PLL 2013 10K




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K

þ
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended July 31, 2013
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 incorporation or organization)
(I.R.S. Employer 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)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $.10 par value
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o      No þ
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act).  Yes o      No þ
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, computed by reference to the closing price of a share of common stock on January 31, 2013 (the last business day of the registrant’s most recently completed second fiscal quarter) was $7,587,973,100.






On September 6, 2013, there were 111,835,283 outstanding shares of the registrant’s common stock, $.10 par value.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s proxy statement for the 2013 annual meeting of shareholders, scheduled to be held on December 11, 2013 (hereinafter referred to as the “Proxy Statement”), are incorporated by reference into Part III of this report. 






TABLE OF CONTENTS

 
 
Page No.
 
 
 
 
 
 
 
 






PART I
 
ITEM 1. BUSINESS.
 
As used herein, the terms “we,” “us,” “our,” the “Company,” or “Pall,” unless the context otherwise requires, mean Pall Corporation and its subsidiaries.
General
We are a leading supplier of filtration, separation and purification technologies. Our products are used to remove solid, liquid and gaseous contaminants from a variety of liquids and gases, and are principally made by us, using our engineering capability, fluid management expertise, proprietary filter media and manufacturing expertise.
Our products are used across a wide array of applications, including to:
discover, develop, validate and produce biotechnology drugs and make vaccines;
protect critical care hospital patients with infection control devices;
enhance the quality and efficiency of manufacturing processes;
keep equipment (such as manufacturing and mining equipment and airplanes) running efficiently; and
produce safe drinking water and protect the environment.
We have more than a 60-year history of commercializing innovative products and continue to develop new materials and technologies for our customers and their increasingly difficult fluid filtration, purification and separation challenges. We have an array of core materials and technologies that can be applied in many ways to solve complex fluid separation challenges.
Our proprietary materials and technologies, coupled with our ability to engineer them into useful forms and place them into fully integrated systems, are the cornerstone of our capabilities. Our deep customer process knowledge and related engineering know-how enable us to provide our customers with products that are well matched to their needs. These capabilities also allow us to develop new and innovative products and enter new markets.
Global drivers for the filtration, separation and purification market include:
growth of the use of large-molecule biopharmaceuticals;
need for anti-infective products in hospitals and by other medical providers;
increased sophistication of semiconductor manufacturing;
higher efficiency performance mechanical equipment and factory processes;
urbanization and related infrastructure and environmental investments;
changes in global demographics with aging population;
global growth of the middle class driving increasing standards of living; and
increasing government regulations, particularly with respect to pharmaceuticals and the environment.
Business and Strategy
We serve customers through two businesses globally: Life Sciences and Industrial. The Life Sciences business group is focused on developing, manufacturing and selling products to customers in the BioPharmaceutical, Food & Beverage and Medical markets. The Industrial business group is focused on developing, manufacturing and selling products to customers in the Process Technologies, Aerospace and Microelectronics markets.
These all require more efficient and ever finer levels of filtration, separation and purification. We have a broad portfolio of products that are sold into diversified markets around the globe. Our strategy for growth includes expansion in high-growth geographies such as Asia, Eastern Europe, the Middle East, Africa and Latin America as well as continuing to focus on high-growth markets such as biotechnology, diagnostics, cell therapy, vaccine production, microelectronics, next-generation aircraft, energy and water.
We actively pursue markets and applications in which our products can make a substantial difference to customers. We especially target projects in which our integrated filtration, purification and separation solutions are able to enhance performance and economics. This strategy leverages our resources and capabilities to help our customers improve operating efficiencies within their processes. We make extensive use of our engineering and scientific expertise in fluid management to provide unique and cost-effective solutions for customers.

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Another key strategy for us, in addition to organic growth through pursuit of high growth markets and applications, is that we expect to use our strong cash generation and balance sheet capacity for relevant acquisitions. We evaluate potential targets in a disciplined manner for strategic fit and financial returns.
Our products primarily consist of:
Consumables. Consumable filtration products are principally filters made with our proprietary filter media produced by chemical film casting, melt blowing of polymer fibers, papermaking and metallurgical processes, as well as smaller capital goods products, including housings; and
Systems. Systems typically include our proprietary consumable filtration and associated hardware. When fully commissioned, we generally expect these systems to provide an ongoing annuity stream for our consumables.
Our consumables sales constituted 87% of our sales and systems accounted for 13% in fiscal year 2013. Our consumables typically are either used in a system sold by us or a third-party, or are integrated in a customer’s own process infrastructure and do not require a systems purchase for their use.
Life Sciences Segment
Our Life Sciences technologies facilitate the process of drug discovery, development, regulatory validation and production, and are used extensively in research laboratories, and the pharmaceutical and biotechnology industries. We also supply products and technologies for food and beverage industries and in hospitals at the point of patient care. We sell into these markets through our direct sales force as well as distributors.
Consumables sales accounted for 92% of Life Sciences segment sales, and systems sales accounted for 8% in fiscal year 2013. This compares to 90% and 10%, respectively, in fiscal year 2012.
Key requirements of our Life Sciences customers include: safety, quality, efficacy, ease of use, technical support, and price.
BioPharmaceuticals Market
We sell a broad line of filtration and purification technologies, associated hardware and engineered systems primarily to pharmaceutical and biotechnology companies for use in the development and commercialization of chemically synthesized and biologically derived drugs, plasma and vaccines. We provide a broad range of advanced solutions for each critical stage of drug development through drug production. In addition, our validation services assist drug manufacturers through the regulatory process to commercialization.
The fastest growing part of this market is the biotechnology industry, representing an increasingly important portion of total BioPharmaceuticals sales. Biotechnology drugs, plasma and biologically derived vaccines are filtration and purification intensive. A key growth driver is increasing adoption of single-use processing technologies for drug production as a replacement for “hard-piped” steel factories. Disposable single-use systems provide customers many advantages including smaller capital outlays and flexible use of manufacturing floor space. They reduce the risk of cross-contamination between batches and eliminate costly and time-consuming cleaning and cleaning validation steps.
Our laboratory product line is used in areas such as drug research and discovery, quality control testing and in environmental monitoring applications for a host of industries. In the Americas and Europe, laboratory products are sold to customers principally through our distribution partner, VWR International.
Principal competitors in the BioPharmaceuticals market include Merck Millipore (a division of Merck KGaA), The Sartorius Group, 3M Purification and GE Healthcare (a unit of General Electric Company (“GE”)).
Food & Beverage Market
Within the Food & Beverage market, we serve the filtration needs of the beer, wine, dairy, alcohol-free beverage, bottled water, and food ingredient markets. Our comprehensive product portfolio and capabilities are used in manufacturing processes to help customers ensure the quality of their products while lowering operating costs and minimizing waste.
Principal competitors in the Food & Beverage market include 3M Purification, Pentair, Inc., Filtrox Group, The Sartorius Group, Eaton Corporation and Parker Domnick Hunter (a division of Parker Hannifin).

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Medical Market
Our medical products help control the spread of infections in hospitals. Hospital-acquired infections are a growing problem for patients and the world’s health care systems. Products such as our breathing circuit and intravenous filters, and our point-of-use Pall-Aquasafe™ water filters help protect people from these infections. Our cell therapy product portfolio provides enabling technologies for the emerging regenerative medicine market.
Principal competitors in the Medical market include Merck Millipore, GE Healthcare, Teleflex Incorporated, Covidien plc and Intersurgical, Ltd.
As described in detail in Note 19 (Discontinued Operations) to the accompanying consolidated financial statements, on August 1, 2012, we sold certain assets of our blood collection, filtration and processing product line (the “Blood Product Line”) to Haemonetics Corporation (“Haemonetics”). The Blood Product Line has been reported as a discontinued operation in our accompanying consolidated financial statements, and all discussions regarding our results of operations throughout this Form 10-K are on a continuing operations basis.

Industrial Segment
We provide enabling and process-enhancing technologies throughout the industrial marketplace. These include the Process Technologies, Aerospace and Microelectronics markets. We have the capability to provide customers with integrated solutions using our proprietary consumable filtration products for their process fluids. We also supply associated hardware and engineered systems. Virtually all of the raw materials, process fluids and waste streams that course through industry are candidates for multiple stages of filtration, separation and purification.
Consumables sales accounted for 82% of Industrial segment sales, and systems sales accounted for 18% in fiscal year 2013. This compares to 82% and 18%, respectively, in fiscal year 2012.
Key product requirements of our Industrial customers include: product efficiency, performance and quality, service and price.
Process Technologies Market
Process Technologies consists of a broad range of end-markets, including producers and users of energy, oil, gas, renewable and alternative fuels, power, chemicals and water. This market also includes what we refer to as the Machinery & Equipment submarket, consisting of producers of mobile equipment and trucks, pulp and paper, automobiles and metals.
Within these end-markets, demand is driven by end users and original equipment manufacturers (“OEM”) working to increase production and efficiency, reduce costs, produce cleaner burning fuels, conserve water, meet environmental regulations and develop alternative fuel sources.
Sales to Process Technologies customers are made through our sales force, distributors, manufacturers’ representatives and architectural and engineering firms.
Principal competitors in the Process Technologies market include Donaldson Company, Inc., Parker Hannifin Corporation, CLARCOR Inc., HYDAC International GmbH, GE Infrastructure (a unit of GE), Pentair, Inc., 3M Purification, U.S. Filter (a unit of Siemens AG) and ESCO Technologies Inc.
Aerospace Market
We sell filtration and fluid monitoring equipment to the Aerospace industry for use on commercial and military aircraft, marine and land-based military vehicles to help protect critical systems and components. Demand typically is driven by passenger air miles flown, military budgets and production and demand for new military and commercial aircraft.
We sell to customers through a combination of direct sales to airframe manufacturers and other customers, including the United States (“U.S.”) military, and through our distribution partner, Satair A/S, to commercial airlines for the commercial aerospace “aftermarket.”
Competition varies by product and application. Principal competitors in the Aerospace market include Donaldson Company, Inc. and ESCO Technologies Inc.

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Microelectronics Market
We sell highly sophisticated filtration and purification technologies for the semiconductor, data storage, graphic arts, advanced display and electronic components markets. We provide a comprehensive suite of contamination control solutions for chemical, gas, water, chemical mechanical polishing and photolithography processes to meet the needs of this demanding industry. Our products help enable the production of tablet computers, smart phones, computer gaming consoles, MP3 players, flat screen TVs and monitors and ink jet printers and cartridges. Newer applications served by our Microelectronics business include the production of solar cells and the emerging “high bright” LED market.
We sell to customers through a combination of our direct sales force, distributors and manufacturers’ representatives.
Principal competitors in the Microelectronics market include Entegris, Inc. and Mott Corporation.

* * *
For financial information by operating segment and geography, please see Note 18 (Segment Information and Geographies) to the accompanying consolidated financial statements and the information under the caption “Segment Review” in Management’s Discussion and Analysis of Financial Condition and Results of Operations (Part II - Item 7. of this report).
Backlog
The table below presents our total backlog by market as well as the amount of that backlog expected to be shipped during fiscal year 2014.
 
 
Total Backlog at July 31, 2013
 
Percentage Shippable
 
Total Backlog at July 31, 2012
BioPharmaceuticals
 
$
191,266,000

 
99
%
 
$
156,594,000

Food & Beverage
 
33,365,000

 
98
%
 
40,931,000

Medical
 
23,761,000

 
98
%
 
22,077,000

Total Life Sciences
 
248,392,000

 
99
%
 
219,602,000

Process Technologies
 
302,571,000

 
85
%
 
374,647,000

Aerospace
 
151,504,000

 
74
%
 
165,450,000

MicroElectronics
 
29,879,000

 
100
%
 
31,977,000

Total Industrial
 
483,954,000

 
82
%
 
572,074,000

Total Pall
 
$
732,346,000

 
88
%
 
$
791,676,000

Research and Development
Our research and development activities are primarily sponsored by us alone and are largely directed at the commercialization of our core technologies. We also focus on basic research of core filtration media and ever-improving the efficacy of filtration devices.
Research and development expenses totaled $94,216,000 in fiscal year 2013, $82,932,000 in fiscal year 2012 and $80,506,000 in fiscal year 2011.
Customers
No one customer accounted for 10% or more of the Company’s consolidated sales in fiscal years 2013, 2012, or 2011. Accordingly, our business is not dependent on any single customer or group of customers.

