Edgar Filing: PALL CORP

PLL-4/30/2012-Q3

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended April 30, 2012



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

For the transition period from to

Commission File Number: 001- 04311

PALL CORPORATION

(Exact name of registrant as specified in its charter)



New York		11-1541330
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

25 Harbor Park Drive, Port Washington, NY		11050
(Address of principal executive offices)		(Zip Code)

(516) 484-5400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



	Large accelerated filer þ	Accelerated filer o

	Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of the registrant’s common stock outstanding as of June 1, 2012 was 116,202,448.

Table of Contents



		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited).
	Condensed Consolidated Balance Sheets as of April 30, 2012 and July 31, 2011.	3
	Condensed Consolidated Statements of Earnings for the three and nine months ended April 30, 2012 and April 30, 2011.	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2012 and April 30, 2011.	5
	Notes to Condensed Consolidated Financial Statements.	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	36
Item 4.	Controls and Procedures.	36
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings.	37
Item 1A.	Risk Factors.	37
Item 6.	Exhibits.	37
SIGNATURES

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

PALL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)



	Apr 30, 2012			July 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	535,891		$	557,766
Accounts receivable	614,900			646,769
Inventories	402,292			444,842
Prepaid expenses	48,201			39,322
Other current assets	159,371			120,509
Assets held for sale	126,737			—
Total current assets	1,887,392			1,809,208
Property, plant and equipment	772,293			794,599
Goodwill	341,731			290,606
Intangible assets	158,310			61,735
Other non-current assets	235,128			276,268
Total assets	$	3,394,854		$	3,232,416

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable	$	199,953		$	214,957
Accounts payable	171,666			225,398
Accrued liabilities	364,222			294,485
Income taxes payable	63,280			34,531
Current portion of long-term debt	482			511
Dividends payable	24,402			20,125
Total current liabilities	824,005			790,007
Long-term debt, net of current portion	487,936			491,954
Income taxes payable – non-current	149,555			175,040
Deferred taxes and other non-current liabilities	269,564			285,594
Total liabilities	1,731,060			1,742,595

Stockholders’ equity:
Common stock, par value $.10 per share	12,796			12,796
Capital in excess of par value	272,020			246,665
Retained earnings	1,780,468			1,619,051
Treasury stock, at cost	(442,149		)	(483,705		)
Stock option loans	(54		)	(133		)
Accumulated other comprehensive income/(loss):
Foreign currency translation	150,492			207,478
Pension liability adjustment	(113,141		)	(121,831		)
Unrealized investment gains	3,362			9,500
	40,713			95,147
Total stockholders’ equity	1,663,794			1,489,821
Total liabilities and stockholders’ equity	$	3,394,854		$	3,232,416

See accompanying notes to condensed consolidated financial statements.

PALL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)



	Three Months Ended				Nine Months Ended
	Apr 30, 2012		Apr 30, 2011		Apr 30, 2012		Apr 30, 2011
Net sales	$	657,976	$	653,792	$	1,949,285	$	1,798,479
Cost of sales	323,550		321,526		941,342		867,087
Gross profit	334,426		332,266		1,007,943		931,392

Selling, general and administrative expenses	215,226		203,327		632,982		572,026
Research and development	20,780		19,308		60,351		57,198
Restructuring and other charges, net	2,861		7,723		31,001		13,921
Interest expense, net	6,351		6,068		17,682		19,176
Earnings from continuing operations before income taxes	89,208		95,840		265,927		269,071
Provision for income taxes	18,270		34,082		60,691		80,021
Net earnings from continuing operations	$	70,938	$	61,758	$	205,236	$	189,050
Earnings from discontinued operations, net of income taxes	$	7,980	$	9,311	$	27,866	$	29,092
Net earnings	$	78,918	$	71,069	$	233,102	$	218,142

Earnings per share from continuing operations:
Basic	$	0.61	$	0.53	$	1.77	$	1.62
Diluted	$	0.60	$	0.52	$	1.74	$	1.60
Earnings per share from discontinued operations:
Basic	$	0.07	$	0.08	$	0.24	$	0.25
Diluted	$	0.07	$	0.08	$	0.24	$	0.25
Earnings per share:
Basic	$	0.68	$	0.61	$	2.01	$	1.87
Diluted	$	0.67	$	0.60	$	1.98	$	1.84

Dividends declared per share	$	0.210	$	0.175	$	0.595	$	0.510

Average shares outstanding:
Basic	116,567		116,899		116,190		116,565
Diluted	118,358		118,723		117,817		118,296

See accompanying notes to condensed consolidated financial statements.

