10-K 1 pallcorp_10k.htm ANNUAL REPORT pallcorp_10k.htm
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, 2010
  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 o   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, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter) was $4,019,001,695.
 
On September 21, 2010, there were 115,564,279 outstanding shares of the registrant’s common stock, $.10 par value.
 
DOCUMENTS INCORPORATED BY REFERENCE:
 
Portions of the registrant’s proxy statement for the 2010 annual meeting of shareholders, scheduled to be held on December 15, 2010 (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.     3  
Item 1A.   Risk Factors.     9  
Item 1B.   Unresolved Staff Comments.     12  
Item 2.   Properties.     13  
Item 3.   Legal Proceedings.     14  
Item 4.   Removed and Reserved.     18  
PART II          
Item 5.   Market for the Registrant’s Common Equity, Related Stockholder Matters and        
        Issuer Purchases of Equity Securities.     19  
Item 6.   Selected Financial Data.     22  
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.     23  
Item 7A.   Quantitative and Qualitative Disclosure About Market Risk.     42  
Item 8.   Financial Statements and Supplementary Data.     43  
Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.     43  
Item 9A.   Controls and Procedures.     44  
Item 9B.   Other Information.     46  
PART III          
Item 10.   Directors, Executive Officers and Corporate Governance.     46  
Item 11.   Executive Compensation.     49  
Item 12.   Security Ownership of Certain Beneficial Owners and Management and        
        Related Stockholder Matters.     49  
Item 13.   Certain Relationships and Related Transactions, and Director Independence.     49  
Item 14.   Principal Accounting Fees and Services.     50  
PART IV          
Item 15.   Exhibits, Financial Statement Schedules.     50  
SIGNATURES     53  
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     54  
FINANCIAL STATEMENT SCHEDULE II –        
       VALUATION AND QUALIFYING ACCOUNTS     101  


 

PART I
 
ITEM 1. BUSINESS.
 
GENERAL:
 
     Pall Corporation, a New York corporation incorporated in July 1946, and its subsidiaries (the “Company”) is a leading supplier of filtration, separation and purification technologies, principally made by the Company using its engineering capability and fluid management expertise, proprietary filter media, and other fluid clarification and separations equipment for the removal of solid, liquid and gaseous contaminants from a wide variety of liquids and gases.
 
     The Company serves customers through two business groups globally: Life Sciences and Industrial. The Life Sciences business group is focused on developing, manufacturing and selling products to customers in the Medical, BioPharmaceuticals and Food & Beverage marketplaces. The Industrial business group is focused on developing, manufacturing and selling products to customers in the Aeropower, Microelectronics and Energy & Water markets. These business groups are supported by shared and corporate services groups that facilitate the Company’s corporate governance and business activities globally and a core portfolio of intellectual property that underlies the products sold by the business groups. Company management believes that this structure positions the Company for future profitable growth with holistic focus on the global marketplace presenting opportunities for sales growth, efficiencies and cost reduction in both business groups, as well as on the Company’s corporate governance and shared services infrastructure, while efficiently leveraging its entire intellectual property portfolio to the marketplaces.
 
     Effective in the fourth quarter of fiscal year 2010, the Company reorganized its operating segments and markets in order to better align its technologies, market channel and management to customer needs. The changes are as follows:
  • The Food & Beverage market is now integrated within the Life Sciences segment. It was previously managed by the Industrial segment and reported within the Energy, Water and Process Technologies market (“EWPT”).
     
  • The Aerospace & Transportation market has been renamed Aeropower. Aeropower now includes Industrial Manufacturing, previously reported as part of EWPT, which was combined with Transportation to form the Machinery & Equipment submarket.
     
  • The Power Generation, Fuels & Chemicals and Municipal Water submarkets remaining within EWPT are now being reported as Energy & Water.
     Segment and market information for prior periods has been restated to reflect these changes. All discussions and amounts reported in this report are based on the reorganized segment and market structure.
 
     For financial information of the Company 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 “Review of Operating Segments” in Management’s Discussion and Analysis of Financial Condition and Results of Operations (Part II – Item 7. of this report).
 
     With few exceptions, research and development activities conducted by the Company are Company sponsored. Research and development expenses totaled $74,944,000 in fiscal year 2010, $71,213,000 in fiscal year 2009 and $71,647,000 in fiscal year 2008.
 
     No one customer accounted for 10% or more of the Company’s consolidated sales in fiscal years 2010, 2009, or 2008.
 
     The Company is 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 the Company’s capital expenditures or competitive position. For a further description of environmental matters in this report, see Part I – Item 3. – Legal Proceedings, and Note 14, Contingencies and Commitments, to the accompanying consolidated financial statements.
 
     At July 31, 2010, the Company employed approximately 10,400 persons.
 
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     The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the Exchange Act). The Company therefore files periodic reports, proxy statements and other information with the United States (“U.S.) 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. 

     The Companys website address is www.pall.com. The Company makes available, free of charge in the investor section of its website, copies of its 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 the website. 

     Copies of financial and other information is 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 the Companys website is not incorporated into this Form 10-K or its other securities filings and is not a part of them.
 
OPERATIONS:
 
     Pall Corporation is a broad-based filtration, separation and purification company. Its proprietary products are used to discover, develop and produce biotechnology drugs, vaccines, protect hospital patients as in the case of the Company’s blood, breathing circuit and hospital water filters, enhance the quality and efficiency of manufacturing processes, keep equipment (such as manufacturing equipment and airplanes) running efficiently, produce safe drinking water and to protect the environment. Requirements for product quality, purity, environmental protection, health and safety apply to a wide range of industries and across geographic borders. The Company has more than a 60-year history of commercializing successful products and continues to develop new materials and technologies for its Life Sciences and Industrial customers and their increasingly difficult fluid filtration, purification and separation challenges. The Company has an array of core materials and technologies that can be combined and manipulated in many ways to solve complex fluid separation challenges. These proprietary materials and technologies, coupled with the Company’s ability to engineer them into useful forms and place them into fully integrated systems, are the cornerstone of the Company’s capabilities. Proprietary materials and technologies, customer process knowledge, and engineering know-how enable the Company to provide customers with products that are well matched to their needs, to develop new products and to enter new markets.
 