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Competition
The competition is intense in all of our markets and includes numerous large companies and many smaller regional competitors. In some instances, our primary competition comes from alternative, often older technologies, such as chemical additives, sand filtration, and pasteurization as opposed to the finer level of membrane filtration that we provide. In many markets, there are significant barriers to entry limiting the number of qualified suppliers. These barriers result from stringent product performance standards, product qualification protocols and requirements for consistent levels of global service and support. Our broad array of materials and product designs coupled with our engineering and manufacturing expertise and global reach enable us to provide customers with differentiated product performance and value, and global customer support.
Compliance with Environmental and Other Governmental Regulations
We are in substantial compliance with federal, state and local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. To date, compliance with environmental matters has not had a material effect upon our capital expenditures or competitive position. For a further description of environmental matters in this report, see Note 14, Contingencies and Commitments, to the accompanying consolidated financial statements.
Employees and Employee Relations
At July 31, 2013, we employed approximately 9,800 persons. Some of our employees around the world are covered by collective bargaining agreements and/or are represented by unions or workers’ councils. We believe we generally have good relations with our employees.
Raw Materials
The vast majority of the raw materials and/or components that we use in the production of our products are available from multiple sources. A limited number of such purchased materials are proprietary or otherwise sole sourced; primarily those which are plastic resin based. Although we believe we could obtain reasonably equivalent materials should supply become restricted or made unavailable, it remains a possibility our supply chain could be interrupted while we identify, evaluate, and obtain certification on such satisfactory substitutes. Steps are being taken toward implementing a global supply chain continuity plan with the initial focus of mitigating risks regarding single source suppliers.
Intellectual Property
We have a robust intellectual property portfolio comprised of patents, proprietary trade secrets and know-how, trademarks, and licensed technology. We own numerous U.S. and foreign patents directed to filtration materials, devices, systems, and improvements and applications of these technologies; and have numerous patent applications pending in the U.S. and abroad. We possess a wide array of proprietary trade secret technology and know-how directed to our manufacturing operations and quality systems, business methods and competitive intelligence. In addition to our patent position and trade secrets, we also hold numerous U.S. and foreign trademarks and have applications pending for registration of trademarks throughout the world. Finally, we also license intellectual property rights from third parties, some of which bear royalties and are terminable in specified circumstances. We believe that our patents, proprietary trade secrets and know-how, trademarks, and licensed technology are important to our competitive strength. We believe that our trade secrets and know-how described above coupled with our continuous product improvement innovations create barriers to entry from competitors. We, therefore, do not believe that the expiration of any individual patent or any patents due to expire in the foreseeable future will have a material impact on our business, financial condition or results of operations in any one year.
Company Information
Pall Corporation was incorporated in New York in 1946.
We are subject to the informational requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). We therefore file periodic reports, proxy statements and other information with the United States Securities and Exchange Commission (“SEC”). Such reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549, or by calling the SEC at (800) SEC-0330. In addition, the SEC maintains an internet website (www.sec.gov) that contains reports, proxy and information statements and other information.

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Our website address is www.pall.com. In the Investor Relations Section of our website, we make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Financial and other information can also be accessed on our website.
Copies of financial and other information are also available free of charge by calling (516) 484-5400 or by sending a request to Pall Corporation, Attn: Investor Relations, 25 Harbor Park Drive, Port Washington, NY, 11050. Information on our website is not incorporated into this Form 10-K or our other securities filings and is not a part of them.
EXECUTIVE OFFICERS OF THE REGISTRANT:
Name
 
Age(1)
 
Current Positions Held
 
First Appointed an Executive Officer
Lawrence D. Kingsley
 
50
 
President and Chief Executive Officer
 
2011
Akhil Johri
 
52
 
Chief Financial Officer
 
2013
Michael Egholm, Ph.D
 
50
 
Chief Technology Officer
 
2012
Yves Baratelli
 
48
 
Group Vice President and President, Life Sciences
 
2010
Ruby Chandy
 
51
 
Group Vice President and President, Industrial
 
2012
Wolfgang Platz
 
55
 
President, Pall Europe
 
2011
Eric Garnier
 
52
 
President, Pall Asia
 
2012
Roya Behnia
 
47
 
Senior Vice President, General Counsel and Corporate Secretary
 
2012
Kenneth V. Camarco
 
50
 
Senior Vice President, Global Operations and Business Systems
 
2012
H. Alex Kim
 
42
 
Senior Vice President, Business Development and Strategic Planning
 
2012
Linda Villa
 
64
 
Chief Human Resources Officer
 
2012
     (1)  Age as of September 10, 2013.
None of the persons listed above is related.
Lawrence D. Kingsley has served as President and Chief Executive Officer since October 2011. Prior to joining Pall, Mr. Kingsley served as President and Chief Executive Officer of IDEX Corporation (“IDEX”) from March 2005 until October 2011, and as Chairman of IDEX from April 2006 until December 2011.
Akhil Johri has served as Chief Financial Officer since May 2013. Prior to joining Pall, Mr. Johri held various executive positions of increasing responsibilities during his 26-year tenure with United Technologies Corporation (“UTC”), most recently Vice President of Finance and Chief Financial Officer of UTC’s Propulsion and Aerospace Systems Group from November 2011 to April 2013 and Vice President Financial Planning and Investor Relations from May 2009 to October 2011.
Michael Egholm, Ph.D. was appointed Chief Technology Officer in June 2010. Prior to joining Pall, Dr. Egholm served in various roles for 454 Life Sciences, a center of excellence at Roche Applied Science, including as Vice President of Research and Development, Vice President of Molecular Biology and most recently, Chief Technology Officer from 2008 to 2010.
Yves Baratelli has served as Group Vice President and President, Life Sciences, since May 2010. Mr. Baratelli began his employment with Pall in 2002 as President of Pall Medical, Europe. He was promoted to President of Pall Life Sciences Europe two years later and thereafter, assumed the additional responsibility for Pall Life Sciences Asia.
Ruby Chandy has served as Group Vice President and President, Industrial, since April 2012. Prior to joining Pall, Ms. Chandy was Chief Marketing Officer of Rohm and Haas from 2007 until 2009. She subsequently served as Chief Marketing Officer and later as Managing Director at Dow Chemical Company until 2012.

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Wolfgang Platz has served as President, Pall Europe, since March 2012. Mr. Platz began his employment with Pall in 1981 as a Sales Engineer. He has held many management positions with the Company, including President, Food and Beverage, President Industrial, Europe, and President, Pall Industrial.
Eric Garnier has served as President, Pall Asia since February 2011. Mr. Garnier began his employment with the Company in 2004 as President, Pall Medical Europe, and served in increasingly senior positions including Vice President Life Sciences, South Europe and President, Life Sciences, Asia.
Roya Behnia has served as Senior Vice President, General Counsel and Corporate Secretary since June 2012. Prior to joining Pall, Ms. Behnia served as Senior Vice President, General Counsel and Secretary of Rewards Network Inc. from 2006 to 2010. Ms. Behnia served as Assistant General Counsel and Group General Counsel of SPX Corporation from 2001 to 2005.
Kenneth V. Camarco was appointed Senior Vice President of Global Operations and Business Systems in March 2012. Prior to joining Pall, Mr. Camarco was President and Owner of WaxWing Group, LLC, a strategic business advisory practice. Mr. Camarco held several management positions with Cooper Industries, Ltd., including serving as President of Cooper Notification from 2006 to 2009.
H. Alex Kim was appointed Senior Vice President, Business Development and Strategic Planning in August 2012. Prior to joining Pall, Mr. Kim served in various roles with Danaher Corporation (“Danaher”) since 2002, most recently, from 2007 to 2012, as Vice President of Business Development for Danaher’s Water Quality Group.
Linda Villa has served as Chief Human Resources Officer since March 2012. Ms. Villa began her employment with Pall in 2008 as Executive Vice President, Human Resources. Previously, Ms. Villa served as Executive Vice President, Human Resources and Corporate Security at Telcordia Technologies, Inc.
None of the above persons has been involved in any legal proceeding required to be disclosed by Item 401(f) of Regulation S-K during the past ten years.
ITEM 1A. RISK FACTORS.
The risk factors described below identify what we believe to be the most significant risks that could materially adversely affect our financial and/or operational performance. These risk factors should be considered and evaluated together with information incorporated by reference or otherwise presented elsewhere in this Form 10-K. Additional risks not currently known to us or that we believe are immaterial also may impair our business, financial condition, results of operation or cash flows.
Disruptions in the supply of raw materials and key components for our products from suppliers, including limited or single source suppliers, could have an adverse effect on the results of our business operations and could damage our relationship with customers.
The manufacturing of our products is dependent on an adequate supply of raw materials and key components. Our ability to maintain an adequate supply of such materials and components, especially those materials and components that are single-sourced or have a limited number of suppliers (primarily those which are plastic resin based), could be impacted by the availability and price of those raw materials and components and related commodities and maintaining relationships with key suppliers. Even where multiple sources of materials and components are available, the quality of the alternative materials (including the composition of such supplies), regulatory and contractual requirements to qualify materials for use in manufacturing, and the time required to establish new relationships with reliable suppliers could result in manufacturing delays and possible loss of sales. If our supply of raw materials and key components is adversely affected, our relationship with current and prospective customers could be damaged, a short-fall in our expected sales could occur and our operating results and financial condition could be adversely affected.

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Terrorist acts, conflicts and wars or natural disasters may adversely affect our business, financial condition and results of operations.
While we have taken precautions to prevent production and service interruptions at our global facilities, the occurrence of a major earthquake, fire, flood, power outage or other catastrophic event or natural disaster could disrupt or delay critical business operations, which may result in significant liability to customers, cause reputational damage or have a material adverse effect on our business, operating results or financial condition. Of note are our manufacturing facilities located along the Florida coast line, United States Eastern seaboard and Japan, which have experienced and weathered significant storms and other natural disasters over the last few years.
We operate with a large international footprint. As such, we are subject to increased risk of damage or disruption to our business, employees, facilities, suppliers, distributors or customers due to terrorist acts, conflicts, acts of wars or political instability (wherever located around the world). The potential for future terrorist attacks, the national and international responses to terrorist attacks, political instability, and other acts of war or hostility have created many economic and political uncertainties, which could adversely affect our business. Any such events could decrease the demand for our products, make it difficult or impossible to deliver our products to customers or to receive materials from suppliers or create delays and inefficiencies in our supply chain, which in turn adversely affects our business, financial condition or results of operations.
Our international operations are subject to special U.S. and foreign government laws and regulations, such as the Foreign Corrupt Practices Act and the U.K. Bribery Act, and regulations and procurement policies and practices, including regulations to import-export control, which may expose us to liability or impair our ability to compete in international markets.
Our international operations are subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”), the U.K. Bribery Act and similar laws and regulations that prohibit improper payments or offers of payments to foreign governments and their officials and political parties business entities for the purpose of obtaining or retaining business. We have operations and transact business with governmental customers in countries known to experience corruption. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, distributors, consultants or contractors that could be in violation of various laws, including the FCPA, even though these parties are not always subject to our control. We are also subject to import-export control regulations restricting the import-export of certain components and products, including the SEC rules for disclosing use of conflict minerals.
Although we have developed and instituted a corporate compliance program, we cannot guarantee that our employees, distributors, consultants or contractors are or will be in compliance with all potential applicable U.S. federal and state or foreign regulations and/or laws. If our agents fail to comply with the FCPA and similar anti-bribery laws and regulations or applicable import-export control regulations, we could be subject to substantial civil and criminal penalties, including fines and incarceration for responsible individuals, and the possible loss of export or import privileges which could have a material adverse effect on our business and results of operations.
Emerging markets are a focus of our international growth strategy and we may be adversely affected by the greater economic, political, social and regulatory instability, and other risks characteristic of doing business in emerging markets.
Our strategy to grow our business includes continued expansion of international activities within developing markets and areas, such as Asia, Eastern Europe, the Middle East, Africa and Latin America. In some cases, countries in these regions have greater political and economic volatility, greater vulnerability to infrastructure and labor disruptions and differing local customer product requirements than our other markets. Operating and seeking to expand business in a number of different regions and countries exposes us to multiple and potentially conflicting cultural practices, business practices and legal, compliance and regulatory requirements that are subject to change, including those related to tariffs and trade barriers, investments, property ownership rights, taxation and repatriation of earnings. Such expansion efforts may also require the use of capital and other resources of ours that could be invested in other areas. As these emerging geographic markets become more important to us, our competitors are also seeking to expand their production capacities and sales in these same markets, which may lead to industry overcapacity that could adversely affect pricing, volumes and financial results in such markets. These risks and uncertainties may adversely impact our ability to implement our business strategy in these markets, and as a result, our sales growth and operating profits may be adversely affected.