PALL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine Months Ended
	Apr 30, 2012			Apr 30, 2011
Operating activities:
Net cash provided by operating activities	$	326,417		$	280,956

Investing activities:
Capital expenditures	(126,923		)	(103,142		)
Acquisition of businesses	(167,638		)	—
Purchases of retirement benefit assets	(33,805		)	(62,439		)
Proceeds from retirement benefit assets	33,422			51,307
Proceeds from sale of assets	25,604			530
Other	(9,666		)	(5,099		)
Net cash used by investing activities	(279,006		)	(118,843		)

Financing activities:
Notes payable	(15,004		)	109,682
Dividends paid	(64,554		)	(57,287		)
Long-term borrowings	104			35,145
Repayments of long-term debt	(390		)	(298,405		)
Net proceeds from stock plans	34,845			54,487
Purchase of treasury stock	—			(64,524		)
Excess tax benefits from stock-based compensation arrangements	4,177			10,799
Net cash used by financing activities	(40,822		)	(210,103		)
Cash flow for period	6,589			(47,990		)
Cash and cash equivalents at beginning of year	557,766			498,563
Effect of exchange rate changes on cash and cash equivalents	(28,464		)	40,923
Cash and cash equivalents at end of period	$	535,891		$	491,496
Supplemental disclosures:
Interest paid	$	13,274		$	13,589
Income taxes paid (net of refunds)	75,401			79,850

See accompanying notes to condensed consolidated financial statements.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

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

As discussed in Note 16, Discontinued Operations, the Company has entered into an agreement to sell certain assets of its blood collection, filtration and processing product line, which was a component of the Company’s Life Sciences segment, and met both the component and held for sale criteria during the third quarter of fiscal year 2012. As such, it has been reported as a discontinued operation in the Company’s condensed consolidated financial statements.

NOTE 2 – BALANCE SHEET DETAILS

The following tables provide details of selected balance sheet items:



	Apr 30, 2012			July 31, 2011
Accounts receivable:
Billed	$	546,916		$	553,500
Unbilled	77,290			101,652
Total	624,206			655,152
Less: Allowances for doubtful accounts	(9,306		)	(8,383		)
	$	614,900		$	646,769

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



	Apr 30, 2012 (a)		July 31, 2011
Inventories:
Raw materials and components	$	88,266	$	102,745
Work-in-process	100,503		96,601
Finished goods	213,523		245,496
	$	402,292	$	444,842



Property, plant and equipment:
Property, plant and equipment	$	1,639,568		$	1,705,559
Less: Accumulated depreciation and amortization	(867,275		)	(910,960		)
	$	772,293		$	794,599

(a) The amounts for inventory and property, plant and equipment as of April 30, 2012 exclude those assets that are classified as held for sale, which are $40,651 and $61,623, respectively. See Note 16, Discontinued Operations, for further details.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

NOTE 3 – GOODWILL AND INTANGIBLE ASSETS

The following table presents goodwill, allocated by reportable segment.



	Apr 30, 2012 (a)		July 31, 2011
Life Sciences	$	179,490	$	131,852
Industrial	162,241		158,754
	$	341,731	$	290,606

(a) The amount for goodwill allocated to the Life Sciences reportable segment as of April 30, 2012 excludes goodwill that is classified as held for sale of $22,018 . See Note 16, Discontinued Operations, for further details.

Intangible assets, net, consist of the following:



	Apr 30, 2012 (b)
	Gross		Accumulated Amortization		Net
Patents and unpatented technology	$	133,333	$	69,406	$	63,927
Customer-related intangibles	95,371		11,414		83,957
Trademarks	13,207		5,104		8,103
Other	5,063		2,740		2,323
	$	246,974	$	88,664	$	158,310
	July 31, 2011
	Gross		Accumulated Amortization		Net
Patents and unpatented technology	$	102,372	$	64,921	$	37,451
Customer-related intangibles	26,478		6,598		19,880
Trademarks	6,802		4,684		2,118
Other	4,685		2,399		2,286
	$	140,337	$	78,602	$	61,735

(b) The amount for intangible assets as of April 30, 2012 excludes intangible assets, net, that is classified as held for sale of $567. See Note 16, Discontinued Operations, for further details.

The changes in both goodwill and intangible assets relate to the preliminary valuation of the acquisition of ForteBio®, Inc. in the third quarter of fiscal year 2012, discussed in further detail in Note 17, Acquisition, as well as an acquisition in Brazil in the first quarter of fiscal year 2012. During the third quarter, the Company completed its valuation of its acquisition in Brazil. In connection with the acquisition in Brazil, the Company recorded the fair value of the intangible assets acquired (approximately $22,250, with the majority recorded as customer-related intangibles), which were valued using the income approach. The amount of goodwill recorded in connection with this acquisition was approximately $9,000. In addition, the carrying amounts were also impacted by changes in foreign exchange rates used to translate the goodwill and intangible assets contained in the financial statements of foreign subsidiaries using the rates at each respective balance sheet date.

Amortization expense for intangible assets for the three and nine months ended April 30, 2012 was $5,956 and $14,746, respectively. Amortization expense for intangible assets for the three and nine months ended April 30, 2011 was $3,432 and $9,941, respectively. Amortization expense is estimated to be approximately $6,539 for the remainder of fiscal year 2012, $21,098 in fiscal year 2013, $18,758 in fiscal year 2014, $17,162 in fiscal year 2015, $15,950 in fiscal year 2016 and $15,891 in fiscal year 2017.

