
 
Corporate
32,020

 

 
32,020

 

U.S. Treasury
10,210

 

 
10,210

 

Federal agency
29,404

 

 
29,404

 

Mortgage-backed
6,356

 

 
6,356

 

Municipal government
1,002

 

 
1,002

 

Derivative financial instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
1,456

 

 
1,456

 

Financial liabilities carried at fair value
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
478

 

 
478

 


The Company’s money market funds and equity securities are valued using quoted market prices and, as such, are classified within Level 1 of the fair value hierarchy.
The fair value of the Company’s investments in debt securities are valued utilizing third party pricing services. The pricing services use inputs to determine fair value which are derived from observable market sources including reportable trades, benchmark curves, credit spreads, broker/dealer quotes, bids, offers, and other industry and economic events. These investments are included in Level 2 of the fair value hierarchy.
The fair values of the Company’s foreign currency forward contracts are valued using pricing models, with all significant inputs derived from or corroborated by observable market data such as yield curves, currency spot and forward rates and currency volatilities. These investments are included in Level 2 of the fair value hierarchy.
In connection with the acquisition in the first quarter of fiscal year 2012, the Company recorded the fair value of the intangible assets acquired, which were valued using the income approach. The valuation employed level 3 inputs, as defined in the fair value hierarchy.

NOTE 12 – INVESTMENT SECURITIES
The following is a summary of the Company’s available-for-sale investment securities by category which are classified within other non-current assets in the Company’s condensed consolidated balance sheets. Contractual maturity dates of debt securities held by the trust at January 31, 2012 range from 2012 to 2044.


15

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

 
Cost/
Amortized
Cost Basis
 
Fair Value
 
Gross
Unrealized
Holding
Gains
 
Gross
Unrealized
Holding
Losses
 
Net
Unrealized
Holding
Gains
January 31, 2012
 
 
 
 
 
 
 
 
 
Equity securities
$
1,011

 
$
1,014

 
$
3

 
$

 
$
3

Debt securities:
 
 
 
 
 
 
 
 
 
Corporate
29,799

 
31,710

 
1,945

 
(34
)
 
1,911

U.S. Treasury
8,821

 
9,694

 
873

 

 
873

Federal agency
27,120

 
28,962

 
1,842

 

 
1,842

Mortgage-backed
6,155

 
6,340

 
215

 
(30
)
 
185

Municipal government
1,000

 
1,000

 

 

 

 
$
73,906

 
$
78,720

 
$
4,878

 
$
(64
)
 
$
4,814

 
 
 
 
 
 
 
 
 
 
July 31, 2011
 
 
 
 
 
 
 
 
 
Equity securities
$
2,381

 
$
12,064

 
$
9,683

 
$

 
$
9,683

Debt securities:
 
 
 
 
 
 
 
 
 
Corporate
30,239

 
32,020

 
1,814

 
(33
)
 
1,781

U.S. Treasury
9,544

 
10,210

 
666

 

 
666

Federal agency
28,042

 
29,404

 
1,362

 

 
1,362

Mortgage-backed
6,242

 
6,356

 
144

 
(30
)
 
114

Municipal government
1,000

 
1,002

 
2

 

 
2

 
$
77,448

 
$
91,056

 
$
13,671

 
$
(63
)
 
$
13,608

The following table shows the gross unrealized losses and fair value of the Company’s available-for-sale investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
 
Less than 12 months
 
12 months or greater
 
Total
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
January 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed
$
697

 
$
3

 
$
1,505

 
$
27

 
$
2,202

 
$
30

Corporate
2,589

 
34

 

 

 
2,589

 
34

 
$
3,286

 
$
37

 
$
1,505

 
$
27

 
$
4,791

 
$
64


 
Less than 12 months
 
12 months or greater
 
Total
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
July 31, 2011
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed
$
1,502

 
$
30

 
$

 
$

 
$
1,502

 
$
30

Corporate
1,985

 
33

 

 

 
1,985

 
33

 
$
3,487

 
$
63

 
$

 
$

 
$
3,487

 
$
63


16

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)


The following table shows the proceeds and gross gains and losses from the sale of available-for-sale investments for the three and six months ended January 31, 2012 and January 31, 2011:
 