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Fluctuations in foreign currency exchange rates and interest rates may materially affect operating results.
In fiscal year 2013, we derived approximately 74% of sales from outside the U.S. Although sales and expenditures outside the U.S. with third parties are typically made in the local currencies of those countries providing a natural hedge against fluctuations in foreign currency rates, we retain significant exposure to the value of foreign currencies relative to the U.S. dollar and the currencies of inter-company trading partners. Accordingly, operating results may be materially affected by changes in foreign currency rates. The primary foreign currency exposures relate to adverse changes in the U.S. dollar compared to each of the Euro, the British Pound, the Brazilian Real, the Japanese Yen, the Australian Dollar, the Canadian Dollar, the Swiss Franc and the Singapore Dollar, as well as adverse changes in the relationship of the British Pound to the Euro.
Our debt portfolio was approximately 27% variable rate and cash and cash equivalents was 100% variable rate at July 31, 2013. Pension obligations, and attendant pension expense, are recognized on a discounted basis using long-term interest rates. Accordingly, fluctuations in short and long-term interest rates may also materially affect operating results.
If we experience a significant disruption in, or a breach in security of, our information technology systems or if we fail to implement, manage or integrate new systems, software and technologies successfully, it could harm our business.
Our information technology (“IT”) systems are an integral part of our business. We depend on our IT systems to process transactions, manage logistics, keep financial records, prepare our financial reporting and operate other critical functions. Security breaches, cyber-attacks or other serious disruption of our IT systems can create systemic disruptions, shutdowns or unauthorized disclosure of confidential information. If we are unable to prevent or adequately respond to such breaches, attacks or other disruptions, our operations could be adversely affected or we may suffer financial or reputational damage.
In addition, our ability to effectively implement our business plans in a rapidly evolving market requires effective planning, reporting and analytical processes and systems. We are improving and expect that we will need to continue to improve and further integrate our IT systems, reporting systems and operating procedures on an ongoing basis. If we fail to do so effectively, it could adversely affect our ability to achieve our objectives.
We may not be able to successfully complete or integrate acquisitions.
We have expressed the intention to undertake acquisitions, in part as a means to obtain new products and new technologies. In the event such acquisitions are undertaken, there is no assurance of our ability to complete any such transactions due to a number of risks and uncertainties, including, but not limited to, competition for opportunities, increase in costs and price for acquisition candidates and the ability to obtain any necessary financing. In the event any acquisitions are completed, we may experience delays or unexpected difficulties in the integration process which could adversely impact our business. Moreover, even if we are successful in integrating acquired businesses, we may not achieve the operating efficiencies and synergies or other expected transaction benefits or such benefits may not be achieved within the expected time frame. Our inability to complete, integrate or gain expected benefits and synergies from acquisitions could adversely impact our operating results, financial condition and ability to obtain our objectives including the impairment of intangible assets recorded at the time of acquisition. Businesses that we acquire may have unknown or contingent liabilities which could adversely affect our business. Although we typically attempt to exclude significant liabilities from transactions and seek indemnification for at least a portion of these matters, we may experience difficulty enforcing those contractual provisions.
Our future growth depends on new products and new technology innovation.
Our future growth depends in part on maintaining our competitive advantage with current products in new and existing markets, as well as our ability to develop new products and technologies to serve such markets. To the extent that competitors develop competitive products and technologies, or new products or technologies which achieve higher customer satisfaction, our business prospects could be adversely impacted. In addition, regulatory approvals for new products or technologies may be required, which approvals may not be obtained in a timely or cost effective manner, adversely impacting our business prospects.
We may be adversely affected by global and regional economic conditions and legislative, regulatory and political developments.
We conduct operations around the globe. We expect to continue to derive a substantial portion of sales and earnings from outside the U.S. The uncertain global macroeconomic environment, particularly the current economic concerns in Europe and Asia wherein we derived approximately 39% and 29% of sales respectively, in fiscal year 2013, and other countries in which we derive significant sales could continue to have a negative impact on demand for our products. The prospects, strength, sustainability and timing of an improvement in the current environment remain uncertain as does the possibility of an economic downturn in the U.S. and other countries around the globe.

12





The uncertainty or deterioration of the global economic environment could adversely affect us. Customers or suppliers may experience cash flow problems and as a result, may modify, delay or cancel plans to purchase our products and suppliers may significantly and quickly increase their prices or reduce their output. Additionally, if customers are not successful in generating sufficient sales or are precluded from securing financing, they may not be able to pay, or may delay payment of, amounts owed to us. Any inability of current and/or potential customers to purchase our products and/or to pay us for our products may adversely affect our sales, earnings and cash flow. Sales and earnings could also be affected by our ability to manage the risks and uncertainties associated with the application of local legal requirements or the enforceability of laws and contractual obligations, trade protection measures, changes in tax laws, regional political instability, war, terrorist activities, severe or prolonged adverse weather conditions and natural disasters as well as health epidemics or pandemics.
We are subject to significant regulatory obligations.
Our operations are subject to a broad array of regulatory requirements globally. In particular, a number of our Life Science business units must satisfy domestic and international standards in the medical, biopharmaceutical and other health sciences areas involving products and technologies which impact human health and safety. In addition, some of our Industrial operations, particularly Aerospace, must meet governmental requirements in terms of contracting, sourcing, financial accounting standards, product testing and reporting. There are also business operations which produce products regulated by import/export regulations because their actual or potential use is considered sensitive and involves substantial licensing and record-keeping obligations. Failure to meet one or more of these various regulatory obligations could have adverse consequences in the event of material non-compliance. Conversely, compliance with these regulatory obligations and the new SEC rules for disclosing use of conflict minerals, may require us to incur significant expenses.
We may be adversely affected by the loss of one or more members of our senior management team or the inability to recruit and retain qualified management personnel.
Our business depends, in large part, on the continued efforts of our senior management team. The unplanned loss of key personnel could negatively impact our ability to manage our business. In addition, if we are unable to hire and retain highly qualified individuals, including those in middle management positions, our business and operations may be impaired or disrupted. There is substantial competition for highly qualified individuals and there is no assurance that we will be successful in attracting or retaining individuals to fill vacant or newly created positions. The resulting gaps in key senior and middle management positions could adversely affect our operations.
Changes in demand for our products and business relationships with key customers and suppliers may affect operating results.
To achieve our objectives, we must develop and sell products that are subject to the demands of our customers. This is dependent on many factors including, but not limited to, managing and maintaining relationships with key customers, responding to the rapid pace of technological change and obsolescence, which may require increased investment by us or result in greater pressure to commercialize developments rapidly or at prices that may not fully recover the associated investment, and the effect on demand resulting from customers’ research and development, capital expenditure plans and capacity utilization. If we are unable to keep up with our customers’ demands, our sales, earnings and operating results may be negatively affected.
Changes in product mix and product pricing may affect our operating results particularly with systems products and associated hardware and devices (together “Capital Goods”) for our consumable filtration products, in which we experience significantly longer sales cycles with less predictable revenue and no certainty of future revenue streams from related consumable product offerings and services.
Our business strategy is partially reliant on sales of Capital Goods. As these are generally sold at lower gross margins than many other products, our overall gross margin could decline if these Capital Goods sales continue to grow as a percentage of total sales and the anticipated future revenue streams from related consumable product offerings and services are not realized. Our Capital Goods generally also experience significantly longer sales cycles and involve less predictable revenue and uncertainty of future revenue streams from related consumable product offerings and services. Current slow growth global business conditions typically affect Capital Goods sales more than consumables sales. In addition, the profitability of our Capital Goods sales depends substantially on the ability of management to accurately estimate the costs involved in manufacturing and implementing the relevant capital product according to the customer’s specifications. Our estimates can be adversely affected by disruptions in a customer’s plans or operations, on-time completion of third party equipment and infrastructure required prior to delivery of our Capital Goods, and unforeseen events, such as manufacturing defects. Failure to accurately estimate our cost of Capital Goods sales can adversely affect the profitability of those sales, and we may not be able to recover lost profits through pricing or other actions.

13





Product defects and unanticipated use or inadequate disclosure with respect to our products could adversely affect our business, reputation and financial statements.
Manufacturing or design defects (including in products or components that we source from third parties), unanticipated use of, or inadequate disclosure of risks relating to, the use of products that we make and sell may lead to personal injury, death or property damage. These events could lead to recalls or alerts relating to our products, result in the removal of a product from the market or result in product liability claims being brought against us. Product recalls, removals and liability claims can lead to significant costs, as well as negative publicity and damage to our reputation that could reduce demand for our products.
We may be unable to deliver our backlog on time, which could affect future sales and profitability and our relationships with customers.
Our ability to meet customer delivery schedules for backlog is dependent on a number of factors including, but not limited to, sufficient manufacturing plant capacity, adequate supply channel access to raw materials and other inventory required for production, an adequately trained and capable workforce, project engineering expertise for certain large projects and appropriate planning and scheduling of manufacturing resources. Many of the contracts we enter into with our customers require long manufacturing lead times and contain penalty clauses related to on-time delivery. Failure to deliver in accordance with customer expectations could subject us to financial penalties, may result in damage to existing customer relationships and could have a material adverse effect on our business, financial condition and results of operations.
Increases in manufacturing and operating costs and/or the ability to achieve the savings anticipated from our structural cost improvement initiatives may affect operating results.
Our costs are subject to fluctuations, particularly due to changes in commodity prices, raw materials, energy and related utilities and cost of labor. The achievement of our financial objectives is reliant on our ability to manage these fluctuations through cost savings or recovery actions and efficiency initiatives.
We continue to pursue a number of structural cost improvement initiatives. These efforts may not improve our financial performance or produce the full efficiencies and benefits we expect due to delays or other factors affecting our execution of these initiatives.
Our operations and products are subject to environmental, health and safety laws and regulations, and violations could adversely affect our operating results.
Our operations and products are subject to environmental laws and regulations that impose limitations on the discharge of pollutants into the environment and establish standards for the use, generation, treatment, storage and disposal of hazardous and non-hazardous wastes. We must also comply with various health and safety regulations in the U.S. and other jurisdictions with our operations and products. We cannot assure that our environmental, health and safety compliance program has been, or will at all times be, effective. Failure to comply with any of these laws could result in civil and criminal, monetary and non-monetary penalties and damage to our reputation. In addition, we cannot provide assurance that our costs of complying with current or future environmental protection and health and safety laws will not exceed our estimates or adversely affect our financial statements.
We currently incur costs and may incur additional costs related to remedial efforts of alleged environmental damage associated with past or current waste disposal practices or other hazardous materials handling practices. We may also become subject to additional remedial or compliance costs due to future events such as changes in existing laws or regulations, changes in agency direction or enforcement policies, developments in remediation technologies, changes in the conduct of our operations and changes in accounting rules. We cannot make assurance that our liabilities arising from past or future releases of, or exposures to, hazardous substances will not exceed our estimates or adversely affect our financial statements and reputation or that we will not be subject to additional claims for cleanup in the future based on our past, present or future business activities.