NOTE 4 – TREASURY STOCK

On October 16, 2008, the board authorized an expenditure of $350,000 to repurchase shares. On September 26, 2011, the board authorized an additional $250,000. The Company’s shares may be purchased over time, as market and business conditions warrant. There is no time restriction on these authorizations. There were no share repurchases during the nine months ended April 30, 2012. As of April 30, 2012, $453,037 remains to be expended under the current board repurchase authorizations. Repurchased shares are held in treasury for use in connection with the Company’s stock plans and for general corporate purposes.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

During the nine months ended April 30, 2012, 1,156 shares were issued under the Company’s stock-based compensation plans. At April 30, 2012, the Company held 11,807 treasury shares.

NOTE 5 – CONTINGENCIES AND COMMITMENTS

With respect to the matters described in Note 14, Contingencies and Commitments, to the Company’s consolidated financial statements included in the 2011 Form 10-K, under the heading Federal Securities Class Actions, Shareholder Derivative Lawsuits and Other Proceedings, the Company has reached an agreement with the lead plaintiff to settle the consolidated putative securities class-action lawsuit originally filed in August 2007 in the United States District Court for the Eastern District of New York. Under the terms of the proposed settlement, the lawsuit will be dismissed with prejudice, without any admission of liability by the Company or the individual defendants. Both the Company and the individual defendants will receive a full and complete release of all claims asserted against them in the litigation, in exchange for the payment of an aggregate of $22,500, substantially all of which will be funded with insurance proceeds. The proposed settlement was submitted to the United States District Court for the Eastern District of New York for preliminary approval on May 16, 2012. The agreement is subject to the execution of definitive settlement documents and court approval after the class has been notified of its terms. The Company has reflected appropriate costs, contingent liabilities and related insurance recoveries in the condensed consolidated financial statements as of April 30, 2012 and July 31, 2011.

The Company and its subsidiaries are subject to certain other legal actions that arise in the normal course of business. Other than those legal proceedings and claims discussed above and in the 2011 Form 10-K, the Company did not have any current other legal proceedings and claims that would individually or in the aggregate have a reasonably possible materially adverse affect on its financial condition or operating results. As such, any reasonably possible loss or range of loss, other than those legal proceedings discussed in this note and in the 2011 Form 10-K, is immaterial. However, the results of legal proceedings cannot be predicted with certainty. If the Company failed to prevail in several of these legal matters in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.

Environmental Matters:

The Company’s condensed consolidated balance sheet at April 30, 2012 includes liabilities for environmental matters of approximately $12,632, which relate primarily to the environmental proceedings discussed in the 2011 Form 10-K. In the opinion of management, the Company is in substantial compliance with applicable environmental laws and its current accruals for environmental remediation are adequate. However, as regulatory standards under environmental laws are becoming increasingly stringent, there can be no assurance that future developments, additional information and experience gained will not cause the Company to incur material environmental liabilities or costs beyond those accrued in its condensed consolidated financial statements.

NOTE 6 – RESTRUCTURING AND OTHER CHARGES, NET

The following tables summarize the restructuring and other charges (“ROTC”) recorded for the three and nine months ended April 30, 2012 and April 30, 2011:



	Three Months Ended Apr 30, 2012									Nine Months Ended Apr 30, 2012
	Restructuring (1)			Other (Gains)/ Charges (2)			Total			Restructuring (1)			Other (Gains)/ Charges (2)			Total
Severance benefits and other employment contract obligations	$	953		$	2,604		$	3,557		$	29,255		$	11,436		$	40,691
Gain on sale of assets	—			(2,168		)	(2,168		)	(1,515		)	(11,364		)	(12,879		)
Professional fees, legal settlements and other costs, net of receipt of insurance claim payments	1,755			(252		)	1,503			3,121			145			3,266
Reversal of excess restructuring reserves	(31		)	—			(31		)	(77		)	—			(77		)
	$	2,677		$	184		$	2,861		$	30,784		$	217		$	31,001

Cash	$	2,677		$	(942	)	$	1,735		$	30,784		$	(3,446	)	$	27,338
Non-cash(a)	—			1,126			1,126			—			3,663			3,663
	$	2,677		$	184		$	2,861		$	30,784		$	217		$	31,001

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)



	Three Months Ended Apr 30, 2011								Nine Months Ended Apr 30, 2011
	Restructuring (1)			Other (Gains)/ Charges (2)		Total			Restructuring (1)			Other (Gains)/ Charges (2)		Total
Severance benefits and other employment contract obligations	$	716		$	4,631	$	5,347		$	4,169		$	4,631	$	8,800
Professional fees and other costs, net of receipt of insurance claim payments	1,431			891		2,322			4,151			272		4,423
Environmental matters	—			59		59			—			709		709
Reversal of excess restructuring reserves	(5		)	—		(5		)	(11		)	—		(11		)
	$	2,142		$	5,581	$	7,723		$	8,309		$	5,612	$	13,921

Cash	$	2,142		$	3,241	$	5,383		$	8,309		$	3,272	$	11,581
Non-cash	—			2,340		2,340			—			2,340		2,340
	$	2,142		$	5,581	$	7,723		$	8,309		$	5,612	$	13,921

(a) Reflects non-cash stock based compensation expense.

(1) Restructuring:

Restructuring charges recorded in the three and nine months ended April 30, 2012 and April 30, 2011 reflect the expenses incurred in connection with the Company’s cost reduction initiatives.