Three Months Ended
 
Six Months Ended
 
Jan 31, 2012
 
Jan 31, 2011
 
Jan 31, 2012
 
Jan 31, 2011
Proceeds from sales
$
5,180

 
$
10,670

 
$
21,227

 
$
14,212

Realized gross gains on sales
115

 
514

 
9,478

 
694

Realized gross losses on sales

 
12

 
16

 
12


NOTE 13 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company manages certain financial exposures through a risk management program that includes the use of foreign exchange and interest rate derivative financial instruments. Derivatives are executed with counterparties with a minimum credit rating of “A” by Standard & Poors and Moody’s Investor Services, in accordance with the Company’s policies. The Company does not utilize derivative instruments for trading or speculative purposes.
Foreign Exchange Related:
a. Derivatives Not Designated as Hedging Instruments
The risk management objective of holding foreign exchange derivatives is to mitigate volatility to earnings and cash flows due to changes in foreign exchange rates. The Company and its subsidiaries conduct transactions in currencies other than their functional currencies. These transactions include non-functional intercompany and external sales as well as intercompany and external purchases. The Company uses foreign exchange forward contracts, matching the notional amounts and durations of the receivables and payables resulting from the aforementioned underlying foreign currency transactions, to mitigate the exposure to earnings and cash flows caused by the changes in fair value of these receivables and payables from fluctuating foreign exchange rates. The notional amount of foreign currency forward contracts entered into during the three and six months ended January 31, 2012 was $489,067 and $1,371,611, respectively. The notional amount of foreign currency forward contracts outstanding as of January 31, 2012 was $255,994.
b. Net Investment Hedges
The risk management objective of designating the Company’s foreign currency loan as a hedge of a portion of its net investment in a wholly owned Japanese subsidiary is to mitigate the change in the fair value of the Company’s net investment due to changes in foreign exchange rates. The Company uses a JPY loan outstanding to hedge its equity of the same amount in the Japanese wholly owned subsidiary. The hedge of net investment consists of a JPY 9 billion loan.
Interest Rate Related:
    As of January 31, 2012, there are no existing interest rate related derivatives.
The fair values of the Company’s derivative financial instruments included in the condensed consolidated balance sheets are presented as follows:
 
Asset Derivatives
 
Liability Derivatives
January 31, 2012
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
Not applicable (N/A)
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
Foreign exchange forward contracts
Other current assets
 
$
2,968

 
Other current liabilities
 
$
934

Total derivatives
 
 
$
2,968

 
 
 
$
934

Nonderivative instruments designated as hedging instruments
 
 
 
 
 
 
 
Net investment hedge
 
 
 
 
Long-term debt, net of current portion
 
$
117,891



17

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

 
Asset Derivatives
 
Liability Derivatives
July 31, 2011
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
N/A
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
Foreign exchange forward contracts
Other current assets
 
$
1,456

 
Other current liabilities
 
$
478

Total derivatives
 
 
$
1,456

 
 
 
$
478

Nonderivative instruments designated as hedging instruments
 
 
 
 
 
 
 
Net investment hedge
 
 
 
 
Long-term debt, net of current portion
 
$
115,803


For the three months ended January 31, 2012 and January 31, 2011, the Company had no derivative financial instruments outstanding that were designated as hedging instruments.
The amounts of the gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments for the three months ended January 31, 2012 and January 31, 2011 are presented as follows:
 
 
 
Amount of Gain or (Loss) Recognized in
Earnings on Derivatives
 
 
 
Three Months Ended
 
Six Months Ended
 
Location of Gain or (Loss) Recognized in
Earnings on Derivatives
 
Jan 31, 2012
 
Jan 31, 2011
 
Jan 31, 2012
 
Jan 31, 2011
Derivatives not designated as
hedging relationships
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
Selling, general and administrative expenses
 
$
4,747

 
$
(2,015
)
 
$
6,162

 
$
(4,350
)

The amounts of the gains and losses related to the Company’s nonderivative financial instruments designated as hedging instruments for the three and six months ended January 31, 2012 and January 31, 2011 are presented as follows:
 
Amount of Gain or (Loss)
Recognized in OCI on Derivatives
(Effective Portion)
 
Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Earnings
(Effective Portion)
 
Amount of Gain or (Loss) Reclassified from
Accumulated OCI into Earnings
(Effective Portion) (a)
 
Three Months Ended
 
 
 
Three Months Ended
 
Jan 31, 2012
 
Jan 31, 2011
 
 
 
Jan 31, 2012
 
Jan 31, 2011
Nonderivatives designated as hedging relationships
 
 
 
 
 
 
 
 
 
Net investment hedge
$
513

 
$
1,445

 
N/A
 
$

 
$


(a)
There were no gains or losses recognized in earnings related to the ineffective portion of the hedging relationship or related to the amount excluded from the assessment of hedge effectiveness for the three months ended January 31, 2012 and January 31, 2011.