14





We may not successfully enforce patents or protect proprietary products and manufacturing techniques.
We own numerous patents, trademarks, trade secrets and other intellectual property and licenses to intellectual property owned by others. Some of these patented technologies and other intellectual property require substantial resources to develop. Our intellectual property rights may not be sufficiently broad or otherwise may not provide us with a significant competitive advantage, and patents may not be issued for pending or future patent applications owned by or licensed to us. In addition, steps taken to maintain and protect our intellectual property may not prevent it from being challenged, invalidated, circumvented or designed-around. The failure to obtain or maintain our intellectual property rights or the costs to adequately protect our intellectual property, including costs to detect or prevent circumvention, unauthorized use and enforcement of rights, could adversely impact our competitive position and operating results.
We are subject to a variety of litigation and similar proceedings in the course of our business that could adversely affect our financial statements.
We are subject to various litigations and similar proceedings incidental to our business that arise in the ordinary course of our business, including claims for damages arising out of the use of our products and claims relating to intellectual property matters, employment matters, tax matters, commercial disputes, environmental matters and personal injury. These lawsuits may include claims for compensatory damages, punitive and consequential damages and/or injunctive relief. The defense of these lawsuits may divert management’s attention, we may incur significant expenses in defending these lawsuits and we may be required to pay damage awards or settlements or become subject to equitable remedies that could adversely affect our financial statements. Moreover, any insurance or indemnification rights that we have may be insufficient or unavailable to protect us against such losses and expenses. In addition, developments in legal proceedings in any given period may require us to revise our expectations regarding the outcome of certain matters or adjust the loss contingency estimate that is recorded in our financial statements, which could adversely affect our results of operations or cash flows in any particular period. It cannot be assured that our liabilities in connection with litigation and similar proceedings will not exceed estimates or adversely affect our financial statements or reputation.
Changes in our effective tax rate may affect financial results.
Fluctuations in our effective tax rate may affect financial results. Our effective tax rate is subject to fluctuation based on a variety of factors, such as:
the geographical mix of income derived from the countries in which we operate;
the nature, timing and impact of permanent or temporary changes in tax rates, laws or regulations; 
the timing and amount of our repatriation of foreign earnings; 
the timing and nature of our resolution of uncertain income tax positions;
acquisitions and dispositions of businesses; and
our success in managing our effective tax rate through the implementation of global tax and cash management strategies.
We operate in numerous countries and are subject to taxation in all of the countries in which we operate. The tax rules and regulations in such countries can be complex and, in many cases, uncertain in their application. In addition to challenges to our tax positions arising during routine audits, disputes can arise with the taxing authorities over the interpretation or application of certain rules to our business conducted within the country involved and with respect to intercompany transactions when the parties are taxed in different jurisdictions.
We are subject to domestic and international competition in all of our global markets.
We are subject to competition in all of the global markets in which we operate. Our achievement of our objectives is reliant on our ability to successfully respond to many competitive factors including, but not limited to, pricing, technological innovations, product quality, customer service, manufacturing capabilities and hiring and retention of qualified personnel. Our inability to compete effectively may adversely affect our operating results.
Restrictive covenants in our debt facilities could adversely affect our business.
Agreements governing our indebtedness include certain covenants, which among other things, can restrict our ability to incur additional indebtedness, make investments and other restricted payments, enter into sale and leaseback transactions, create liens and sell assets. Moreover, certain of these agreements require us to maintain specified financial ratios. These and other covenants in our agreements may restrict our ability to fully pursue our business strategies. Our ability to comply with such covenants may be affected by events beyond our control. Failure to comply with these covenants could result in an event of default which, if not cured or waived, may have a material adverse effect on our financial condition, results of operations and cash flow.

15





ITEM 1B. UNRESOLVED STAFF COMMENTS.
 
None.

ITEM 2. PROPERTIES.
Our primary facilities (i.e., facilities with square footage in excess of 25,000 square feet), which support our Life Sciences, Industrial and Corporate Services Groups, are comprised of facilities whose principal activities relate to manufacturing, research & development and validation, warehousing, and selling, marketing and administration, which in the opinion of management are suitable and adequate to meet our requirements:
Location
 
Owned (Square Footage)

 
Leased (Square Footage)

 
Total (Square Footage)

Americas
 
1,959,000

 
614,000

 
2,573,000

Europe
 
1,733,000

 
44,000

 
1,777,000

Asia
 
126,000

 
777,000

 
903,000

Total
 
3,818,000

 
1,435,000

 
5,253,000


ITEM 3. LEGAL PROCEEDINGS.
Certain legal proceedings in which we are involved are discussed in Note 14, Contingencies and Commitments, to the accompanying consolidated financial statements, which is incorporated herein by reference.
 ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
 
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
The Company’s common stock is listed on the New York Stock Exchange under the symbol PLL. The table below sets forth quarterly data relating to the Company’s common stock prices and cash dividends declared per share for the past two fiscal years.
 
 
Price per share
 
 
 
 
 
 
2013
 
2012
 
Cash Dividends Declared Per Share
 
High

 
Low

 
High

 
Low

 
2013

 
2012

Quarter: 
First
$
65.82

 
$
52.00

 
$
54.08

 
$
39.81

 
$
0.250

 
$
0.175

 
Second
69.05

 
58.18

 
60.75

 
48.86

 
0.250

 
0.210

 
Third
69.17

 
62.72

 
64.55

 
56.91

 
0.250

 
0.210

 
Fourth
73.19

 
64.00

 
59.97

 
49.97

 
0.250

 
0.210

As of September 6, 2013 there were approximately 2,070 holders of record of the Company’s common stock. Dividends are paid when, as and if declared by the board of directors of the Company.

16





PERFORMANCE GRAPH
 The following graph compares the annual change in the cumulative total return on the Company’s common stock during the Company’s last five fiscal years with the annual change in the cumulative total return of the Standard & Poor’s Composite-500 Index and the Standard & Poor’s Industrial Machinery Index (which includes the Company). The graph assumes an investment of $100 on July 31, 2008 (the last trading day of the Company’s fiscal year 2008) and the reinvestment of all dividends paid during the last five fiscal years.

There were no purchases made by or on behalf of the Company or any “affiliated purchaser” of our common stock during the quarter ended July 31, 2013.
 
ITEM 6. SELECTED FINANCIAL DATA.
 
The following table sets forth selected financial data for the last five fiscal years. This selected financial data is not necessarily indicative of results of future operations and should be read in conjunction with Item 7. –Management’s Discussion and Analysis of Financial Condition and Results of Operations and the accompanying consolidated financial statements and related notes included elsewhere in this Form 10-K.
 

17





(In millions, except per share data)
 
2013
 
2012
 
2011
 
2010
 
2009
RESULTS FOR THE YEAR:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
2,648.1

 
$
2,671.7

 
$
2,517.2

 
$
2,185.7

 
$
2,119.6

Cost of sales
 
1,276.1

 
1,291.6

 
1,232.3

 
1,064.2

 
1,094.4

Gross profit
 
1,372.0

 
1,380.1

 
1,284.9

 
1,121.5

 
1,025.2

Selling, general and administrative expenses
 
810.4

 
843.2

 
790.3

 
716.6

 
675.6

Research and development
 
94.2

 
82.9

 
80.5

 
68.8

 
64.8

Restructuring and other charges, net
 
40.2

 
66.9

 
26.5

 
17.7

 
30.7

Interest expense, net (a)
 
15.6

 
20.2

 
18.9

 
14.3

 
28.1

Loss on extinguishment of debt (a)
 

 

 

 
31.5

 

Earnings from continuing operations before income taxes
 
411.6

 
366.9

 
368.7

 
272.6

 
226.0

Provision for income taxes
 
81.6

 
86.0

 
89.5

 
70.2

 
62.4

Net earnings from continuing operations
 
330.0

 
280.9

 
279.2

 
202.4

 
163.6

Earnings from discontinued operations, net of income taxes
 
244.9

 
38.4

 
36.3

 
38.8

 
32.0

Net earnings
 
$
574.9

 
$
319.3

 
$
315.5

 
$
241.2

 
$
195.6

Earnings per share from continuing operations:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
2.93

 
$
2.42

 
$
2.40

 
$
1.72

 
$
1.38

Diluted
 
$
2.89

 
$
2.39

 
$
2.36

 
$
1.70

 
$
1.37

Earnings per share from discontinued operations:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
2.17

 
$
0.33

 
$
0.31

 
$
0.33

 
$
0.27

Diluted
 
$
2.14

 
$
0.32

 
$
0.31

 
$
0.33

 
$
0.27

Earnings per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
5.10

 
$
2.75

 
$
2.71

 
$
2.05

 
$
1.65

Diluted
 
$
5.03

 
$
2.71

 
$
2.67

 
$
2.03

 
$
1.64

 
 
 
 
 
 
 
 
 
 
 
Dividends declared per share
 
$
1.000

 
$
0.805

 
$
0.685

 
$
0.625

 
$
0.565

 
 
 
 
 
 
 
 
 
 
 
Capital expenditures(b)
 
$
110.2

 
$
158.9

 
$
160.8

 
$
136.3

 
$
133.0

Depreciation & amortization of long-lived
     assets(b)
 
$
106.3

 
$
111.1

 
$
98.1

 
$
93.6

 
$
89.4

 
 
 
 
 
 
 
 
 
 
 
YEAR-END POSITION:
 
 
 
 
 
 
 
 
 
 
Working capital(c)
 
$
1,321.0

 
$
1,000.3

 
$
1,019.2

 
$
1,065.6

 
$
853.1

Property, plant and equipment(c)
 
774.9

 
751.0

 
794.6

 
706.4

 
681.7

Total assets
 
3,472.8

 
3,347.9

 
3,232.4

 
2,999.2

 
2,840.8

Long-term debt, net of current portion
 
467.3

 
490.7

 
492.0

 
741.4

 
577.7

Total liabilities
 
1,657.9

 
1,837.9

 
1,742.6

 
1,816.9

 
1,726.2

Stockholders’ equity
 
1,814.9

 
1,510.0

 
1,489.8

 
1,182.3

 
1,114.6

(a)
Refer to Note 8, Notes Payable and Long-term Debt, to the accompanying consolidated financial statements.
(b)
Includes capital expenditures and depreciation & amortization of both continuing and discontinued operations.
(c)
The year-end position figures for fiscal year 2012 reflect the impact of classifying assets held for sale related to the previously discussed sale of certain assets of the Blood Product Line as current assets, including amounts that had been classified as property, plant and equipment and goodwill in prior fiscal years. The year-end position figures for fiscal year 2013 reflect the impact of the net proceeds from the sale of the Blood Product Line.