     The global drivers for the filtration, separation and purification market include increasing potable water and energy demands, emerging and mutating pathogens, environmental concerns and regulations, industrial globalization and consolidation, increasing government regulations and process innovation and optimization. These all require more and ever finer levels of filtration, separation and purification. Opportunities to filter water exist in every one of the Company’s markets. The Company has a balanced portfolio of products that are sold into diversified markets. The Company’s strategy for growth includes expansion in high-growth geographies such as Asia, Eastern Europe, the Middle East and Latin America as well as focusing on high-growth markets such as biotechnology, diagnostics, cell therapy, vaccine production, micro and macroelectronics, next-generation aircraft, energy and water. The Company’s products help to meet the evolving needs of markets worldwide.
 
     The Company actively pursues applications in which its products can make a substantial difference to customers and especially targets projects, under the umbrella of its Total Fluid ManagementSM (“TFM”) strategy, whereby it can engineer integrated filtration, purification and separation systems to enhance performance and economics. The TFM strategy leverages the Company’s resources and capabilities to help its customers improve operating efficiencies within their processes through the optimal selection and integration of filtration and separation products. This approach makes use of the Company’s engineering and scientific expertise in fluid management to create unique and cost-effective solutions for customers. Integrated systems are an important part of this approach, and generally couple or automate filtration/separation steps for greater efficiency and ease and economy of use. These systems typically include the Company’s proprietary consumable filtration products. When fully commissioned, Company management expects these systems to provide an ongoing annuity stream for the Company’s consumable filtration products. System sales accounted for approximately 11% of fiscal 2010 revenues. This is about the Company’s average for system sales in the last five fiscal years. Consumable filtration products sold are principally filters made with proprietary Company filter media produced by chemical film casting, melt blowing of polymer fibers, papermaking and metallurgical processes.
 
     The Company is executing a full suite of initiatives aimed at strengthening its supply chain while increasing efficiency and reducing costs. Such improvement initiatives include procurement and “lean manufacturing”. The Company is also executing major initiatives to streamline processes and infrastructure.
 
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     Competition is intense in all of the Company’s markets and includes numerous large companies and many smaller regional competitors. In many cases, the Company’s 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 the Company provides. 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. The Company’s broad array of materials and product designs coupled with its engineering and manufacturing expertise and global reach enable it to provide customers with differentiated product performance and value, and global customer support.
 
LIFE SCIENCES SEGMENT:
 
     The Company’s Life Sciences technologies facilitate the process of drug discovery, development, regulatory validation and production. They are used extensively in the research laboratory, pharmaceutical, biotechnology and food and beverage industries, in blood centers and in hospitals at the point of patient care. The Company’s broad capability in the life sciences industry is a competitive strength and an important element of its strategy going forward. Sales in the Medical, BioPharmaceuticals and Food & Beverage markets are made through direct sales and distributors.
 
     Safety, quality, efficacy, ease of use, technical support, product delivery and price are all important considerations among the Company’s Life Sciences customers. Pricing for blood filtration products is a strong consideration as customers are typically large centralized procurers, such as blood centers in the Western Hemisphere and nationalized blood services in Europe and Asia. The backlog for the Life Sciences segment at July 31, 2010 was approximately $203,983,000 (all of which is expected to be shipped in fiscal year 2011) compared with $163,412,000 at July 31, 2009.
 
MEDICAL MARKET:
 
     The Company’s medical products improve the safety of the use of blood products in patient care and help control the spread of infections in hospitals. The Company’s cell therapy product portfolio provides efficient enabling technologies for the emerging regenerative medicine market.
 
     Products related to transfusion therapy represent a significant portion of Life Sciences sales. For example, the Company’s blood filters remove unwanted white blood cells from donor blood. Its Acrodose™ PL System enables blood centers to tap into the abundant, but often discarded, supply of whole blood platelets. Hospital-acquired infections are a growing problem for patients and the world’s health care systems. The Company’s breathing-circuit, intravenous and point-of-use Pall-Aquasafe™ water filters help protect people from these infections.
 
     The backlog for the Medical market at July 31, 2010 was approximately $42,829,000 (all of which is expected to be shipped in fiscal year 2011) compared with $39,809,000 at July 31, 2009. The Company’s principal competitors in the Medical market include Fenwal, Inc., MacoPharma Group, Fresenius Medical Care AG & Co., Merck Millipore (a division of Merck KGaA), GE Healthcare (a unit of General Electric Company (“GE”)), Tyco International Ltd., Teleflex Incorporated, Terumo Medical Corporation, and Capital Health Inc.
 
BIOPHARMACEUTICALS MARKET:
 
     The Company sells a broad line of filtration and purification technologies and engineered systems primarily to pharmaceutical and biotechnology companies for use by them in the development and commercialization of chemically synthesized and biologically derived drugs and vaccines. The Company provides a broad range of advanced filtration solutions for each critical stage of drug development through drug production. Its filtration systems and validation services assist drug manufacturers through the regulatory process and on to the market. The Company’s 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.
 
     The fastest growing part of the market is the biotechnology industry. Biotechnology drugs 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 stainless steel. Disposable 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.
 
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     Company management believes that the Company’s established record of product performance and innovation, as well as its ability to sell and globally support a complete range of products, including its engineered systems, provide a strong competitive advantage among BioPharmaceuticals customers because of the high costs and safety risks associated with drug development and production. The backlog for the BioPharmaceuticals market at July 31, 2010 was approximately $129,879,000 (all of which is expected to be shipped in fiscal year 2011) compared with $100,273,000 at July 31, 2009. Principal competitors in the BioPharmaceuticals market include Merck Millipore (a division of Merck KGaA), The Sartorius Group, CUNO (a 3M company) and GE Healthcare (a unit of GE).
 
FOOD & BEVERAGE MARKET:
 
     Within the Food & Beverage market, the Company serves the filtration needs of the beer, wine, dairy, soft drink, bottled water, and food ingredient markets. The Company's TFM strategy and capabilities help customers to ensure the quality of their products while lowering operating costs and minimizing waste.
 
     The backlog for the Food & Beverage market at July 31, 2010 was approximately $31,275,000 (all of which is expected to be shipped in fiscal year 2011) compared with $23,330,000 at July 31, 2009. Principal competitors in the Food & Beverage market include Norit Group, Filtrox Group, The Sartorius Group, BEGEROW and Parker domnick hunter, a division of Parker Hannifin.
 