Severance benefits recorded in the three and nine months ended April 30, 2012 primarily relate to global restructuring activities in the Industrial segment. The most significant restructuring activities include:


•	the realignment of sales and marketing management of certain of the Company’s markets,


•	the reorganization of the global management structure that supports the Company’s systems product line, and


•	shifting resources from mature country markets to emerging regions.

Restructuring charges/(income) in the nine months ended April 30, 2012 also includes a gain on the divestiture of a non-strategic asset group.

Severance benefits recorded in the three and nine months ended April 30, 2011 primarily relate to the closure of an Industrial manufacturing facility in Europe.

(2) Other (Gains) / Charges:

Employment contract obligations and other severance benefits:

In the three and nine months ended April 30, 2012, the Company recorded charges related to certain employment contract obligations.

Gain on sale of assets:

In the three months ended April 30, 2012 the Company recored a gain on sale of assets related to the sale of a building in Europe. The nine months ended April 30, 2012 also includes a gain of $9,196 on the sale of the Company’s investment in Satair A/S.

Professional fees and other costs:

In the three and nine months ended April 30, 2012 and April 30, 2011, the Company recorded legal and other professional fees related to the Federal Securities Class Actions, Shareholder Derivative Lawsuits and Other Proceedings (see Note 5, Contingencies and Commitments) which pertain to matters that had been under audit committee inquiry as discussed in Note 2, Audit Committee Inquiry and Restatement, to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2007 (“2007 Form 10-K”). Furthermore, in the nine months ended April 30, 2012, the Company

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

recorded costs related to the settlement of the Federal Securities Class Actions (see Note 5, Contingencies and Commitments). The receipt of insurance claim payments more than offset the costs discussed above in the three months ended April 30, 2012 and offset the majority of such costs in the nine months ended April 30, 2012 and April 30, 2011.

The following table summarizes the activity related to restructuring liabilities that were recorded in the nine months ended April 30, 2012 and in fiscal years 2011, 2010 and 2009.



	Severance			Other			Total
2012
Original charge	$	29,255		$	3,121		$	32,376
Utilized	(23,151		)	(2,121		)	(25,272		)
Translation	271			12			283
Balance at Apr 30, 2012	$	6,375		$	1,012		$	7,387



	Severance			Other			Total
2011
Original charge	$	4,863		$	5,507		$	10,370
Utilized	(1,817		)	(5,225		)	(7,042		)
Translation	272			68			340
Balance at Jul 31, 2011	$	3,318		$	350		$	3,668
Utilized	(3,199		)	(350		)	(3,549		)
Translation	(119		)	—			(119		)
Balance at Apr 30, 2012	$	—		$	—		$	—



	Severance			Other			Total
2010
Original charge (a)	$	6,034		$	5,581		$	11,615
Utilized	(2,031		)	(5,441		)	(7,472		)
Translation	1			(9		)	(8		)
Balance at Jul 31, 2010	$	4,004		$	131		$	4,135
Utilized	(1,356		)	(135		)	(1,491		)
Translation	2			4			6
Balance at Jul 31, 2011	$	2,650		$	—		$	2,650
Utilized	(1,608		)	—			(1,608		)
Translation	—			—			—
Balance at Apr 30, 2012	$	1,042		$	—		$	1,042

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)



	Severance			Other			Total
2009
Original charge	$	18,938		$	4,734		$	23,672
Utilized	(12,757		)	(4,133		)	(16,890		)
Translation	412			20			432
Balance at Jul 31, 2009	6,593			621			7,214
Utilized	(4,902		)	(588		)	(5,490		)
Reversal of excess reserves	(143		)	—			(143		)
Translation	(86		)	(27		)	(113		)
Balance at Jul 31, 2010	$	1,462		$	6		$	1,468
Utilized	(845		)	(6		)	(851		)
Reversal of excess reserves	(6		)	—			(6		)
Translation	120			—			120
Balance at Jul 31, 2011	$	731		$	—		$	731
Utilized	(317		)	—			(317		)
Reversal of excess reserves	(46		)	—			(46		)
Translation	(48		)	—			(48		)
Balance at Apr 30, 2012	$	320		$	—		$	320

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

NOTE 7 – INCOME TAXES

The Company’s effective tax rate on continuing operations for the nine months ended April 30, 2012 and April 30, 2011 was 22.8% and 29.7%, respectively. For the nine months ended April 30, 2012 and April 30, 2011, the effective tax rate on continuing operations varied from the U.S. federal statutory rate primarily due to the benefits of foreign operations, offset by tax costs of $8,409 associated with the establishment of the Company’s Asian headquarters recorded in the third quarter of fiscal year 2011.

At April 30, 2012 and July 31, 2011, the Company had gross unrecognized income tax benefits of $215,798 and $188,380, respectively. During the nine months ended April 30, 2012, the amount of gross unrecognized tax benefits increased by $27,418, primarily due to tax positions taken during the fiscal year, partially offset by the impact of foreign currency translation and the expiration of various statutes of limitations. As of April 30, 2012, the amount of net unrecognized income tax benefits that, if recognized, would impact the effective tax rate was $144,360.