18





ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion should be read together with the accompanying consolidated financial statements and notes thereto and other financial information in this Form 10-K. Certain information is presented below excluding the impact of foreign exchange translation (“FX”) (i.e., had exchange rates not changed year over year). We consider year-over-year change excluding FX to be an important measure because by excluding the impact of volatility of exchange rates, underlying impact of volume and rate changes are evident. Dollar amounts discussed below are in thousands, unless otherwise indicated, except per share dollar amounts. In addition, per share dollar amounts are discussed on a diluted basis. We utilize certain estimates and assumptions that affect the reported financial information as well as to quantify the impact of various significant factors that contribute to the changes in our periodic results included in the discussion below.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The matters discussed in this Annual Report on Form 10-K contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future. All statements regarding future performance, earnings projections, earnings guidance, management’s expectations about our future cash needs and effective tax rate, and other future events or developments are forward-looking statements. Forward-looking statements 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. They 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 this Form 10-K. We make these statements as of the date of this disclosure and undertake no obligation to update them, whether as a result of new information, future developments or otherwise.
OVERVIEW
We are a leading supplier of filtration, separation and purification technologies. Our products are used to remove solid, liquid and gaseous contaminants from a variety of liquids and gases, and are principally made by us, using our engineering capability, fluid management expertise, proprietary filter media and manufacturing expertise. Our products primarily consist of consumable filtration products and filtration systems.
We serve customers through two businesses globally: Life Sciences and Industrial. The Life Sciences business group serves customers in the BioPharmaceutical, Food & Beverage and Medical markets. The Industrial business group serves customers in the Process Technologies, Aerospace and Microelectronics markets. We operate globally in three geographic regions: the Americas; Europe (in which we include the Middle East and Africa); and Asia.
Our reporting currency is the U.S. Dollar. Because we operate through subsidiaries or branches that transact in over thirty foreign currencies around the world, our earnings are exposed to translation risk when the financial statements of the subsidiaries or branches, as stated in their functional currencies, are translated into the U.S. Dollar. We estimate that foreign exchange translation had a 10 cent impact on earnings per share in fiscal year 2013.
On August 1, 2012, we sold our blood collection, filtration and processing product line (the “Blood Product Line”) to Haemonetics Corporation for $550,000. We received a total of approximately $535,000 upon closing, with the balance payable upon transfer of related blood media manufacturing capabilities and assets. The Blood Product Line was a component of our Life Sciences segment and has been reported as a discontinued operation for all periods presented.
On June 7, 2012, we announced a $100,000, multi-year strategic cost reduction initiative. Half of the initiative was executed in fiscal 2013, with the balance to occur ratably over fiscal 2014-2015. As part of our continued efforts to more strategically align our regional facilities and appropriately structure ourselves to cost-effectively deliver high-quality products and superior service to our customers worldwide, we initiated the closure of two of our facilities in the United States (namely, Ann Arbor, Michigan and Fort Myers, Florida). Much of the work done at these sites will be relocated to other operations within the Americas.


19





RESULTS FROM CONTINUING OPERATIONS

Net Sales
By Segment
 
2013
 
 
2012
 
 
2011
 
Life Sciences
 
$
1,309,375

 
 
$
1,253,594

 
 
$
1,184,142

 
Industrial
 
1,338,688

 
 
1,418,062

 
 
1,333,053

 
Total Sales
 
$
2,648,063

 
 
$
2,671,656

 
 
$
2,517,195

 
 
 
 
 
 
 
 
 
 
 
By Product
 
2013
 
 
2012
 
 
2011
 
Consumables
 
$
2,295,685

 
 
$
2,291,691

 
 
$
2,175,459

 
Systems
 
352,378

 
 
379,965

 
 
341,736

 
Total Sales
 
$
2,648,063

 
 
$
2,671,656

 
 
$
2,517,195

 
 
 
 
 
 
 
 
 
 
 
The percentage change in sales year-over-year by segment, with and without the impact of foreign currency translation (“FX”) are presented below:
 
2013 compared to 2012
 
 
2012 compared to 2011
 
By Segment
% Change excluding FX

 
FX

 
Total % Change

 
 
% Change excluding FX

 
FX

 
Total % Change

 
Life Sciences
6.3

 
(1.9
)
 
4.4

 
 
7.3

 
(1.4
)
 
5.9

 
Industrial
(3.9
)
 
(1.7
)
 
(5.6
)
 
 
7.1

 
(0.7
)
 
6.4

 
Total
0.9

 
(1.8
)
 
(0.9
)
 
 
7.2

 
(1.1
)
 
6.1

 
The percentage change in sales year-over-year by product, with and without the impact of FX are presented below:
 
2013 compared to 2012
 
 
2012 compared to 2011
 
By Product
% Change excluding FX

 
FX

 
Total % Change

 
 
% Change excluding FX

 
FX

 
Total % Change

 
Consumables
2.1

 
(1.9
)
 
0.2

 
 
6.2

 
(0.9
)
 
5.3

 
Systems
(6.3
)
 
(1.0
)
 
(7.3
)
 
 
13.4

 
(2.2
)
 
11.2

 
Total
0.9

 
(1.8
)
 
(0.9
)
 
 
7.2

 
(1.1
)
 
6.1

 
2013 Compared with 2012
Sales increased approximately 1% (excluding FX) reflecting growth in the Life Sciences segment, principally driven by the BioPharmaceuticals market, partly offset by weakness in the Process Technologies and Microelectronics markets in the Industrial segment. More details regarding sales by segment can be found in the discussions under the section “Segment Review.”
Looking at sales by product, the approximately 2% increase in consumables sales (excluding FX) reflects solid growth in the Life Sciences segment, principally driven by the BioPharmaceuticals market, largely offset by weakness in the Industrial segment in the Process Technologies and Microelectronics markets. Increased pricing contributed $20,989, or about 90 basis points to consumables sales growth year-over-year, reflecting increases in both segments. The decline in system sales primarily reflects:
weak capital spending by Food & Beverage customers in the Life Sciences segment, and
weakness in Municipal Water, which is part of the Process Technologies market in the Industrial segment, as customers continue to delay projects, given that funds available to the municipalities to support these projects have diminished.

2012 Compared with 2011
Sales grew approximately 7% (excluding FX) attributable to growth in Life Sciences, driven by the BioPharmaceuticals market, and in Industrial, on strength in the Process Technologies and Aerospace markets.

20





Looking at sales by product, the growth in overall consumables sales of approximately 6% (excluding FX) was driven by strong growth in BioPharmaceuticals in the Life Sciences segment, as well as strong growth in the Process Technologies and Aerospace markets in the Industrial segment. Increased pricing contributed $17,733, or about 80 basis points, to consumables sales growth year-over-year, reflecting increases in both segments. The growth in systems sales primarily reflects:
increased capital spend by Pharmaceuticals customers in the Life Sciences segment,
increased spend by Food & Beverage customers in the Life Sciences segment in emerging markets, and
increased spend in the Process Technologies market in the Industrial segment as customers in the oil and gas sectors continued to invest to increase output.

Gross Margin
 
 
2013
 
 
2012
 
 
2011
 
Gross Profit
 
$
1,372,003

 
 
$
1,380,098

 
 
$
1,284,912

 
Gross Margin (% of sales)
 
51.8

 
 
51.7

 
 
51.0

 
 
 
 
 
 
 
 
 
 
 
% Change year-over-year
 
(0.6
)
 
 
7.4

 
 
 
 

2013 Compared with 2012
Gross profit dollars decreased $8,095, which is in-line with the reduction in sales. The increase in overall gross margin of 10 basis points reflects a combination of many offsetting factors. Factors that improved gross margin include pricing, as noted above, lower obsolescence and warranty costs and our consumables products, which typically have higher margins than our systems products, comprising a larger proportion of our total sales. These were largely offset by unfavorable consumables market mix. More details regarding gross margin can be found in the discussions under the section “Segment Review.”
2012 Compared with 2011
The increase in overall gross margin of 70 basis points was primarily driven by favorable pricing, as noted above, and the benefit of sales channel changes from distributor to direct sales, as well as favorable consumables market mix. Manufacturing cost savings achieved were offset by inflation in manufacturing costs and unfavorable overhead absorption. More details regarding gross margin can be found in the discussions under the section “Segment Review.”
Selling, General and Administrative
 
 
2013
 
 
2012
 
 
2011
 
Selling, general and administrative
 
$
810,358

 
 
$
843,221

 
 
$
790,279

 
% of sales
 
30.6

 
 
31.6

 
 
31.4

 
 
 
 
 
 
 
 
 
 
 
% Change year-over-year
 
(3.9
)
 
 
6.7

 
 
 
 

2013 Compared with 2012
The decrease in selling, general and administrative expenses (“SG&A”) reflects savings generated by our structural cost improvement initiatives, as well as a favorable foreign currency translation of approximately 150 basis points. These decreases were partly offset by:
incremental depreciation expense resulting from the go-live of the last significant phase of our ERP system implementation;
incremental costs related to ForteBio (which was acquired in the third quarter of fiscal year 2012);
select investments in high growth markets; and
inflationary increases in payroll and related costs.

2012 Compared with 2011
The increase in SG&A primarily reflects the following factors:
project related costs in information technology incurred as we concluded the last significant phase of our global ERP system implementation;

21





increased expenses driven by resource deployment related to regional expansion in Latin America (including incremental costs related to an acquisition in Brazil), the Middle East and Asia;
incremental costs related to the acquisition of ForteBio;
costs related to bringing Industrial into our European and Asian headquarters; and
inflationary increases in payroll and related costs.
These increases were partly offset by favorable foreign currency translation of approximately 100 basis points and savings realized from our cost reduction programs.
Research & Development
 
 
2013
 
 
2012
 
 
2011
 
Research and development
 
$
94,216

 
 
$
82,932

 
 
$
80,506

 
% of sales
 
3.6

 
 
3.1

 
 
3.2

 
 
 
 
 
 
 
 
 
 
 
% Change year-over-year
 
13.6

 
 
3.0

 
 
 
 

2013 Compared with 2012
The increase in research and development expenses (“R&D”), reflects the earlier announced strategy to increase innovation investment in the Life Sciences and Industrial segments. This was driven by our focus on new product development and innovation, including development of our media and instrumentation capabilities. The year-over-year comparative also reflects spend related to ForteBio (which was acquired in the third quarter of fiscal year 2012).
2012 Compared with 2011
The increase in R&D reflects increased spending in the Life Science segment, including spend related to ForteBio.
Restructuring and Other Charges, Net
 
 
2013
 
 
2012
 
 
2011
 
Restructuring and other charges, net
 
$
40,182

 
 
$
66,858

 
 
$
26,505

 

2013
Restructuring and other charges (“ROTC”) reflect the expenses incurred in connection with our structural cost improvement initiatives, impacting both segments as well as the Corporate Services Group. Furthermore, ROTC includes charges related to certain employment contract obligations and an increase to environmental reserves.
2012
ROTC includes expenses incurred in connection with our structural cost improvement initiatives as discussed above. ROTC also includes charges related to certain employment contract obligations. Such charges were partly offset by a gain on the sale of assets.
2011
ROTC includes expenses incurred in connection with the Company’s cost reduction initiatives, including the closure of an Industrial manufacturing facility in Europe. Furthermore, ROTC includes charges related to certain employment contract obligations and an increase to previously established environmental reserves.
The details of ROTC, as well as the activity related to restructuring liabilities that were recorded related to our structural cost improvement initiatives and Industrial cost reduction initiatives, can be found in Note 2, Restructuring and Other Charges, Net, to the accompanying consolidated financial statements.

22





Interest Expense, Net
 
 
2013

 
 
2012

 
 
2011

 
Interest expense, net
 
$
15,621

 
 
$
20,177

 
 
$
18,903

 

2013 Compared with 2012
Interest expense, net, in fiscal years 2013 and 2012 reflect the reversal of accrued interest of $6,704 and $4,435, respectively, primarily related to the resolution of U.S. tax audits. Excluding the benefits described above, interest expense, net, in fiscal year 2013 and fiscal year 2012 would have been $22,325 and $24,612, respectively. The resulting decrease in net interest expense of $2,287 in fiscal year 2013 compared to fiscal year 2012 was primarily driven by a reduction in other income tax related interest expense (excluding those referenced above).