INDUSTRIAL SEGMENT:
 
     The Company provides enabling and process enhancing technologies throughout the industrial marketplace. This includes the Energy & Water, Aeropower and Microelectronics markets. The Company has the capability to provide customers with integrated solutions for their process fluids. 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. The backlog for the Industrial segment at July 31, 2010 was approximately $466,493,000 (of which approximately $369,243,000 is expected to be shipped in fiscal year 2011) compared with $364,785,000 at July 31, 2009.
 
ENERGY & WATER MARKET:
 
     This market consists of producers of energy, oil, gas, renewable and alternative fuels, electricity, chemicals and municipal water. The growing demand for energy produced using clean and green technologies including careful use and reuse of water creates growth opportunities for the company.
 
     Within the Energy submarket, demand is driven by oil and gas producers, refineries and power generating stations working to increase production, produce cleaner burning fuels, conserve water, meet environmental regulations and develop alternative fuel sources. Each of these applications provides opportunities for the Company.
 
     Technologies that purify water for use and reuse represent an important opportunity. Governments around the world are implementing stringent new regulations governing drinking water standards and Company management believes that its filters and systems provide a solution for these requirements. These standards apply to municipal water supplies throughout the U.S. and in a growing number of countries. Industry, which consumes enormous quantities of water, also increasingly needs to filter it before, during and after use both to conserve it and to ensure it meets discharge requirements.
 
     The backlog at July 31, 2010 was approximately $269,447,000 (of which approximately $202,355,000 is expected to be shipped in fiscal year 2011) compared with $207,265,000 at July 31, 2009. Sales to Energy & Water customers are made through Company personnel, distributors and manufacturers’ representatives. The Company believes that its TFM strategy and ability to engineer fully integrated systems, underscored by product performance and quality, customer service, and price, are the principal competitive factors in this market. The Company’s primary competitors in the Energy & Water market include CUNO (a 3M company), GE Infrastructure (a unit of GE), U.S. Filter (a Siemens business) and CLARCOR Inc.
 
AEROPOWER MARKET:
 
     The Company sells filtration and fluid monitoring equipment to the aerospace industry for use on commercial and military aircraft, ships and land-based military vehicles to help protect critical systems and components. The Company also sells filtration solutions to the Machinery & Equipment submarkets, which consist of a grouping of producers of mobile equipment and trucks, pulp and paper, mining, automotive and metals. Commercial, Military and Machinery & Equipment sales represented 21%, 26% and 53%, respectively, of total Aeropower sales in fiscal year 2010. Key drivers in this market include passenger air miles flown, military budgets, new military and commercial aircraft, and demand for new aircraft and mobile construction equipment in emerging geographic markets, particularly in Asia. Increasing environmental regulation faced by the Company’s customers, as well as customer requirements for improved equipment reliability and fuel efficiency impact demand.
 
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     The Company’s products are sold to customers through a combination of direct sales to airframe manufacturers and other customers, including the U.S. military, and through the Company’s distribution partner, Satair A/S, for the commercial aerospace “aftermarket,” such as sales to commercial airlines. The backlog at July 31, 2010 was approximately $163,008,000 (of which approximately $133,667,000 is expected to be shipped in fiscal year 2011) compared with $138,442,000 at July 31, 2009. Competition varies by product and application. The Company’s principal competitors in the Aeropower market include Donaldson Company, Inc., Parker Hannifin Corporation, ESCO Technologies Inc. and CLARCOR Inc.
 
     Company management believes that product efficacy, performance and quality, service and price, are determinative in most sales.
 
MICROELECTRONICS MARKET:
 
     The Company sells highly sophisticated filtration and purification technologies for the semiconductor, data storage, fiber optic, advanced display and materials markets. The Company provides 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. Integrated circuits, which control almost every device or machine in use today, require exceedingly high levels of filtration technologies, which the Company provides. Diversification into the macroelectronics side of the market is enabling the Company to capitalize on demand for computer gaming consoles, MP3 players, flat screen TVs and monitors, multimedia cell phones and ink jet printers and cartridges. Newer applications served by Microelectronics are the production of solar cells and the emerging “high bright” LED market.
 
     The Company’s products are sold to customers in this market through its own personnel, distributors and manufacturers’ representatives. The backlog at July 31, 2010 was approximately $34,038,000 (of which approximately $33,221,000 is expected to be shipped in fiscal year 2011) compared with $19,078,000 at July 31, 2009. Company management believes that performance, product quality, innovation and service are the most important factors in the majority of sales in this market. The Company’s principal competitors in the Microelectronics market include Entegris, Inc. and Mott Corporation.
 
The following comments relate to the two operating segments discussed above:
 
RAW MATERIALS:
 
     Most raw materials used by the Company are available from multiple sources. A limited number of materials are proprietary products of major chemical companies. Management believes that the Company could obtain satisfactory substitutes for these materials should they become unavailable.
 
INTELLECTUAL PROPERTY:
 
     The Company owns numerous U.S. and foreign patents and has patent applications pending in the U.S. and abroad. The Company also licenses intellectual property rights from third parties, some of which bear royalties and are terminable in specified circumstances. In addition to the Company’s patent portfolio, the Company possesses a wide array of proprietary technology and know-how. The Company also owns numerous U.S. and foreign trademarks covering its diverse array of products, and has applications pending for the registration of trademarks. The Company believes that patents and other proprietary rights are important to the strength of the Company. The Company also relies upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. The Company does not believe that the expiration of any individual patent or any patents due to expire in the foreseeable future will have a material adverse impact on its business, financial condition or results of operations in any one year.
 
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EXECUTIVE OFFICERS OF THE REGISTRANT:
 
            First Appointed an
Name       Age (1)       Current Positions Held       Executive Officer
Eric Krasnoff   58   Chairman, Chief Executive Officer and President   1986
Lisa McDermott   45   Chief Financial Officer and Treasurer   2006
Roberto Perez   61   Chief Operating Officer   2003
Yves Baratelli   45   Group Vice President and   2010
        President, Life Sciences    
Sandra Marino   40   Senior Vice President, General Counsel and   2008
        Corporate Secretary    

      (1)   Age as of September 21, 2010.

     None of the persons listed above is related.
 