At April 30, 2012 and July 31, 2011, the Company had liabilities of $33,557 and $29,652, respectively, for potential payment of interest and penalties.

Based on recent discussion with various tax authorities and due to the expiration of various statutes of limitations, the Company believes that it is reasonably possible that the gross amount of unrecognized tax benefits may decrease within the next twelve months by a range of zero to $61,633. As a result, the Company has reclassified $57,126 of income taxes payable and $17,870 of interest payable from non-current liabilities to current liabilities, respectively.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

NOTE 8 – COMPONENTS OF NET PERIODIC PENSION COST

Net periodic pension benefit cost for the Company’s defined benefit pension plans includes the following components (included in the table below is net periodic benefit cost included in discontinued operations for the three months ended April 30, 2012 and April 30, 2011 of $185 and $177, respectively, and $552 and $536 for the nine months ended April 30, 2012 and April 30, 2011, respectively):



	Three Months Ended
	U.S. Plans						Foreign Plans						Total
	Apr 30, 2012			Apr 30, 2011			Apr 30, 2012			Apr 30, 2011			Apr 30, 2012			Apr 30, 2011
Service cost	$	2,231		$	2,014		$	1,157		$	1,304		$	3,388		$	3,318
Interest cost	3,052			3,100			4,527			4,578			7,579			7,678
Expected return on plan assets	(2,303		)	(2,202		)	(3,908		)	(3,554		)	(6,211		)	(5,756		)
Amortization of prior service cost	374			615			(31		)	71			343			686
Recognized actuarial loss	1,546			1,946			1,312			1,415			2,858			3,361
Gain due to curtailments and settlements	—			—			—			(23		)	—			(23		)
Net periodic benefit cost	$	4,900		$	5,473		$	3,057		$	3,791		$	7,957		$	9,264



	Nine Months Ended
	U.S. Plans						Foreign Plans						Total
	Apr 30, 2012			Apr 30, 2011			Apr 30, 2012			Apr 30, 2011			Apr 30, 2012			Apr 30, 2011
Service cost	$	6,693		$	6,044		$	3,548		$	3,912		$	10,241		$	9,956
Interest cost	9,699			9,164			13,643			13,735			23,342			22,899
Expected return on plan assets	(6,909		)	(6,608		)	(11,727		)	(10,661		)	(18,636		)	(17,269		)
Amortization of prior service cost	1,405			1,527			(98		)	215			1,307			1,742
Recognized actuarial loss	6,546			3,880			3,944			4,245			10,490			8,125
Gain due to curtailments and settlements	—			—			—			(71		)	—			(71		)
Net periodic benefit cost	$	17,434		$	14,007		$	9,310		$	11,375		$	26,744		$	25,382

NOTE 9 – STOCK–BASED PAYMENT

The Company currently has four stock-based employee and director compensation award types (Restricted Stock Unit, Stock Option Plans, Management Stock Purchase Plan (“MSPP”), and Employee Stock Purchase Plan (“ESPP”)), which are more fully described in Note 15, Common Stock, to the consolidated financial statements included in the 2011 Form 10-K.

On December 14, 2011, the Company’s shareholders approved the Pall Corporation 2012 Stock Compensation Plan (the “2012 Stock Plan”). The Board adopted the 2012 Stock Plan on September 26, 2011, subject to shareholder approval. The 2012 Stock Plan replaced the Pall Corporation 2005 Stock Compensation Plan (the “2005 Stock Plan”).

Similar to the 2005 Stock Plan, the 2012 Stock Plan permits the Company to grant to its employees, including the Company’s “named executive officers”, a variety of equity compensation (that is, stock options, restricted shares, restricted units, performance shares and performance units). In addition, the 2012 Stock Plan provides that (i) in January of each calendar year, each member of the board of directors who is not on such grant date an employee of the Company will be granted a number of annual award units as determined by the board of directors, (ii) each person who is elected a director of the Company for the first time at an annual meeting and who is not an employee of the Company on the date of such annual meeting will receive a number of annual award units as determined by the board of directors, and (iii) at the discretion of a non-employee director, 100% of the cash fees paid to such director in a calendar year may be deferred in additional units which will be paid out either in one lump sum or in five equal annual installments upon the director ceasing to be a member of the board. Up to 7,100 shares are issuable under the 2012 Stock Plan. The number of shares available for awards under the 2012 Stock Plan will be reduced by one share for every

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

one share subject to a stock option granted under the 2012 Stock Plan and will be reduced by 2.31 shares for every one share subject to a Full Value Award (i.e., restricted shares, restricted units, performance shares and performance units).

The fair value of stock options is estimated using a Black-Scholes-Merton option pricing formula and are charged to earnings over the service periods during which the options are deemed to be earned; which is generally four years. The forms of options currently approved for use in awarding options provide that the options may not be exercised within one year from the date of grant, and expire if not fully exercised within seven years from the date of grant. Generally, in any year after the first year, the options can be exercised with respect to only up to 25% of the shares subject to the option, computed cumulatively.