 
Amount of Gain or (Loss)
Recognized in OCI on Derivatives
(Effective Portion)
 
Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Earnings
(Effective Portion)
 
Amount of Gain or (Loss) Reclassified from
Accumulated OCI into Earnings
(Effective Portion) (a)
 
Six Months Ended
 
 
 
Six Months Ended
 
Jan 31, 2012
 
Jan 31, 2011
 
 
 
Jan 31, 2012
 
Jan 31, 2011
Nonderivatives designated as hedging relationships
 
 
 
 
 
 
 
 
 
Net investment hedge
$
(1,336
)
 
$
(3,468
)
 
N/A
 
$

 
$


(a)
There were no gains or losses recognized in earnings related to the ineffective portion of the hedging relationship or related to the amount excluded from the assessment of hedge effectiveness for the six months ended January 31, 2012 and January 31, 2011.

18

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)


NOTE 14 – COMPREHENSIVE INCOME

 
Three Months Ended
 
Six Months Ended
 
Jan 31, 2012
 
Jan 31, 2011
 
Jan 31, 2012
 
Jan 31, 2011
Net earnings
$
84,729

 
$
75,664

 
$
154,184

 
$
147,073

Unrealized translation adjustment
(40,736
)
 
(7,705
)
 
(65,670
)
 
38,277

Income taxes
(1,112
)
 
(717
)
 
(310
)
 
3,933

Unrealized translation adjustment, net
(41,848
)
 
(8,422
)
 
(65,980
)
 
42,210

Pension liability adjustment
7,113

 
3,850

 
13,367

 
4,532

Income taxes
(3,559
)
 
(1,217
)
 
(5,582
)
 
(1,476
)
Pension liability adjustment, net
3,554

 
2,633

 
7,785

 
3,056

Change in unrealized investment (losses)/gains
812

 
(1,452
)
 
(8,794
)
 
560

Income taxes
(254
)
 
523

 
3,204

 
(201
)
Change in unrealized investment (losses)/gains, net
558

 
(929
)
 
(5,590
)
 
359

Total comprehensive income
$
46,993

 
$
68,946

 
$
90,399

 
$
192,698


Unrealized investment gains on available-for-sale securities, net of related income taxes, consist of the following:
 
Three Months Ended
 
Six Months Ended
 
Jan 31, 2012
 
Jan 31, 2011
 
Jan 31, 2012
 
Jan 31, 2011
Unrealized (losses)/gains arising during the period
$
778

 
$
(1,452
)
 
$
403

 
$
560

Income taxes
(242
)
 
523

 
(270
)
 
(201
)
Net unrealized (losses)/gains arising during the period
536

 
(929
)
 
133

 
359

Reclassification adjustment for gains included in net earnings
22

 

 
(5,723
)
 

Change in unrealized investment (losses)/gains, net
$
558

 
$
(929
)
 
$
(5,590
)
 
$
359


19

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)


NOTE 15 – SEGMENT INFORMATION
The Company’s reportable segments, which are also its operating segments, consist of the Company’s Life Sciences and Industrial businesses.
The following table presents sales and segment profit by business segment reconciled to earnings before income taxes, for the three and six months ended January 31, 2012 and January 31, 2011.

 
Three Months Ended
 
Six Months Ended
 
Jan 31, 2012
 
Jan 31, 2011
 
Jan 31, 2012
 
Jan 31, 2011
SALES:
 
 
 
 
 
 
 
Life Sciences
$
357,165

 
$
334,214

 
$
713,298

 
$
645,794

Industrial
340,816

 
311,018

 
690,324

 
604,915

Total
$
697,981

 
$
645,232

 
$
1,403,622

 
$
1,250,709

SEGMENT PROFIT:
 
 
 
 
 
 
 