     Eric Krasnoff has served as Chairman and Chief Executive Officer since July 1994 and as President of the Company since August 2010. Since joining the Company in 1975, Mr. Krasnoff served in several corporate management positions, including Group Vice President and Executive Vice President. He was elected President and Chief Operating Officer of the Company in 1993. Mr. Krasnoff is a director of the Company and member of the board’s executive committee.
 
     Lisa McDermott has served as Chief Financial Officer and Treasurer since January 2006. Ms. McDermott began her employment with the Company in 1999 as Corporate Controller and was promoted to Vice President - Finance in July 2004.
 
     Roberto Perez has served as Chief Operating Officer since May 2010. Mr. Perez joined the Company in January 2000 as President of the Medical Products Manufacturing Group. In March 2001, Mr. Perez was promoted to Vice President of the Company’s blood filtration submarket. Mr. Perez was promoted to President, Life Sciences in November 2004.
 
     Yves Baratelli has served as President, Life Sciences since May 2010. Mr. Baratelli began his employment with the Company in 2002 as President of Pall Medical, Europe. He was promoted to President of Pall Life Sciences Europe two years later and soon thereafter, assumed responsibility for Pall Life Sciences Asia.
 
     Sandra Marino has served as Senior Vice President and General Counsel since September 2008 and as Corporate Secretary since March 2008. Ms. Marino joined the Company in January 2005 as Corporate Counsel and Assistant Corporate Secretary. Prior to that, Ms. Marino was employed as a corporate attorney at Carter Ledyard & Milburn LLP.
 
     None of the above persons has been involved in those legal proceedings required to be disclosed by Item 401(f) of Regulation S-K during the past five years.
 
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ITEM 1A. RISK FACTORS.
 
     The risk factors described below are not inclusive of all risk factors but highlight those that the Company believes are the most significant and that could impact its performance and financial results. These risk factors should be considered together with all other information presented in this Form 10-K.
 
Litigation and regulatory inquiries associated with the restatement of the Company’s prior period financial statements could result in substantial costs, penalties and other adverse effects.
 
     Substantial costs may be incurred to defend and resolve regulatory proceedings and litigation arising out of or relating to matters underlying the Company’s restatement of prior period financial statements as described in its Form 10-K for the fiscal year ended July 31, 2007 (“2007 Form 10-K”). These proceedings include the ongoing audits of the Company’s tax returns, as well as audits expected to commence of the Company’s tax returns for some of the periods affected by the restatement. In September 2007, the Company deposited $135 million with the U.S. Treasury, which reflected management’s preliminary assessment of additional taxes and interest that the Company might owe the Internal Revenue Service (“IRS”) for prior years as a result of tax compliance matters identified at the time and did not include any amount with respect to potential penalties. In completing the restatement, the Company examined the appropriateness of the Company’s accounting treatment of the tax consequences of each type of intercompany transaction in the various taxing jurisdictions in which the Company operates. As a result of this analysis, the Company determined that additional financial statement reserves were required with respect to certain other lesser tax compliance matters. The Company cannot predict when the ongoing IRS audit will be completed or the amount or timing of the final resolution with the IRS or other relevant taxing authorities of the matters that gave rise to the restatement, including the amount of any penalties that may be imposed, which could be substantial.
 
     The Company is also subject to other regulatory and litigation proceedings relating to, or arising out of, the restatement, including pending investigations by the SEC and the Department of Justice, securities class action lawsuits and derivative lawsuits seeking relief against certain of the Company’s officers and directors. These proceedings could also result in civil or criminal fines and other non-monetary penalties. The Company has not reserved any amount in respect of these matters in its consolidated financial statements.
 
     The Company cannot predict whether any monetary losses it experiences in the proceedings will be covered by insurance or whether insurance proceeds recovered will be sufficient to offset such losses. Pending civil, regulatory and criminal proceedings may also divert the efforts and attention of the Company’s management from business operations, particularly if adverse developments are experienced in any of them, such as an expansion of the investigations being conducted by the SEC and the Department of Justice. See Part I – Item 3. – Legal Proceedings, for further discussion of these pending matters.
 
The Company may be adversely affected by global and regional economic conditions and legislative, regulatory and political developments.
 
     The Company conducts operations around the globe. The Company expects to continue to derive a substantial portion of sales and earnings from outside the U.S. The uncertain macroeconomic environment in the U.S. and other countries around the globe in which the Company derives significant sales adversely affected the Company’s results for fiscal year 2009 and 2010 and could continue to have a negative impact on demand for the Company’s products as the prospects, strength and timing of the current recovery remain uncertain as well as the possibility of a return to a recession in the U.S. and other countries around the globe. Customers or suppliers may experience serious cash flow problems and as a result, may modify, delay or cancel plans to purchase the Company’s products and suppliers may significantly and quickly increase their prices or reduce their output. Additionally, if customers are not successful in generating sufficient revenue or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to the Company. Any inability of current and/or potential customers to purchase the Company’s products and/or to pay the Company for its products may adversely affect the Company’s earnings and cash flow. Sales and earnings could also be affected by the Company’s 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.
 
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Changes in demand for the Company’s products and business relationships with key customers and suppliers, including delays or cancellations in shipments, may affect operating results.
 
     To achieve its objectives, the Company must develop and sell products that are subject to the demands of 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 or 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.
 
     The manufacturing of the Company’s products is dependent on an adequate supply of raw materials. The Company’s ability to maintain an adequate supply of raw materials could be impacted by the availability and price of those raw materials and maintaining relationships with key suppliers.
 
The Company may not be able to obtain regulatory approval or market acceptance of new technologies.
 
     Part of the Company’s planned growth is dependent on new products and technologies. Some of those new products may require regulatory approval. Growth from those new technologies may not be realized if regulatory approval is not granted or customer demand for those products or technologies does not materialize.
 
If the Company experiences a disruption of its information technology systems, or if the Company fails to successfully implement, continue to manage and integrate its information technology systems, it could harm the Company’s business.
 
     The Company’s information technology (“IT”) systems are an integral part of its business. A serious disruption of its IT systems, whether caused by fire, storm, flood, telecommunications failures, physical or software break-ins or viruses, or any other events, could have a material adverse effect on the Company’s business and results of operations. The Company depends on its IT systems to process transactions, prepare its financial reporting and effectively manage and monitor its business. The Company cannot provide assurance that its contingency plans will allow it to operate at its current level of efficiency in the event of a serious IT disruption.
 