2012 Compared with 2011
Interest expense, net, in fiscal year 2011 reflects the net reversal of $6,184 of accrued interest primarily related to the resolution of U.S. tax audits, partially offset by an interest accrual related to foreign tax matters. Excluding these items and the benefit in fiscal year 2012 described above, net interest expense decreased $475 compared to fiscal year 2011.
Income Taxes
 
 
2013
 
 
2012
 
 
2011
 
Income taxes
 
$
81,664

 
 
$
85,963

 
 
$
89,522

 
Effective tax rate (%)
 
19.8

 
 
23.4

 
 
24.3

 

2013 Compared with 2012
The effective tax rate for fiscal year 2013 reflects a net tax benefit of $7,757 primarily from the resolution of a U.S. tax audit partly offset by the establishment of deferred tax liabilities for the repatriation of foreign earnings. Excluding these impacts, as well as the impact of ROTC and interest discussed above, the effective tax rates for fiscal years 2013 and 2012 would have been 22.0% and 23.2%, respectively. The reduction in the tax rate is a result of the extension of the federal research credit in fiscal year 2013 and a favorable geographical mix of earnings.
During the first quarter of fiscal year 2013, the Internal Revenue Service (“IRS”) concluded its audits of fiscal years 2006 through 2008, including the matter previously disclosed for those years in Note 2, Audit Committee Inquiry and Restatement, to the consolidated financial statements included in the 2007 Form 10-K. In closing the audit, the IRS did not assess any penalties. We will not make any further cash payments to the IRS or receive any refunds with respect to these matters.
2012 Compared with 2011
The effective tax rate for fiscal year 2011 reflects a tax benefit from the resolution of a U.S. tax audit partly offset by tax costs associated with the repatriation of foreign earnings and the establishment of our Asian headquarters in Singapore. Excluding this impact, as well as the impact of ROTC and interest discussed above, the effective tax rates for fiscal years 2012 and 2011 would have been 23.2% and 26.5%, respectively. The decrease in tax rate year-over-year reflects tax benefits associated with our Asian headquarters in Singapore and the expansion of our European headquarters in Switzerland.
Net Earnings
 
 
2013
 
 
2012
 
 
2011
 
Net Earnings
 
$
329,962

 
 
$
280,947

 
 
$
279,197

 
Diluted earnings per share
 
$
2.89

 
 
$
2.39

 
 
$
2.36

 
We estimate that foreign currency translation decreased earnings per share by 10 cents in fiscal year 2013 when compared to fiscal year 2012 and had an immaterial impact on earnings per share in fiscal year 2012 when compared to fiscal year 2011. The decrease in share count in fiscal year 2013 compared to fiscal year 2012 benefited diluted earnings per share in fiscal year 2013 by approximately 9 cents.


23





RESULTS FROM DISCONTINUED OPERATIONS
 
 
2013
 
 
2012
 
 
2011
 
Sales
 
$
8,975

 
 
$
230,826

 
 
$
223,721

 
Net Earnings
 
244,973

 
 
38,362

 
 
36,299

 
Diluted Earnings per share
 
$
2.14

 
 
$
0.32

 
 
$
0.31

 
The increase in net earnings in fiscal year 2013 compared to fiscal year 2012 primarily reflects the gain on the sale of the Blood Product Line. More details regarding discontinued operations can be found in Note 19, Discontinued Operations, to the accompanying consolidated financial statements.

SEGMENT REVIEW

 
 
2013
 
 
2012
 
 
2011
 
Sales:
 
 
 
 
 
 
 
 
 
Life Sciences
 
$
1,309,375

 
 
$
1,253,594

 
 
$
1,184,142

 
Industrial
 
1,338,688

 
 
1,418,062

 
 
1,333,053

 
Total
 
$
2,648,063

 
 
$
2,671,656

 
 
$
2,517,195

 
Segment profit:
 
 
 
 
 
 
 
 
 
Life Sciences segment profit
 
$
319,271

 
 
$
319,312

 
 
$
292,503

 
Industrial segment profit
 
214,798

 
 
198,747

 
 
182,749

 
Total segment profit
 
534,069

 
 
518,059

 
 
475,252

 
Corporate Services Group
 
66,640

 
 
64,114

 
 
61,125

 
ROTC
 
40,182

 
 
66,858

 
 
26,505

 
Interest expense, net
 
15,621

 
 
20,177

 
 
18,903

 
Earnings before income taxes from continuing operations
 
$
411,626

 
 
$
366,910

 
 
$
368,719

 
 
 
 
 
 
 
 
 
 
 


Life Sciences
 
2013
 
% of
Sales
 
2012
 
% of
Sales
 
2011
 
% of
Sales
Sales
$
1,309,375

 
 
 
$
1,253,594

 
 
 
$
1,184,142

 
 
Cost of sales
552,651

 
42.2
 
523,902

 
41.8
 
509,950

 
43.1
Gross margin
756,724

 
57.8
 
729,692

 
58.2
 
674,192

 
56.9
SG&A
375,970

 
28.7
 
357,722

 
28.5
 
332,635

 
28.1
R&D
61,483

 
4.7
 
52,658

 
4.2
 
49,054

 
4.1
Segment profit
$
319,271

 
24.4
 
$
319,312

 
25.5
 
$
292,503

 
24.7
 
 
 
 
 
 
 
 
 
 
 
 


24





SALES:
2013
 
2012
 
2011
By Market and Product
 
 
 
 
 
BioPharmaceuticals
$
812,328

 
$
754,906

 
$
680,951

Food & Beverage
177,633

 
182,294

 
190,898

Medical
208,544

 
195,149

 
200,533

Total Consumables sales
$
1,198,505

 
$
1,132,349

 
$
1,072,382

Systems Sales
110,870

 
121,245

 
111,760

Total Life Sciences Sales
$
1,309,375

 
$
1,253,594

 
$
1,184,142

 
 
 
 
 
 
By Region
 
 
 
 
 
Americas
$
416,170

 
$
384,757

 
$
345,273

Europe
627,647

 
606,397

 
605,539

Asia
265,558

 
262,440

 
233,330

Total Life Sciences Sales
$
1,309,375

 
$
1,253,594

 
$
1,184,142

 
 
 
 
 
 
The percentage change in sales year-over-year, with and without the impact of foreign currency translation (“FX”) are presented below:
 
2013 compared to 2012
 
2012 compared to 2011
SALES % CHANGE
% Change excluding FX

 
FX

 
Total % Change

 
% Change excluding FX

 
FX

 
Total % Change

By Market and Product
 
 
 
 
 
 
 
 
 
 
 
BioPharmaceuticals
9.6

 
(2.0
)
 
7.6

 
12.1

 
(1.2
)
 
10.9

Food & Beverage
(0.3
)
 
(2.3
)
 
(2.6
)
 
(2.5
)
 
(2.0
)
 
(4.5
)
Medical
8.5

 
(1.6
)
 
6.9

 
(1.3
)
 
(1.4
)
 
(2.7
)
Total Consumables sales
7.8

 
(2.0
)
 
5.8

 
7.0

 
(1.4
)
 
5.6

Systems Sales
(7.4
)
 
(1.2
)
 
(8.6
)
 
10.5

 
(2.0
)
 
8.5

Total Life Sciences Sales
6.3

 
(1.9
)
 
4.4

 
7.3

 
(1.4
)
 
5.9

 
 
 
 
 
 
 
 
 
 
 
 
By Region
 
 
 
 
 
 
 
 
 
 
 
Americas
9.0

 
(0.8
)
 
8.2

 
12.1

 
(0.7
)
 
11.4

Europe
4.8

 
(1.3
)
 
3.5

 
3.2

 
(3.1
)
 
0.1

Asia
6.0

 
(4.8
)
 
1.2

 
10.8

 
1.7

 
12.5

Total Life Sciences Sales
6.3

 
(1.9
)
 
4.4

 
7.3

 
(1.4
)
 
5.9

2013 Compared with 2012
Life Sciences consumables sales growth (excluding FX) was driven by strong growth in BioPharmaceuticals, augmented by growth in Medical.
BioPharmaceuticals consumables sales growth reflects continued strength in the biotech sector in all three regions. The ForteBio acquisition (acquired in the third quarter of fiscal year 2012) added approximately $16 million, or 2%, in BioPharmaceuticals consumables sales growth.
Food & Beverage consumables sales were down slightly (excluding FX). This reflects overall softness in Eastern Europe and weakness in the wine sector in France and Australia, partly offset by the impact of geographic expansion in Latin America.
Medical consumables sales growth reflects an increase in sales to hospitals primarily driven by point of use water filtration sales, principally in Europe. Furthermore, media sales, under a supply agreement with the purchaser of our Blood Product Line, contributed approximately 600 basis points to Medical consumables sales growth year-over-year.
Life Sciences systems sales were down primarily due to weak capital spending in the Food & Beverage market in the Americas and Asia.

25





Life Sciences segment profit was essentially flat year-over-year despite the growth in sales. This reflects the impact of the decline in gross margin percentage combined with increased SG&A costs and R&D investment. The decline of 40 basis points in gross margin percentage is primarily due to unfavorable product mix and the impact of a weaker Japanese Yen (particularly in the second half of fiscal year 2013), where a large portion of goods sold are sourced from outside of Japan, partly offset by the benefit of favorable pricing. The increase in SG&A reflects incremental costs related to ForteBio (acquired in the third quarter of fiscal year 2012) and increased investments we are making for future growth, partly offset by savings achieved by our structural cost improvement initiatives. The increase in R&D spend was driven by our focus on new product development and innovation, particularly for development of our instrumentation capabilities, including spend related to ForteBio. The translation impact of FX reduced segment profit by approximately 200 basis points.
2012 Compared with 2011
Life Sciences consumables sales growth (excluding FX) was driven by strong growth in BioPharmaceuticals.
BioPharmaceuticals consumables sales growth reflects strength in the biotech sector. The ForteBio acquisition (acquired in the third quarter of fiscal year 2012) added approximately $13 million, or 2%, in BioPharmaceuticals consumables sales growth in the year.
Food & Beverage consumables sales were down over 2% (excluding FX) year-over-year. However, excluding the impact of the divestiture of a non-core asset group in Italy in the first quarter of fiscal year 2012, Food & Beverage consumables sales grew about 4%, driven by new market applications and products augmented by growth in emerging markets.
Medical consumables sales were down reflecting the impact of weak economic conditions in Europe and fewer infection outbreaks, which resulted in reduced spending by hospitals, as well as pricing competition, particularly in Latin America.
The increase in Life Sciences systems sales reflects increased capital spend by pharmaceuticals customers driven by strength in the biotech sector, as well as increased spend in Food & Beverage, driven by emerging markets.
Life Sciences segment profit grew approximately 9%. This reflects the growth in sales augmented by the improvement in gross margin percentage, partly offset by an increase in SG&A. The improvement in gross margin percentage was primarily driven by favorable pricing and the benefit of sales channel changes from distributor to direct sales, with the remainder attributable to favorable mix driven by growth in Pharmaceuticals consumables sales. The increase in SG&A was primarily driven by regional expansion into emerging markets and incremental costs related to the acquisition of ForteBio. The translation impact of FX reduced segment profit by approximately 100 basis points.
Industrial
 
2013
 
% of
Sales
 
2012
 
% of
Sales
 
2011
 
% of
Sales
Sales
$
1,338,688

 
 
 
$
1,418,062

 
 
 
$
1,333,053

 
 
Cost of sales
723,409

 
54.0
 
767,656

 
54.1
 
722,333

 
54.2
Gross margin
615,279

 
46.0
 
650,406

 
45.9
 
610,720

 
45.8
SG&A
367,748

 
27.5
 
421,385

 
29.7
 
396,519

 
29.7
R&D
32,733

 
2.4
 
30,274

 
2.1
 
31,452

 
2.4
Segment profit
$
214,798

 
16.0
 
$
198,747

 
14.0
 
$
182,749

 
13.7
 
 
 
 
 
 
 
 
 
 
 
 


26





SALES:
2013
 
2012
 
2011
By Market and Product
 
 
 
 
 
Process Technologies
$
584,125

 
$
627,644

 
$
587,051

Aerospace
237,371

 
224,016

 
201,487

Microelectronics
275,684

 
307,682

 
314,539

Total Consumables sales
$
1,097,180

 
$
1,159,342

 
$
1,103,077

Systems Sales
241,508

 
258,720

 
229,976

Total Industrial Sales
$
1,338,688

 
$
1,418,062

 
$
1,333,053

 
 
 
 
 
 
By Region
 
 
 
 
 