Life Sciences
$
88,706

 
$
83,650

 
$
177,688

 
$
156,838

Industrial
52,480

 
47,942

 
100,621

 
93,281

Total segment profit
141,186

 
131,592

 
278,309

 
250,119

Corporate Services Group
17,678

 
16,980

 
33,379

 
29,301

Operating profit
123,508

 
114,612

 
244,930

 
220,818

ROTC
5,813

 
4,789

 
28,797

 
6,198

Interest expense, net
5,386

 
5,814

 
11,331

 
13,108

Earnings before income taxes
$
112,309

 
$
104,009

 
$
204,802

 
$
201,512


NOTE 16 – SUBSEQUENT EVENT

On March 1, 2012 (the “Closing Date”), the Company acquired 100% of the outstanding capital stock of ForteBio®, Inc. (“ForteBio”), a privately held provider of advanced analytical systems that accelerate the discovery and development of biotech drugs. On the Closing Date, the Company paid a cash purchase price of approximately $142,500, net of cash acquired, subject to a post closing working capital adjustment. Pall ForteBio Corp., the new company, is headquartered in Menlo Park, California, and has wholly owned subsidiaries in London, England and Shanghai, China. This acquisition is not expected to have a material impact on the Company's financial position or results of operations for fiscal year 2012.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements and Risk Factors
The following discussion should be read together with the accompanying condensed consolidated financial statements and notes thereto and other financial information in this Form 10-Q and in the Pall Corporation and its subsidiaries (hereinafter collectively called the “Company”) Annual Report on Form 10-K for the fiscal year ended July 31, 2011 (“2011 Form 10-K”). The discussion under the subheading “Review of Operating Segments” below is in local currency (i.e., had exchange rates not changed year over year) unless otherwise indicated. Company management considers local currency change to be an important measure because by excluding the impact of volatility of exchange rates, underlying volume change is clearer. Dollar amounts discussed below are in thousands, unless otherwise indicated, except per share dollar amounts. In addition, per share dollar amounts are discussed on a diluted basis. The Company utilizes certain estimates and assumptions affecting the reported financial information as well as to quantify the impact of various significant factors that contribute to the changes in the Company’s periodic results included in the discussion below.
The matters discussed in this Quarterly Report contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that address activities, events or developments that the Company or management intends, expects, projects, believes or anticipates will or may occur in the future. All statements regarding future performance, earnings projections, earnings guidance, management’s expectations about its future cash needs and effective tax rate, and other future events or developments are forward-looking statements. Forward-looking statements are those that use terms such as “may,” “will,” “expect,” “believe,” “intend,” “should,” “could,” “anticipate,” “estimate,” “forecast,” “project,” “plan,” “predict,” “potential,” and similar expressions. Forward-looking statements contained in this and other written and oral reports are based on management’s assumptions and assessments in light of past experience and trends, current conditions, expected future developments and other relevant factors.
The Company’s forward-looking statements are subject to risks and uncertainties and are not guarantees of future performance, and actual results, developments and business decisions may differ materially from those envisaged by the Company’s forward-looking statements. Such risks and uncertainties include, but are not limited to, those discussed in Part I–Item 1A.–Risk Factors in the 2011 Form 10-K, and other reports the Company files with the Securities and Exchange Commission, including: the impact of legislative, regulatory and political developments globally; the impact of the uncertain global economic environment; the extent to which adverse economic conditions may affect our sales volume and results; changes in product mix, market mix and product pricing, particularly relating to the expansion of the systems business; demand for our products and business relationships with key customers and suppliers, which may be impacted by their cash flow and payment practices; delays or cancellations in shipments; our ability to develop and commercialize new technologies; our ability to obtain regulatory approval or market acceptance of new technologies; our ability to successfully complete our business improvement initiatives, which include supply chain enhancements and integrating and upgrading our information systems; the effect of a serious disruption in our information systems; fluctuations in our effective tax rate; volatility in foreign currency exchange rates, interest rates and energy costs and other macroeconomic challenges currently affecting us; increase in costs of manufacturing and operating costs; our ability to achieve and sustain the savings anticipated from cost reduction and gross margin improvement initiatives; our ability to attract and retain management talent; the impact of pricing and other actions by competitors; the effect of litigation and regulatory inquiries associated with the restatement of our prior period financial statements; the effect of the restrictive covenants in our debt facilities; our ability to enforce patents and protect proprietary products and manufacturing techniques; and our ability to successfully complete or integrate any acquisitions. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for the Company to predict all of them. The Company makes these statements as of the date of this disclosure and undertakes no obligation to update them, whether as a result of new information, future developments or otherwise.
Market Reorganization
Effective in the second quarter of fiscal year 2012, the Company reorganized its Industrial markets. Machinery & Equipment submarket (previously part of the Aeropower market) and Energy & Water are now being combined and are reported as the Process Technologies market. With the exclusion of Machinery & Equipment from Aeropower, Aerospace is now the stand-alone descriptor for that part of the business. Sales information by market for prior periods has been restated to reflect these changes. All discussions and amounts reported in this filing are based on the reorganized structure.
Review of Consolidated Results 
Sales in the second quarter of fiscal year 2012 increased 8.2% to $697,981 from $645,232 in the second quarter of fiscal year 2011. Exchange rates used to translate foreign subsidiary results into U.S. Dollars increased reported sales by $948, primarily due to the weakening of the U.S. Dollar against the Japanese Yen (“JPY”) partly offset by the strengthening of the U.S. Dollar against the Euro. In local currency, sales increased 8.0%. Sales in the six months increased 12.2% to $1,403,622 from $1,250,709 in the