     Additionally, the Company’s ability to most effectively implement its business plans in a rapidly evolving market requires effective planning, reporting and analytical processes and systems. The Company is improving and expects that it will need to continue to improve and further integrate its IT systems, reporting systems and operating procedures on an ongoing basis. If the Company fails to do so effectively it could adversely affect the Company’s ability to achieve its objectives.
 
Changes in the Company’s effective tax rate may affect operating results.
 
     Fluctuations in the Company’s effective tax rate may affect operating results. The Company’s 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 it operates;
     
  • currently applicable tax rates, particularly in the U.S.;
     
  • the nature, timing and impact of permanent or temporary changes in tax laws or regulations;
     
  • the timing and amount of the Company’s repatriation of foreign earnings;
     
  • the timing and nature of the Company’s resolution of uncertain income tax positions; and
     
  • the Company’s success in managing its effective tax rate through the implementation of global tax and cash management strategies.
     The Company operates in numerous countries and is subject to taxation in all of the countries in which it operates. The tax rules and regulations in such countries can be complex and, in many cases, uncertain in their application. In addition to challenges to the Company’s tax positions arising during routine audits, disputes can arise with the taxing authorities over the interpretation or application of certain rules to the Company’s business conducted within the country involved and with respect to intercompany transactions when the parties are taxed in different jurisdictions. Pending proceedings to which the Company is subject include ongoing audits of the Company’s tax returns for some of the periods affected by the restatement, and the Company cannot predict the timing or outcome of the completion of those audits, which could result in the imposition of additional taxes and substantial penalties. See “Litigation and regulatory inquiries associated with the restatement of the Company’s prior period financial statements could result in substantial costs, penalties and other adverse effects” risk factor above.
 
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Fluctuations in foreign currency exchange rates and interest rates may materially affect operating results.
 
     In fiscal year 2010, the Company derived 69% of sales from outside the U.S. Although sales and expenditures outside the U.S. are typically made in the local currencies of those countries providing a natural hedge against fluctuations in foreign currency rates, the company retains significant exposure to the value of foreign currencies relative to the U.S. dollar and operating results may be materially affected by changes in foreign currency rates. The primary foreign currency exposures relate to adverse changes in the relationships of the U.S. dollar to the Euro, the British Pound, 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 Pound to the Euro.
 
     The Company’s debt portfolio was approximately 37% variable rate at July 31, 2010. Pension obligations, and attendant pension expense, are recognized on a discounted basis using long-term interest rates. Fluctuations in interest rates may also materially affect operating results.
 
Changes in product mix and product pricing may affect the Company’s operating results particularly with the expansion of the systems business, in which the Company experiences significantly longer sales cycles with less predictable revenue and no certainty of future revenue streams from related consumable product offerings and services.
 
     The Company’s TFM strategy is partially reliant on sales of integrated systems. Because systems are generally sold at lower gross margins than many other products, gross margins could decline if systems 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.
 
     The Company’s systems platform generally also experiences significantly longer sales cycles and involves less predictable revenue and uncertainty of future revenue streams from related consumable product offerings and services. In addition, the profitability of the Company’s systems sales depends substantially on the ability of management to estimate accurately the costs involved in manufacturing and implementing the relevant system according to the customer’s specifications. Company estimates can be adversely affected by disruptions in a customer’s plans or operations and unforeseen events, such as manufacturing defects. Failure to accurately estimate the Company’s cost of system sales can adversely affect the profitability of those sales, and the Company may not be able to recover lost profits through pricing or other actions.
 
Increases in costs of manufacturing and operating costs may affect operating results.
 
     The Company’s 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 the Company’s financial objectives is reliant on its ability to manage these fluctuations through cost savings or recovery actions and efficiency initiatives.
 
The Company may not be able to achieve the savings anticipated from its cost reduction and gross margin improvement initiatives.
 
     The Company has a number of longstanding cost reduction and gross margin improvement initiatives. Unexpected delays or other factors in these initiatives could impact the Company’s ability to realize the anticipated savings and to improve its financial performance.  
 
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Restrictive covenants in the Company’s debt facilities could adversely affect its business.
 
     Agreements governing the Company’s indebtedness include certain covenants, that among other things, can restrict the Company’s 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 the Company to maintain specified financial ratios. These and other covenants in the Company’s agreements may restrict the Company’s ability to fully pursue its business strategies. The Company’s ability to comply with such covenants may be affected by events beyond its 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 the Company’s financial condition, results of operations and cash flow.
 
The Company may not successfully enforce patents and protect proprietary products and manufacturing techniques.
 
     Some of the Company’s products, as well as some competitor’s products, are based on patented technology and other intellectual property rights. Some of these patented technologies and other intellectual property require substantial resources to develop. Operating results may be affected by the costs associated with the Company’s defense of its intellectual property against unauthorized use by others, as well as third-party challenges to its intellectual property. The Company could also experience disruptions in its business, including loss of revenues and adverse effects on its prospects, if its patented or other proprietary technologies are successfully challenged.
 
The Company may not be able to successfully complete or integrate acquisitions.
 
     In so far as acquisition opportunities are identified, there is no assurance of the Company’s ability to complete any such transactions and successfully integrate the acquired business as planned.
 
The Company is subject to domestic and international competition in all of its global markets.
 
     The Company is subject to competition in all of the global markets in which it operates. The Company’s achievement of its objectives is reliant on its 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. In addition, unforeseen disruptive technologies could significantly impact operating results.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS.
 
None.
 
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ITEM 2. PROPERTIES.
 