Americas
$
433,316

 
$
455,227

 
$
434,490

Europe
406,868

 
416,555

 
389,982

Asia
498,504

 
546,280

 
508,581

Total Industrial Sales
$
1,338,688

 
$
1,418,062

 
$
1,333,053

 
 
 
 
 
 
The percentage change in sales year-over-year, with and without the impact of foreign currency translation (“FX”) are presented below:
 
2013 compared to 2012
 
2012 compared to 2011
SALES % CHANGE:
% Change excluding FX

 
FX

 
Total % Change

 
% Change excluding FX

 
FX

 
Total % Change

By Market and Product
 
 
 
 
 
 
 
 
 
 
 
Process Technologies
(5.2
)
 
(1.7
)
 
(6.9
)
 
8.0

 
(1.1
)
 
6.9

Aerospace
6.8

 
(0.8
)
 
6.0

 
12.2

 
(1.0
)
 
11.2

Microelectronics
(7.3
)
 
(3.1
)
 
(10.4
)
 
(3.5
)
 
1.3

 
(2.2
)
Total Consumables sales
(3.4
)
 
(2.0
)
 
(5.4
)
 
5.5

 
(0.4
)
 
5.1

Systems Sales
(5.8
)
 
(0.9
)
 
(6.7
)
 
14.8

 
(2.3
)
 
12.5

Total Industrial Sales
(3.9
)
 
(1.7
)
 
(5.6
)
 
7.1

 
(0.7
)
 
6.4

 
 
 
 
 
 
 
 
 
 
 
 
By Region
 
 
 
 
 
 
 
 
 
 
 
Americas
(4.1
)
 
(0.7
)
 
(4.8
)
 
5.5

 
(0.7
)
 
4.8

Europe
(1.0
)
 
(1.3
)
 
(2.3
)
 
11.2

 
(4.4
)
 
6.8

Asia
(5.8
)
 
(2.9
)
 
(8.7
)
 
5.3

 
2.1

 
7.4

Total Industrial Sales
(3.9
)
 
(1.7
)
 
(5.6
)
 
7.1

 
(0.7
)
 
6.4


2013 Compared with 2012
Industrial consumables were down (excluding FX) reflecting declines in the Process Technologies and Microelectronics markets partly offset by growth in the Aerospace market.
Process Technologies consumables sales decreased driven by weakness across all sub-markets, principally in Europe and Asia, with the Machinery & Equipment submarket having the most significant impact. The sales results by submarket are discussed below:
Consumables sales in the Machinery & Equipment submarket, which represented approximately 20% of total Industrial consumables sales in the year, decreased almost 9% year-over-year. This reflects weakness in all end markets with the largest impacts felt in Europe and Asia. Furthermore, the sales decline year-over-year reflects our decision to exit certain low margin product lines in Europe.
Consumables sales in the Fuels & Chemicals submarket, which represented approximately 20% of total Industrial consumables sales in the year, were down about 2% year-over-year on weakness in Europe.

27





Consumables sales in the Power Generation submarket, which represented close to 10% of total Industrial consumables sales in the year, declined approximately 2% reflecting weakness in Asia related to a decrease in demand from wind turbine OEMs.
Aerospace consumables sales growth was driven by increased Commercial Aerospace sales partly offset by a decline in Military Aerospace sales.
Sales to the Commercial Aerospace submarket, which represented approximately 10% of total Industrial consumables sales, increased about 19%, driven by increased aftermarket sales and sales to OEMs.
Sales in the Military Aerospace submarket, which represented approximately 10% of total Industrial consumables sales, decreased about 3%, reflecting the impact of strong helicopter program sales in fiscal year 2012 that did not repeat in fiscal year 2013. This was partly mitigated by increased sales to Military OEMs.
The fulfillment of past-due backlog also contributed to fiscal year 2013 sales in both the Commercial and MilitaryAerospace submarkets.
Microelectronics consumables sales were down reflecting continuing weakness in our customer end markets particularly in the semiconductor, display and data storage sectors, with the most significant impact seen in Asia. Growth in the Graphic Arts end market in Europe partly mitigated the impact.
The decrease in Industrial systems sales primarily reflects weakness in Municipal Water, as customers continue to delay projects given that funds available to the municipalities to support these projects have diminished.
Industrial segment profit grew 8% despite the decline in sales. This increase was primarily driven by the decline in SG&A expenses attributable to our structural cost improvement initiatives. In addition, the improvement in gross margin percentage of 10 basis points was primarily driven by pricing, mostly offset by unfavorable consumables market mix. The impact of FX reduced segment profit by approximately 300 basis points.
2012 Compared with 2011
Industrial consumables sales (excluding FX) were up driven by growth in the Process Technologies and Aerospace markets, partly offset by weakness in the Microelectronics market.
Process Technologies consumables sales growth was driven by increases across most sub-markets, with the Fuels & Chemicals and the Machinery & Equipment submarkets having the most significant impact. The sales results by submarket are discussed below:
Consumables sales in the Machinery & Equipment submarket, which represented approximately 25% of total Industrial consumables sales, increased about 14%, driven by growth in the mining, automotive in-plant and mobile OEM sectors.
Consumables sales in the Fuels & Chemicals submarket, which represented approximately 20% of total Industrial consumables sales, increased about 6%. Robust growth in the oil & gas, refining and alternative energy sectors were key growth drivers in the year.
Consumables sales in the Power Generation submarket, which represented close to 10% of total Industrial consumables sales, decreased about 2% primarily due to weakness in Asia related to a decrease in demand for wind turbine OEMs in China and a reduction in Nuclear spend in Japan and China.
Aerospace consumables sales increased year-over-year driven by strong growth in the Military Aerospace submarket augmented by growth in the Commercial Aerospace submarket.
Sales to the Military Aerospace submarket, which represented about 10% of total Industrial consumables sales, increased about 20%, reflecting double-digit growth in each of the three regions.
Sales to the Commercial Aerospace submarket, which represented less than 10% of total Industrial consumables sales, increased 4%, reflecting increases in OEM production rates and aftermarket sales related to an increase in passenger miles flown.
Microelectronics consumables sales were down, reflecting a decline in semiconductor chip production. Furthermore, the display sector continued to be weak due to overcapacity and the data storage sector struggled due to weak PC sales.
The increase in Industrial systems sales was driven by the Process Technologies market as customers in the oil and gas sectors continued to invest to increase output. The bulk of this investment reflected expansion plans in Brazil, Eastern Europe and the Middle East.

28





Industrial segment profit grew approximately 9%. This reflects the growth in sales and a slight improvement in gross margin percentage, partly offset by an increase in SG&A. The improvement in gross margin percentage of 10 basis points was primarily driven by pricing. Manufacturing cost savings achieved were offset by inflation in manufacturing costs and unfavorable overhead absorption. The increase in SG&A was primarily driven by regional expansion into emerging markets as well as costs related to bringing Industrial into our European and Asian headquarters. The impact of FX increased segment profit by approximately 100 basis points.
Corporate Services Group
 
 
2013
 
 
2012
 
 
2011
 
Corporate Services Group expenses
 
$
66,640

 
 
$
64,114

 
 
$
61,125

 
% Change year-over-year
 
3.9

 
 
4.9

 
 
 
 

2013 Compared with 2012
The increase in Corporate Services Group expenses in fiscal year 2013 compared to fiscal year 2012 primarily reflects an increase in payroll related costs.

2012 Compared with 2011
The increase in Corporate Services Group expenses in fiscal year 2012 compared to fiscal year 2011 primarily reflects an increase in payroll and related costs and costs associated with the executive management transition.
LIQUIDITY AND CAPITAL RESOURCES
We utilize cash flow generated from operations and our commercial paper program to meet our short-term liquidity needs. We consider our cash balances, lines of credit and access to the commercial paper and other credit markets, along with the cash typically generated from operations, to be sufficient to meet our anticipated liquidity needs.
Our cash position, net of debt, was approximately $299,200 at July 31, 2013, compared to a net debt position of $195,800 at July 31, 2012, a change of $495,000. The impact of foreign exchange rates increased net cash by about $23,600. Excluding this impact, net cash increased by $471,400 reflecting an increase in cash and cash equivalents of $436,300 and a decrease in gross debt of $35,100.
As of July 31, 2013, the amount of cash and cash equivalents held by foreign subsidiaries was $905,666. We do not expect any restrictions or taxes on repatriation of cash held outside of the U.S. to have a material effect on our overall liquidity.
On April 11, 2013, we entered into a five-year $1,200,000 unsecured senior revolving credit facility (the “New Facility“) with a syndicate of banks, which expires on April 11, 2018, and terminated our existing $500,000 senior revolving credit facility, which would have expired in fiscal year 2015 (the “Prior Facility“). Borrowings under the New Facility bear interest at either a variable rate based upon the London InterBank Offered Rate (U.S. dollar, British Pound, Euro, Swiss Franc and Japanese Yen borrowings) or the European Union Banking Federation Rate (Euro borrowings) or at the prime rate of the Facility Agent (U.S. dollar borrowing only). The New Facility does not permit us to exceed a maximum consolidated leverage ratio of 3.5:1, based upon the trailing four quarters’ results. In addition, the New Facility includes other covenants that under certain circumstances may restrict our ability to incur additional indebtedness, make investments and other restricted payments, enter into sale and leaseback transactions, create liens and sell assets. As of July 31, 2013, we were in compliance with all related financial and other restrictive covenants, including limitations on indebtedness.
As of July 31, 2013, we had $169,967 of outstanding commercial paper, which is recorded as notes payable in the current liability section of our accompanying consolidated balance sheet. Commercial paper outstanding at any one time during the year had balances ranging from $50,000 to $330,000, carried interest rates ranging between 0.32% and 0.48% and original maturities between 6 and 41 days. Commercial paper outstanding at July 31, 2013 carried an interest rate of 0.35% and maturities between 30 and 31 days. As of July 31, 2013, we did not have any outstanding borrowings under our New Facility.


29





Cash Flow - Operating Activities
 
 
2013
 
2012
 
2011
Net cash provided by operating activities
 
$
384,459

 
$
474,848

 
$
429,987

Less capital expenditures
 
110,182

 
158,909

 
160,771

Free cash flow
 
$
274,277

 
$
315,939

 
$
269,216

 
 
 
 
 
 
 
Fiscal Year 2013
The major items impacting net cash provided by operating activities in fiscal year 2013 include:
net earnings from continuing operations of $329,962;
non-cash reconciling items in net earnings from continuing operations, such as depreciation and amortization of long-lived assets of $106,284 and non-cash stock compensation of $29,778;
income tax and tax-related payments of approximately $94,000 related to the settlement of, and deposits for, several years of U.S. tax audits and payments for the gain on the sale of the Blood Product Line; and
defined benefit pension plan contributions of $27,785.
Discontinued operations had an immaterial impact on net cash provided by operating activities in fiscal year 2013.
Fiscal Year 2012
The major items impacting net cash provided by operating activities in fiscal year 2012 include:
net earnings of $319,309;
non-cash reconciling items in net earnings, such as depreciation and amortization of long-lived assets of $111,105 and non-cash stock compensation of $31,864; and
defined benefit pension plan contributions of $29,224.
The net earnings from discontinued operations adjusted for non-cash reconciling items in fiscal year 2012 and fiscal year 2011 were approximately $45,900 and $51,500, respectively. This includes transaction related costs, net of tax, of $7,444 related to the divestiture of the Blood Product Line in fiscal year 2012.
Free Cash Flow
We utilize free cash flow as one way to measure our current and future financial performance. Free cash flow is a non-GAAP financial measure and is not intended as an alternative measure of cash flow from operations as determined in accordance with GAAP. In addition, our calculation of free cash flow is not necessarily comparable to similar measures as calculated by other companies that do not use the same definition or implementation guidelines. The table above reconciles net cash provided by operating activities, inclusive of discontinued operations, to free cash flow.
The decrease in free cash flow in fiscal year 2013 compared to fiscal year 2012 primarily reflects the decline in net cash provided by operating activities as discussed above. This was partly offset by a decrease in capital expenditures, as fiscal year 2012 included the purchase of a new facility in Europe and investment in our global ERP system.
The increase in free cash flow in fiscal year 2012 compared to fiscal year 2011 primarily reflects the increase in net cash provided by operating activities as discussed above.
Depreciation and Amortization
Depreciation expense and amortization expense are presented below:
 
 
2013
 
2012*
 
2011*
Depreciation expense
 
$
86,428

 
$
90,388

 
$
84,461

Amortization expense
 
$
19,856

 
$
20,717

 
$
13,645

* Includes depreciation and amortization expense from discontinued operations totaling $7,718 and $9,387 in fiscal years 2012 and 2011, respectively.