21



six months of fiscal year 2011. Exchange rates used to translate foreign subsidiary results into U.S. Dollars increased reported sales by $29,149 primarily related to the weakening of the U.S. Dollar in the first quarter against various Asian currencies (the JPY, Chinese Renminbi, Australian Dollar and Korean Won), as well as the Euro. In local currency, sales increased 9.9%. Increased pricing contributed $4,682, or about 1%, to overall sales growth in the quarter and $7,808, or about 1% in the six months, reflecting increases in both segments.
Life Sciences segment sales increased 7.0% (in local currency) in the second quarter and 8.3% in the six months. Industrial segment sales increased 9.2% (in local currency) in the second quarter and 11.6% in the six months. For a detailed discussion of sales by segment, refer to the section “Review of Operating Segments” below.
Consumable filtration products sales (including appurtenant hardware) increased 7.5% (in local currency) in the second quarter reflecting growth of 5.4% in Life Sciences and 10.0% in Industrial. In the six months, consumable filtration products sales (including appurtenant hardware) increased 8.2% (in local currency) reflecting growth of 6.5% in Life Sciences and 10.1% in Industrial.
Systems sales increased 12.2% (in local currency) in the second quarter reflecting growth of 27.6% in Life Sciences and 4.8% in Industrial. In the six months, systems sales increased 25.5% (in local currency) reflecting growth of 36.5% in Life Sciences and 20.7% in Industrial. Systems sales represented 11.3% of total sales in the second quarter of fiscal year 2012 compared to 11.0% in the second quarter of fiscal year 2011. Systems sales represented 11.3% of total sales in the six months compared to 10.0% in the six months of fiscal year 2011.
Sales in emerging markets grew almost 21% in the second quarter and about 29% in the six months, and represented approximately 20% of total sales in both the quarter and six months. Emerging markets are defined as high growth and/or developing areas of the world in which the Company has focused growth resources. In the Americas, emerging markets include Latin America, primarily the countries of Brazil, Argentina and Mexico. In Europe, emerging markets include Eastern European countries, primarily Russia, Turkey and Poland, as well as various countries in the Middle East and Africa. In Asia, emerging markets primarily include the countries of China, India, Philippines, Indonesia and Vietnam.
Gross margin in the second quarter of fiscal year 2012 increased 10 basis points to 51.6% from 51.5% in the second quarter of fiscal year 2011. This reflects an increase in gross margin in the Life Sciences segment of 60 basis points partly offset by a decrease in gross margin in the Industrial segment of 40 basis points. In the six months, gross margin decreased 30 basis points to 51.0% from 51.3% in the six months of fiscal year 2011. This reflects a decrease in gross margin in the Industrial segment of 130 basis points partly offset by an increase in gross margin in the Life Sciences segment of 100 basis points. For a detailed discussion of the factors impacting gross margin by segment, refer to the section “Review of Operating Segments” below.
The Company has risks to gross margin from the fluctuation of the costs of products that are sourced in a currency different that the currency they are sold in (transactional impact). With the Company's current manufacturing footprint, a significant portion of products purchased by the Company in the Eurozone are sourced outside of the Eurozone. Sales in the Eurozone are approximately 25% of total Company sales. The Company currently estimates that the transactional impact of a 5% fluctuation in the U.S. Dollar or the Pound Sterling relationship to the Euro would impact the Company's consolidated gross margin by a range of approximately 40 - 60 basis points. While these currency pair relationships remained relatively stable during the first six months of fiscal year 2012 compared to fiscal year 2011, as at January 31, 2012 the Euro had depreciated approximately 3.5% against the U.S. Dollar and 2.5% against the Pound Sterling.
Selling, general and administrative (“SG&A”) expenses in the second quarter of fiscal year 2012 increased by $18,094, or 9.2% (an increase of $18,015, or 9.1%, in local currency). In the six months, SG&A expenses increased by $49,692, or 13.1% (an increase of $42,178, or 11.1%, in local currency). These increases are reflected in both segments and the Corporate Services Group. Selling expenses increased approximately 5% in the quarter and 11% in the six months. General and administrative (“G&AR