The following are the Company’s principal facilities (i.e., facilities with square footage in excess of 25,000 square feet), which in the opinion of management are suitable and adequate to meet the Company’s requirements:
 
        Principally Supports    
        the Following   Fiscal Year 2010
Location       Principal Activities (1)       Business Groups (2)       Square Footage
OWNED:            
Western Hemisphere            
Cortland, NY   A   PI   338,000
DeLand, FL   M   PI   279,000
Port Washington, NY   L,S   A   278,000
Fajardo & Luquillo, Puerto Rico   M,W   PLS   261,000
Ann Arbor, MI   L,W,S   PLS   148,000
New Port Richey, FL   A   PI   179,000
Timonium, MD   M,W,S   PI   160,000
Pensacola, FL   A   PLS   146,000
Ft. Myers, FL   A   PI   111,000
Hauppauge, NY   M   PLS   75,000
Covina, CA   M,L   PLS   71,000
Putnam, CT   M   PI   63,000
Europe            
Bad Kreuznach, Germany   A   PLS   390,000
Portsmouth, U.K.   A   A   270,000
Crailsheim, Germany   A   PI   215,000
Ascoli, Buccinasco & Verona, Italy   A   A   189,000
Tipperary, Ireland   M   PI   178,000
Redruth, U.K.   M   PI   163,000
Ilfracombe, U.K.   M   PLS   125,000
Newquay, U.K.   M   PLS   110,000
Bazet, France   A   PI   96,000
Frankfurt, Germany   W,S   A   75,000
Saint Germain, France   L,W,S   A   60,000
Asia            
Tsukuba, Japan   M,L,W   A   122,000
 
LEASED:            
Western Hemisphere            
Cortland, NY   M,W   PI   181,000
Fajardo, Puerto Rico   W   PLS   114,000
Timonium, MD   M,W   PI   71,000
Tijuana, Mexico   W   PLS   63,000
Baltimore, MD   W   PI   41,000
Covina, CA   W   PLS   40,000
Northborough, MA   M,W   A   38,000
San Diego, CA   A   PI   26,000
Exton, PA   W,S   A   26,000
Europe            
Madrid, Spain   L,W,S   A   44,000
Cergy, France   A   PLS   43,000
Ascoli, Italy   W   PLS   35,000
Asia            
Beijing, China   A   PI   318,000
Melbourne & Somersby, Australia   A   A   102,000
Mumbai, Banglore, Pune & Bhiwandi, India   L,W,S   A   73,000
Tokyo, Osaka & Nagoya, Japan   L,S   A   40,000
Singapore   L,S   A   26,000

(1) Definition of Principal Activities (2) Definition of Business Groups
M: Manufacturing activities
L: Laboratories for research & development and validation
activities
W: Warehousing activities
S: Sales, marketing and administrative activities
A: All of the above
PLS: Pall Life Sciences
PI: Pall Industrial
CS: Corporate and Shared Services
A: All of the above

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ITEM 3. LEGAL PROCEEDINGS.
 
Federal Securities Class Actions:
 
     Four putative class action lawsuits were filed against the Company and certain members of its management team alleging violations of the federal securities laws relating to the Company’s understatement of certain of its U.S. income tax payments and of its provision for income taxes in certain prior periods as described in Note 2, Audit Committee Inquiry and Restatement to the consolidated financial statements included in the 2007 Form 10-K. These lawsuits were filed between August 14, 2007 and October 11, 2007 in the U.S. District Court for the Eastern District of New York. By Order dated May 28, 2008, the Court consolidated the cases under the caption “In re Pall Corp,” No. 07-CV-3359 (E.D.N.Y.) (JS) (ARL), appointed a lead plaintiff and ordered that the lead plaintiff file a consolidated amended complaint. The lead plaintiff filed its consolidated amended complaint on August 4, 2008. The lead plaintiff seeks to act as representative for a class consisting of purchasers of the Company’s stock between April 20, 2007, and August 2, 2007, inclusive. The consolidated amended complaint names the Company and its current chief executive officer and chief financial officer as defendants and alleges violations of Section 10(b) and 20(a) of the Exchange Act, as amended, and Rule 10b-5 promulgated by the Securities and Exchange Commission. It alleges that the defendants violated these provisions of the federal securities laws by issuing materially false and misleading public statements about the Company’s financial results and financial statements, including the Company’s income tax liability, effective tax rate, internal controls and accounting practices. The plaintiffs seek unspecified compensatory damages, costs and expenses. The Company moved to dismiss the consolidated amended complaint on September 19, 2008, and filed its reply brief to the lead plaintiff’s opposition to the Company’s motion to dismiss on December 2, 2008. By Memorandum and Order dated September 21, 2009, the Court denied the Company’s motion to dismiss the consolidated amended complaint and granted the lead plaintiff leave to amend the consolidated amended complaint by filing a second amended complaint. On October 9, 2009, the Company moved for certification for interlocutory appeal, and the Court denied the motion by Memorandum and Order entered November 25, 2009.
 
Shareholder Derivative Lawsuits:
 
     On October 5, 2007, two plaintiffs filed identical derivative lawsuits in New York Supreme Court, Nassau County, relating to the Company’s understatement of certain of its U.S. income tax payments and of its provision for income taxes in certain prior periods as described in Note 2, Audit Committee Inquiry and Restatement to the consolidated financial statements included in the 2007 Form 10-K. These actions purported to bring claims on behalf of the Company based on allegations that certain current and former directors and officers of the Company breached their fiduciary duties by failing to evaluate and otherwise inform themselves about the Company’s internal controls and financial reporting systems and procedures. In addition, plaintiffs alleged that certain officers of the Company were unjustly enriched as a result of the Company’s inaccurate financial results over fiscal years 1999-2006 and the first three quarters of fiscal year 2007. The complaints sought unspecified compensatory damages on behalf of the Company, disgorgement of defendants’ salaries, bonuses, stock grants and stock options, equitable relief and costs and expenses. The Company, acting in its capacity as nominal defendant, moved to dismiss the complaints for failure to make a demand upon the Company’s board of directors, which motions were granted on April 30 and May 2, 2008. On September 19, 2008, the same two plaintiffs filed a derivative lawsuit in New York Supreme Court, Nassau County, which was served on the Company on September 26, 2008 (the “September Derivative”). This action purports to bring claims on behalf of the Company based on allegations that certain current and former directors and officers of the Company breached their fiduciary duties and were unjustly enriched in connection with the tax matter. In addition, the plaintiffs allege that the board’s refusal of their demand to commence an action against the defendants was not made in good faith. The plaintiffs and the Company agreed to stay this proceeding pending resolution of the Company’s motion to dismiss in the federal securities class action lawsuit related to the tax matter after which resolution the plaintiffs and the Company agreed to confer about a schedule for the defendants’ time to answer or otherwise respond to the complaint. On September 21, 2009, the U.S. District Court for the Eastern District of New York denied the Company’s motion to dismiss the consolidated amended complaint in the federal securities class action lawsuit. On October 9, 2009, the Company moved for certification for interlocutory appeal in the federal securities class action lawsuit, and the Court denied the motion by Memorandum and Order entered November 25, 2009. The September Derivative is still stayed.
 