The fair value of the restricted unit awards is determined by reference to the closing price of the Company’s common stock on the date of the award, and are charged to earnings over the service periods during which the awards are deemed to be earned; four years, in the case of units awarded to employees and upon grant, in the case of the annual award units to non-employee directors. The annual award units granted to non-employee directors of the Company (and any related dividends paid in the form of additional units) are converted to shares once the director ceases to be a member of the board of directors, other than removal for cause. Restricted stock units granted to employees vest after the fourth anniversary of the date of grant. Dividends on unvested restricted stock units vest at the same time as the restricted units for which the dividends were recorded and are forfeitable if the participant does not vest in the original award.

The detailed components of stock-based compensation expense recorded in the condensed consolidated statements of earnings for the three and nine months ended April 30, 2012 and April 30, 2011 are reflected in the table below (excluded from the table below is stock-based compensation expense included in discontinued operations for the three months ended April 30, 2012 and April 30, 2011 of $165 and $125, respectively, and $496 and $367 for the nine months ended April 30, 2012 and April 30, 2011, respectively):



	Three Months Ended				Nine Months Ended
	Apr 30, 2012		Apr 30, 2011		Apr 30, 2012		Apr 30, 2011
Restricted stock units	$	4,541	$	4,145	$	13,880	$	10,177
Stock options	2,013		2,100		5,208		4,078
ESPP	1,415		1,118		3,980		3,180
MSPP	1,027		997		3,131		2,943
Total	$	8,996	$	8,360	$	26,199	$	20,378

NOTE 10 – EARNINGS PER SHARE

The condensed consolidated statements of earnings present basic and diluted earnings per share. Basic earnings per share is determined by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share considers the potential effect of dilution on basic earnings per share assuming potentially dilutive shares that meet certain criteria, such as those issuable upon exercise of stock options, were outstanding. The treasury stock method reduces the dilutive effect of potentially dilutive securities as it assumes that cash proceeds (from the issuance of potentially dilutive securities) are used to buy back shares at the average share price during the period. Employee stock options and restricted stock units aggregating 575 and 98 shares were not included in the computation of diluted shares for the three months ended April 30, 2012 and April 30, 2011, respectively, because their effect would have been antidilutive. For the nine months ended April 30, 2012 and April 30, 2011, 862 and 180 antidilutive shares, respectively, were excluded. The following is a reconciliation between basic shares outstanding and diluted shares outstanding:



	Three Months Ended		Nine Months Ended
	Apr 30, 2012	Apr 30, 2011	Apr 30, 2012	Apr 30, 2011
Basic shares outstanding	116,567	116,899	116,190	116,565
Effect of stock plans	1,791	1,824	1,627	1,731
Diluted shares outstanding	118,358	118,723	117,817	118,296

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

NOTE 11 – FAIR VALUE MEASUREMENTS

The Company records certain of its financial assets and liabilities at fair value, which is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.

The current authoritative guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). Authoritative guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:


•	Level 1: Use of observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

•

Level 2: Use of inputs other than quoted prices included in Level 1, which are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.


•	Level 3: Use of inputs that are unobservable.

The following table presents, for each of these hierarchy levels, the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of April 30, 2012:



	Fair Value Measurements
	As of
	Apr 30, 2012		Level 1		Level 2		Level 3
Financial assets carried at fair value
Money market funds	$	2,568	$	2,568	$	—	$	—
Available-for-sale securities:
Equity securities	1,017		1,017		—		—
Debt securities:
Corporate	35,641		—		35,641		—
U.S. Treasury	5,787		—		5,787		—
Federal agency	29,340		—		29,340		—
Mortgage-backed	6,363		—		6,363		—
Municipal government	1,004		—		1,004		—
Derivative financial instruments:
Foreign exchange forward contracts	2,679		—		2,679		—
Financial liabilities carried at fair value
Derivative financial instruments:
Foreign exchange forward contracts	567		—		567		—

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

The following table presents, for each of these hierarchy levels, the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of July 31, 2011:



	Fair Value Measurements
	As of
	Jul 31, 2011		Level 1		Level 2		Level 3
Financial assets carried at fair value
Money market funds	$	4,575	$	4,575	$	—	$	—
Available-for-sale securities:
Equity securities	12,064		12,064		—		—
Debt securities:
Corporate	32,020		—		32,020		—
U.S. Treasury	10,210		—		10,210		—
Federal agency	29,404		—		29,404		—
Mortgage-backed	6,356		—		6,356		—
Municipal government	1,002		—		1,002		—
Derivative financial instruments:
Foreign exchange forward contracts	1,456		—		1,456		—
Financial liabilities carried at fair value
Derivative financial instruments:
Foreign exchange forward contracts	478		—		478		—

The Company’s money market funds and equity securities are valued using quoted market prices and, as such, are classified within Level 1 of the fair value hierarchy.

The fair value of the Company’s investments in debt securities are valued utilizing third party pricing services and verified by management. The pricing services use inputs to determine fair value which are derived from observable market sources including reportable trades, benchmark curves, credit spreads, broker/dealer quotes, bids, offers, and other industry and economic events. These investments are included in Level 2 of the fair value hierarchy.

The fair values of the Company’s foreign currency forward contracts are valued using pricing models, with all significant inputs derived from or corroborated by observable market data such as yield curves, currency spot and forward rates and currency volatilities. These investments are included in Level 2 of the fair value hierarchy.