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Cash Flow - Investing Activities
 
 
2013
 
2012
 
2011
Net cash provided/(used) by investing activities
 
$
399,300

 
$
(309,825
)
 
$
(176,541
)
The most significant drivers of net cash provided by investing activities in fiscal year 2013 include:
Proceeds from the sale of assets of $537,625, primarily related to the sale of our Blood Product Line, and
Capital expenditures of $110,182, which partly offset the above.

Cash Flow - Financing Activities
 
 
2013
 
2012
 
2011
Net cash used by financing activities
 
$
(344,465
)
 
$
(173,222
)
 
$
(243,185
)
Share repurchases in fiscal years 2013, 2012 and 2011, are presented below. For further information on the Company’s share buyback programs, see Note 15, Common Stock, to the accompanying consolidated financial statements.
 
 
2013
 
2012
 
2011
Share repurchases
 
$
250,000

 
$
121,164

 
$
149,907

Number of shares
 
3,971

 
2,281

 
2,867

We increased our quarterly dividend by 19% from 21 cents to 25 cents per share, effective with the dividend declared on September 26, 2012. Dividends paid in fiscal years 2013, 2012 and 2011 are presented below:
 
 
2013
 
2012
 
2011
Dividends paid
 
$
108,054

 
$
88,955

 
$
77,641

Dividends declared per share
 
$
1.00

 
$
0.805

 
$
0.685

Net proceeds from equity compensation plans were $36,240 in fiscal year 2013.
Non-Cash Working Capital
Non-cash working capital, which is defined as working capital excluding cash and cash equivalents, notes receivable, notes payable and the current portion of long-term debt, was approximately $554,500 at July 31, 2013 as compared with $610,900 at July 31, 2012. This includes working capital related to our discontinued operations, however, this excludes assets aggregating approximately $94,500 at July 31, 2012 classified as held for sale that otherwise would have been reported as non-current. Excluding the effect of foreign exchange (discussed below), non-cash working capital decreased approximately $54,600 compared to July 31, 2012.
Our balance sheet is affected by spot exchange rates used to translate local currency amounts into U.S. Dollars. In comparing spot exchange rates at July 31, 2013 to those at July 31, 2012, the Euro has strengthened against the U.S. Dollar, and the British Pound and the Japanese Yen have weakened against the U.S. Dollar. The effect of foreign currency translation, increased net inventory, net accounts receivable and other current assets by $1,389, $130 and $1,152, respectively, as compared to July 31, 2012. Additionally, foreign currency translation increased accounts payable and other current liabilities by $4,547 and decreased current income taxes payable by $45. The combination of these foreign currency translation impacts decreased non-cash working capital by $1,831.
Derivatives
We manage certain financial exposures through a risk management program that includes the use of foreign exchange derivative financial instruments. Derivatives are executed with counterparties with a minimum credit rating of “A” by Standard and Poor’s and Moody’s Investor Services, in accordance with our policies. We do not utilize derivative instruments for trading or speculative purposes.
We conduct transactions in currencies other than their functional currency. These transactions include non-functional currency intercompany and external sales as well as intercompany and external purchases. We use 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 changing foreign exchange rates.

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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 notional amount of foreign currency forward contracts entered into during the year ended July 31, 2013 was $2,513,320. The notional amount of foreign currency forward contracts outstanding as of July 31, 2013 was $414,981 of which $98,321 are for cash flow hedges that cover monthly transactional exposures through February 2014. Our foreign currency balance sheet exposures resulted in the recognition of a gain within SG&A of approximately $10,821 in the year ended July 31, 2013, before the impact of the measures described above. Including the impact of our foreign exchange derivative instruments, the net recognition within SG&A was a loss of approximately $5,076 in the year ended July 31, 2013.
Contractual Obligations
The following is a summary of our contractual payment commitments as of July 31, 2013 (interest on long-term debt includes the amount of interest due to be paid during the respective fiscal year based upon the amount of debt outstanding as of July 31, 2013):
 
Year Ended
 
 

 
 

 
2014

 
2015

 
2016

 
2017

 
2018

 
Thereafter

 
Total

Long-term debt
$
420

 
$
92,187

 
$
388

 
$
404

 
$
421

 
$
375,290

 
$
469,110

Interest on long-term debt
20,976

 
20,601

 
18,803

 
18,787

 
18,771

 
37,504

 
135,442

Operating leases
26,460

 
17,827

 
11,796

 
7,714

 
4,558

 
11,433

 
79,788

Purchase commitments
47,934

 
5,131

 
3,898

 
2,592

 
2,636

 
6,381

 
68,572

Other commitments
649

 
3,907

 
3,933

 
3,823

 
338

 
2,281

 
14,931

Total commitments
$
96,439

 
$
139,653

 
$
38,818

 
$
33,320

 
$
26,724

 
$
432,889

 
$
767,843

We had gross liabilities for unrecognized tax benefits of approximately $203,376 and related accrued interest and penalties of $18,622 as of July 31, 2013, which were excluded from the table above. See Note 11, Income Taxes, to the accompanying consolidated financial statements for further discussion of these amounts.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). These accounting principles require us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the accompanying consolidated financial statements, as well as the reported amounts of revenues and expenses during the periods presented. Although these estimates are based on management’s knowledge of current events and actions we may undertake in the future, actual results may differ from estimates. The following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and results, and that require judgment. See also the notes to the accompanying consolidated financial statements, which contain additional information regarding our accounting policies.
Income Taxes
Significant judgment is required in determining the worldwide provision for income taxes. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and cost reimbursement arrangements among related entities, the process of identifying items of revenue and expense that qualify for preferential tax treatment and appropriate segregation of foreign and domestic income and expense to avoid double taxation. No assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and net earnings in the period in which a final determination is made.
We record a valuation allowance to reduce deferred tax assets to the amount of the future tax benefit that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, there is no assurance that the valuation allowance would not need to be increased to cover additional deferred tax assets that may not be realizable. Any increase in the valuation allowance could have a material adverse impact on our income tax provision and net earnings in the period in which such determination is made.

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Purchase Accounting and Goodwill
Determining the fair value of assets acquired and liabilities assumed in a business combination is judgmental in nature and often involves the use of significant estimates and assumptions. There are various methods used to estimate the value of tangible and intangible assets acquired, such as discounted cash flow and market multiple approaches. Some of the more significant estimates and assumptions inherent in the two approaches include: projected future cash flows (including timing); discount rates reflecting the risk inherent in the future cash flows; perpetual growth rate; determination of appropriate market comparables; and the determination of whether a premium or a discount should be applied to comparables. There are also judgments made to determine the expected useful lives assigned to each class of assets acquired and liabilities assumed.
We perform impairment testing for goodwill at least annually during our fiscal third quarter, or more frequently if certain events or circumstances indicate impairment might have occurred. We evaluate the recoverability of goodwill using a two-step impairment test approach at the reporting unit level. Our two segments, Life Sciences and Industrial, are also deemed to be our reporting units for purposes of testing goodwill for impairment. In the first step, the overall fair value for the reporting unit is compared to its book value including goodwill. In the event that the overall fair value of the reporting unit was determined to be less than the book value, a second step is performed which compares the implied fair value of the reporting unit’s goodwill to the book value of the goodwill. The implied fair value for the goodwill is determined based on the difference between the overall fair value of the reporting unit and the fair value of the net identifiable assets. If the implied fair value of the goodwill is less than its book value, the difference is recognized as an impairment loss.
We completed our annual goodwill impairment tests as of March 1, 2013 and March 1, 2012. The estimated fair values of both the Life Sciences and Industrial reporting units substantially exceeded the carrying values of these reporting units, and as such, step two was not performed.
When testing for impairment, we use significant estimates and assumptions to estimate the fair values of our reporting units. The fair value of our reporting units is determined using market multiples (derived from trailing-twelve-month revenue, earnings before interest and taxes (“EBIT”) and earnings before interest, taxes, depreciation and amortization (“EBITDA”)), of publicly traded companies with similar operating and investment characteristics as our reporting units. These various market multiples are applied to the operating performance of the reporting unit being tested to determine a range of fair values for the reporting unit. The fair value of the reporting units for the purposes of the goodwill impairment test is then determined using the mean of the fair values derived from the minimum and median market multiples.
The minimum and median market multiples used in the fiscal year 2013 impairment testing ranged from 1.2 to 2.9 times revenue, 9.6 to 17.0 times EBIT and 6.9 to 12.3 times EBITDA. The minimum and median market multiples used in the fiscal year 2012 impairment testing ranged from 1.2 to 2.4 times revenue, 6.9 to 12.1 times EBIT and 5.8 to 9.2 times EBITDA. To further substantiate the reasonableness of the fair value of our reporting units, we compare enterprise value (outstanding shares multiplied by the closing market price per share, plus debt, less cash and cash equivalents) to the aggregate fair value of our reporting units.
Revenue Recognition
Revenue is recognized when title and risk of loss have transferred to the customer and when contractual terms have been fulfilled, except for certain long-term contracts, whereby revenue is recognized under the percentage of completion method (see below). Transfer of title and risk of loss occurs when the product is delivered in accordance with the contractual shipping terms. In instances where contractual terms include a provision for customer acceptance, revenue is recognized when either (i) we have previously demonstrated that the product meets the specified criteria based on either seller or customer-specified objective criteria or (ii) upon formal acceptance received from the customer where the product has not been previously demonstrated to meet customer-specified objective criteria.
For contracts accounted for under the percentage of completion method, revenue recognition is based upon the ratio of costs incurred to date compared with estimated total costs to complete. The cumulative impact of revisions to total estimated costs is reflected in the period of the change, including anticipated losses.

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Allowance for Doubtful Accounts
We evaluate our ability to collect outstanding receivables and provide allowances when collection becomes doubtful. In performing this evaluation, significant estimates are involved, including an analysis of specific risks on a customer-by-customer basis. Based upon this information, we record in earnings an amount believed to be uncollectible. If the factors used to estimate the allowance provided for doubtful accounts do not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected.
Inventories
Inventories are valued at the lower of cost (principally on the first-in, first-out method) or market. We record adjustments to the carrying value of inventory based upon assumptions about historic usage, future demand and market conditions. These adjustments are estimates which could vary significantly, either favorably or unfavorably, from actual requirements if future conditions, customer inventory levels or competitive conditions differ from our expectations.
Defined Benefit Retirement Plans
We sponsor defined benefit retirement plans in various forms covering substantially all employees who meet eligibility requirements. Several statistical and other factors that attempt to anticipate future events are used in calculating the expense and liabilities related to those plans for which the benefit is actuarially determined. These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases as determined by us, within certain guidelines. In addition, our actuarial consultants also use subjective factors, such as withdrawal and mortality rates, to calculate the liabilities and expense. The actuarial assumptions used by us are long-term assumptions and may differ materially from actual experience in the short-term due to changing market and economic conditions and changing participant demographics. These differences may have a significant effect on the amount of pension expense and pension assets/(liabilities) we record.
Pension expense associated with our defined benefit plans was $34,633 in fiscal year 2013, which was based on a weighted average discount rate of 3.79% (calculated using the projected benefit obligation) and a weighted average expected long-term rate of return on plan assets of 6.04% (calculated using the fair