     On November 13, 2008, another shareholder filed a derivative lawsuit in New York Supreme Court, Nassau County, against certain current and former directors and officers of the Company, and against the Company, as nominal defendant, which was served on the Company on December 4, 2008. This action purports to bring similar claims as the September Derivative. The plaintiffs and the Company have agreed to an identical stay as in the September Derivative.
 
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Other Proceedings:
 
     The SEC and U.S. Attorney’s Office for the Eastern District of New York are conducting investigations in connection with the tax matter described above. The Company is cooperating with these investigations.
 
Environmental Matters:
 
     The Company has environmental matters, discussed below, at the following four U.S. sites: Ann Arbor, Michigan; Pinellas Park, Florida; Glen Cove, New York and Hauppauge, New York.
 
     The Company’s balance sheet at July 31, 2010 contains environmental liabilities of $12,803,000, which relate to the items discussed below. In the opinion of Company management, the Company is in substantial compliance with applicable environmental laws and regulatory orders and its accruals for environmental remediation are adequate at this time.
 
     Reference is also made to Note 14, Contingencies and Commitments, to the accompanying consolidated financial statements.
 
Ann Arbor, Michigan:
 
     In February 1988, an action was filed in the Circuit Court for Washtenaw County, Michigan (the “Court”) by the State of Michigan (the “State”) against Gelman Sciences Inc. (“Gelman”), a subsidiary acquired by the Company in February 1997. The action sought to compel Gelman to investigate and remediate contamination near Gelman’s Ann Arbor facility and requested reimbursement of costs the State had expended in investigating the contamination, which the State alleged was caused by Gelman’s disposal of waste water from its manufacturing process. Pursuant to a consent judgment entered into by Gelman and the State in October 1992 (amended September 1996 and October 1999) (the “Consent Judgment”), which resolved that litigation, Gelman is remediating the contamination without admitting wrongdoing. In February 2000, the State Assistant Attorney General filed a Motion to Enforce Consent Judgment in the Court seeking approximately $4,900,000 in stipulated penalties for the alleged violations of the Consent Judgment and additional injunctive relief. Gelman disputed these assertions. Following an evidentiary hearing in July 2000, the Court took the matter of penalties “under advisement.” The Court issued a Remediation Enforcement Order requiring Gelman to submit and implement a detailed plan to reduce the contamination to acceptable levels within five years. Gelman’s plan has been approved by both the Court and the State. Although groundwater concentrations remain above acceptable levels in much of the affected area, the Court has expressed its satisfaction with Gelman’s progress during hearings both before and after the five-year period expired. Neither the State nor the Court has sought or suggested that Gelman should be penalized based on the continued presence of groundwater contamination at the site.
 
     In February 2004, the Court instructed Gelman to submit its Final Feasibility Study describing how it intends to address an area of groundwater contamination not addressed by the previously approved plan. Gelman submitted its Feasibility Study as instructed. The State also submitted its plan for remediating this area of contamination to the Court. On December 17, 2004, the Court issued its Order and Opinion Regarding Remediation and Contamination of the Unit E Aquifer (the “Order”) to address an area of groundwater contamination not addressed in the previously approved plan. Gelman is implementing the requirements of the Order.
 
     In correspondence dated June 5, 2001, the State asserted that stipulated penalties in the amount of $142,000 were owed for a separate alleged violation of the Consent Judgment. The Court found that a “substantial basis” for Gelman’s position existed and again took the State’s request “under advisement,” pending the results of certain groundwater monitoring data. That data has been submitted to the Court, but no ruling has been issued.
 
     On August 9, 2001, the State made a written demand for reimbursement of $227,000 it has allegedly incurred for groundwater monitoring. On October 23, 2006, the State made another written demand for reimbursement of these costs, which now total $494,000, with interest. In February 2007, the Company met with the State to discuss whether the State would be interested in a proposal for a “global settlement” to include, among other matters, the claim for past monitoring costs ($494,000). Gelman is engaged in discussion with the State with regard to this demand, however, Gelman considers this claim barred by the Consent Judgment.
 
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     By letter dated June 15, 2007, the Michigan Department of Environmental Quality, which is now known as the Department of National Resources and Environment (“DNRE”), claimed Gelman was in violation of the Consent Judgment and related work plans due to its failure to operate a groundwater extraction well in the Evergreen Subdivision at the approved minimum purge rate. The DNRE sought to assess stipulated penalties. Gelman filed a Petition for Dispute Resolution with the Court on July 6, 2007 contesting these penalties. Prior to the hearing on Gelman’s petition, the parties met and the DNRE agreed to waive these penalties in exchange for Gelman’s agreement to perform additional investigations in the area. The Court entered a Stipulated Order to this effect on August 7, 2007. Since then, Gelman has installed several monitoring wells requested by the State. Representatives of Gelman and the State met on December 10, 2007 to discuss the data obtained from these wells and to plan further investigative activities. On April 15, 2008, Gelman submitted two reports summarizing the results of the investigation to date. Gelman also submitted a “capture zone analysis” that confirmed that Gelman was achieving the cleanup objective for the Evergreen Subdivision system. On June 23, 2008, the State provided its response to these reports. The response also addressed outstanding issues regarding several other areas of the site. In its response, the State asked the Company to undertake additional investigation in the Evergreen Subdivision area and in other areas of the site to more fully delineate the extent of contamination. The State also asked the Company to capture additional contaminated groundwater in the Wagner Road area, near the Gelman property, unless the Company can show that it is not feasible to do so. Gelman proposed to the DNRE several modifications to the Consent Judgment on August 1, 2008 and met with the DNRE to discuss these modifications (and other outstanding issues) on September 15, 2008. The parties agreed that Gelman would prepare and submit to the DNRE an outline for modifications to the existing Consent Judgment (and Administrative Orders) by October 15, 2008 and that the parties would meet thereafter to discuss. On April 29, 2009, the Court issued an order that sets forth a schedule for the various steps that must be taken to implement agreed upon modifications to the cleanup program. Pursuant to that schedule, the Company submitted its Comprehensive Proposal to Modify Cleanup Program (the “Proposal”) to the State on May 4, 2009. On June 15, 2009, the State refused to approve the Company’s Proposal. Pursuant to the Court-imposed schedule, the Company filed pleadings identifying areas of dispute and motions seeking approval of its Proposal on August 18, 2009. The DNRE did not file any pleadings regarding the Company’s Proposal, but did file a motion to enforce the existing Consent Judgment that asks the Court to order the Company to undertake additional response activities with regard to certain portions of the site. The DNRE’s motion does not seek monetary damages. The Court has not indicated the exact process by which it will resolve these disputes. The State and the Company have met several times during fiscal year 2010 in order to resolve the outstanding disputes and a status conference meeting with the Court is scheduled for October 18, 2010.
 