The Company completed its annual goodwill impairment test for all reporting units in the third quarter of fiscal year 2012 and determined that no impairment existed. In addition, the Company had no impairment of goodwill in the prior year. In connection with the annual goodwill impairment test, the Company estimates the fair value of its reporting units using a market approach employing level 3 inputs as defined in the fair value hierarchy.

In connection with the acquisitions in the first and third quarters of fiscal year 2012, the Company recorded the fair value of the intangible assets acquired, which were valued using the income approach. The valuation employed level 3 inputs, as defined in the fair value hierarchy.

NOTE 12 – INVESTMENT SECURITIES

The following is a summary of the Company’s available-for-sale investment securities by category which are classified within other non-current assets in the Company’s condensed consolidated balance sheets. Contractual maturity dates of debt securities held by the trust at April 30, 2012 range from 2012 to 2044.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)



	Cost/ Amortized Cost Basis		Fair Value		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Net Unrealized Holding Gains
April 30, 2012
Equity securities	$	1,022	$	1,017	$	—	$	(5	)	$	(5	)
Debt securities:
Corporate	33,903		35,641		1,789		(51		)	1,738
U.S. Treasury	5,363		5,787		424		—			424
Federal agency	27,669		29,340		1,674		(3		)	1,671
Mortgage-backed	6,144		6,363		244		(25		)	219
Municipal government	1,000		1,004		4		—			4
	$	75,101	$	79,152	$	4,135	$	(84	)	$	4,051

July 31, 2011
Equity securities	$	2,381	$	12,064	$	9,683	$	—		$	9,683
Debt securities:
Corporate	30,239		32,020		1,814		(33		)	1,781
U.S. Treasury	9,544		10,210		666		—			666
Federal agency	28,042		29,404		1,362		—			1,362
Mortgage-backed	6,242		6,356		144		(30		)	114
Municipal government	1,000		1,002		2		—			2
	$	77,448	$	91,056	$	13,671	$	(63	)	$	13,608

The following table shows the gross unrealized losses and fair value of the Company’s available-for-sale investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:



	Less than 12 months				12 months or greater				Total
	Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses
April 30, 2012
Debt securities:
Corporate	$	5,013	$	51	$	—	$	—	$	5,013	$	51
Mortgage-backed	—		—		1,506		25		$	1,506	$	25
Federal agency	386		3		—		—		386		3
Equity securities	28		5		—		—		28		5
	$	5,427	$	59	$	1,506	$	25	$	6,933	$	84



	Less than 12 months				12 months or greater				Total
	Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses
July 31, 2011
Debt securities:
Mortgage-backed	$	1,502	$	30	$	—	$	—	$	1,502	$	30
Corporate	1,985		33		—		—		1,985		33
	$	3,487	$	63	$	—	$	—	$	3,487	$	63

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

The following table shows the proceeds and gross gains and losses from the sale of available-for-sale investments for the three and nine months ended April 30, 2012 and April 30, 2011:



	Three Months Ended				Nine Months Ended
	Apr 30, 2012		Apr 30, 2011		Apr 30, 2012		Apr 30, 2011
Proceeds from sales	$	5,473	$	4,891	$	26,700	$	19,103
Realized gross gains on sales	176		72		9,654		766
Realized gross losses on sales	12		8		28		20

NOTE 13 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company manages certain financial exposures through a risk management program that includes the use of foreign exchange and interest rate derivative financial instruments. Derivatives are executed with counterparties with a minimum credit rating of “A” by Standard & Poors and Moody’s Investor Services, in accordance with the Company’s policies. The Company does not utilize derivative instruments for trading or speculative purposes.

Foreign Exchange Related:

a. Derivatives Not Designated as Hedging Instruments

The risk management objective of holding foreign exchange derivatives is to mitigate volatility to earnings and cash flows due to changes in foreign exchange rates. The Company and its subsidiaries conduct transactions in currencies other than their functional currencies. These transactions include non-functional intercompany and external sales as well as intercompany and external purchases. The Company uses foreign exchange forward contracts, matching the notional amounts and durations of the receivables and payables resulting from the aforementioned underlying foreign currency transactions, to mitigate the exposure to earnings and cash flows caused by the changes in fair value of these receivables and payables from fluctuating foreign exchange rates. The notional amount of foreign currency forward contracts entered into during the three and nine months ended April 30, 2012 was $522,774 and $1,894,385, respectively. The notional amount of foreign currency forward contracts outstanding as of April 30, 2012 was $244,047.

b. Net Investment Hedges

The risk management objective of designating the Company’s foreign currency loan as a hedge of a portion of its net investment in a wholly owned Japanese subsidiary is to mitigate the change in the fair value of the Company’s net investment due to changes in foreign exchange rates. The Company uses a JPY loan outstanding to hedge its equity of the same amount in the Japanese wholly owned subsidiary. The hedge of net investment consists of a JPY 9 billion loan.

Interest Rate Related:

As of April 30, 2012, there are no existing interest rate related derivatives.

The fair values of the Company’s derivative financial instruments included in the condensed consolidated balance sheets are presented as follows:



	Asset Derivatives			Liability Derivatives
April 30, 2012	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Not applicable (N/A)
Derivatives not designated as hedging instruments
Foreign exchange forward contracts	Other current assets	$	2,679	Other current liabilities	$	567
Total derivatives		$	2,679		$	567
Nonderivative instruments designated as hedging instruments
Net investment hedge				Long-term debt, net of current portion	$	112,128

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)



	Asset Derivatives			Liability Derivatives
July 31, 2011	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
N/A
Derivatives not designated as hedging instruments
Foreign exchange forward contracts	Other current assets	$	1,456	Other current liabilities	$	478
Total derivatives		$	1,456		$	478
Nonderivative instruments designated as hedging instruments
Net investment hedge				Long-term debt, net of current portion	$	115,803

For the three months ended April 30, 2012 and April 30, 2011, the Company had no derivative financial instruments outstanding that were designated as hedging instruments.

The amounts of the gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments for the three and nine months ended April 30, 2012 and April 30, 2011 are presented as follows:



		Amount of Gain or (Loss) Recognized in Earnings on Derivatives
		Three Months Ended					Nine Months Ended
	Location of Gain or (Loss) Recognized in Earnings on Derivatives	Apr 30, 2012		Apr 30, 2011			Apr 30, 2012		Apr 30, 2011
Derivatives not designated as hedging relationships
Foreign exchange forward contracts	Selling, general and administrative expenses	$	1,836	$	(7,527	)	$	7,998	$	(11,877	)

The amounts of the gains and losses related to the Company’s nonderivative financial instruments designated as hedging instruments for the three and nine months ended April 30, 2012 and April 30, 2011 are presented as follows:



	Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)					Location of Gain or (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) ^(a)
	Three Months Ended						Three Months Ended
	Apr 30, 2012		Apr 30, 2011				Apr 30, 2012		Apr 30, 2011
Nonderivatives designated as hedging relationships
Net investment hedge	$	3,688	$	(506	)	N/A	$	—	$	—


(a)	There were no gains or losses recognized in earnings related to the ineffective portion of the hedging relationship or related to the amount excluded from the assessment of hedge effectiveness for the three months ended April 30, 2012 and April 30, 2011.



	Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)					Location of Gain or (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) ^(a)
	Nine Months Ended						Nine Months Ended
	Apr 30, 2012		Apr 30, 2011				Apr 30, 2012		Apr 30, 2011
Nonderivatives designated as hedging relationships
Net investment hedge	$	2,352	$	(3,974	)	N/A	$	—	$	—


(a)	There were no gains or losses recognized in earnings related to the ineffective portion of the hedging relationship or related to the amount excluded from the assessment of hedge effectiveness for the nine months ended April 30, 2012 and April 30, 2011.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

NOTE 14 – COMPREHENSIVE INCOME



	Three Months Ended						Nine Months Ended
	Apr 30, 2012			Apr 30, 2011			Apr 30, 2012			Apr 30, 2011
Net earnings	$	78,918		$	71,069		$	233,102		$	218,142
Unrealized translation adjustment	11,557			62,204			(54,113		)	100,481
Income taxes	(2,563		)	3,008			(2,873		)	6,941
Unrealized translation adjustment, net	8,994			65,212			(56,986		)	107,422
Pension liability adjustment	(477		)	424			12,890			4,956
Income taxes	1,382			(347		)	(4,200		)	(1,823		)
Pension liability adjustment, net	905			77			8,690			3,133
Change in unrealized investment (losses)/gains	(763		)	1,699			(9,557		)	2,259
Income taxes	215			(611		)	3,419			(812		)
Change in unrealized investment (losses)/gains, net	(548		)	1,088			(6,138		)	1,447
Total comprehensive income	$	88,269		$	137,446		$	178,668		$	330,144

Unrealized investment gains on available-for-sale securities, net of related income taxes, consist of the following:



	Three Months Ended						Nine Months Ended
	Apr 30, 2012			Apr 30, 2011			Apr 30, 2012			Apr 30, 2011
Unrealized (losses)/gains arising during the period	$	(506	)	$	1,699		$	(103	)	$	2,259
Income taxes	161			(611		)	(109		)	(812		)
Net unrealized (losses)/gains arising during the period	(345		)	1,088			(212		)	1,447
Reclassification adjustment for gains included in net earnings	(203		)	—			(5,926		)	—
Change in unrealized investment (losses)/gains, net	$	(548	)	$	1,088		$	(6,138	)	$	1,447

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

NOTE 15 – SEGMENT INFORMATION

The Company’s reportable segments, which are also its operating segments, consist of the Company’s Life Sciences and Industrial businesses.

The following table presents sales and segment profit from continuing operations by business segment reconciled to earnings from continuing operations before income taxes, for the three and nine months ended April 30, 2012 and April 30, 2011. The Life Sciences and Industrial results have been restated to reflect the change in allocation of certain shared expenses on a continuing operations basis.



	Three Months Ended				Nine Months Ended
	Apr 30, 2012		Apr 30, 2011		Apr 30, 2012		Apr 30, 2011
SALES:
Life Sciences	$	317,969	$	312,691	$	918,954	$	852,463
Industrial	340,007		341,101		1,030,331		946,016
Total