Pinellas Park, Florida:
 
     In 1995, as part of a facility closure, an environmental site assessment was conducted to evaluate potential soil and groundwater impacts from chemicals that may have been used at the Company’s Pinellas Park facility during the previous 24-year period of manufacturing and testing operations. Methyl Isobutyl Ketone (“MIBK”) concentrations in groundwater were found to be higher than regulatory levels. Soil excavation was conducted in 1998 and subsequent groundwater sampling showed MIBK concentrations below the regulatory limits.
 
     In October 2000, environmental consultants for a prospective buyer of the property found groundwater contamination at the Company’s property. In October 2001, a Site Assessment Report conducted by the Company’s consultants, which detailed contamination concentrations and distributions, was submitted to the Florida Department of Environmental Protection (“FDEP”).
 
     In July 2002, a Supplemental Contamination Assessment Plan and an Interim Remedial Action Plan (“IRAP”) were prepared by the Company’s consultants and submitted to the FDEP. A revised IRAP was submitted by the Company in December 2003, and it was accepted by the FDEP in January 2004. A Remedial Action Plan (“RAP”) was submitted by the Company to the FDEP in June 2004. Final approval by the FDEP of the Company’s RAP was received by the Company on August 26, 2006. Pursuant to the approved RAP, the Company began active remediation on the property.
 
     On March 31, 2006, the FDEP requested that the Company investigate potential off-site migration of contaminants. Off-site contamination was identified and the FDEP was notified. On April 13, 2007, the FDEP reclassified the previously approved RAP as an Interim Source Removal Plan (“ISRP”) because a RAP can only be submitted after all contamination is defined.
 
     Pursuant to FDEP requirements, the Company installed additional on-site and off-site monitoring wells during 2006, 2007, 2008 and 2009. Additional monitoring wells were installed in fiscal year 2010 and monitoring results were provided to the FDEP. Once the delineation has been declared complete by FDEP, the Company will complete and submit a Site Assessment Report Addendum, summarizing the soil and groundwater contamination, delineation and remediation.
 
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     Active remediation through the fourth quarter of fiscal year 2010 was performed in accordance with work defined in the ISRP and addenda approved by FDEP. Additional remediation is scheduled to satisfy site closure requirements, which include (1) no free product contaminants, (2) shrinking or stable plumes, and (3) prevention of future exposure of the public or environment through recordation of restrictive covenants prohibiting groundwater use. The first two requirements will be demonstrated through groundwater monitoring. The Company has secured restrictive covenants (the third requirement) for the three properties immediate, down gradient and continues negotiation of additional restrictive covenants with the owners of two additional down gradient properties. A local law firm is assisting Company management during negotiations with the owners of adjacent properties regarding the restrictive covenants.
 
     Once the contamination has been delineated and active remediation has stopped, groundwater sampling and analysis must continue for at least the legislative minimum of one year. After groundwater sampling is complete, a closure application will be submitted to FDEP.
 
Glen Cove, New York:
 
     A March 1994 report indicated groundwater contamination consisting of chlorinated solvents at a neighboring site to the Company’s Glen Cove facility, and later reports found groundwater contamination in both the shallow and intermediate zones at the facility. In 1999, the Company entered into an Order on Consent with the New York State Department of Environmental Conservation (“NYSDEC”), and completed a Phase II Remedial Investigation at the Glen Cove facility.
 
     The NYSDEC has designated two operable units (“OUs”) associated with the Glen Cove facility. In March 2004, the NYSDEC finalized the Record of Decision (“ROD”) for the shallow and intermediate groundwater zones, termed OU-1. The Company signed an Order on Consent for OU-1 effective July 5, 2004, which requires the Company to prepare a Remedial Design/Remedial Action (“RD/RA”) Work Plan to address groundwater conditions at the Glen Cove facility.
 
     The Company completed a pilot test involving the injection of a chemical oxidant into on-site groundwater and, on May 31, 2006, submitted a report to NYSDEC entitled “In-Situ Chemical Oxidation Phase II Pilot Test and Source Evaluation Report” (the “Report”). The Report contained data which demonstrated that (1) in general, the pilot test successfully reduced contaminant levels and (2) the hydraulic controls installed on the upgradient Photocircuits Corporation (“Photocircuits”) site are not effective and contaminated groundwater continues to migrate from that site. On July 31, 2006, the Company received comments from NYSDEC on the Report. On September 27, 2006, the Company submitted responses to the NYSDEC comments. On November 16, 2006, the Company met with the NYSDEC representatives to discuss the Report and the impact of the continued migration of contaminated groundwater from the upgradient Photocircuits site onto the Glen Cove facility. On January 26, 2007, the Company submitted a draft conceptual remedial design document for the Glen Cove facility to NYSDEC for its technical review.
 
     The Company met with NYSDEC representatives on April 12, 2007 to discuss a possible settlement of liability for OU-1 and for the contamination in the deep groundwater zone, termed OU-2. NYSDEC would not agree to settle OU-2 because a remedial investigation has not been completed. After numerous settlement discussions, the Company and NYSDEC executed on September 23, 2009 a Consent Decree settling liability for OU-1. On October 23, 2009, the Consent Decree was entered by the clerk of the Federal District Court for the Eastern District of New York and became effective. Pursuant to the Consent Decree, the Company paid on November 19, 2009 $2 million (which was previously accrued) in exchange for a broad release of OU-1 claims and liability. Claims and losses arising out of or in connection with OU-2 or any damages to the State’s natural resources are excluded from the settlement. The ROD for OU-2 has been deferred by NYSDEC until additional data is available to delineate contamination and select an appropriate remedy. NYSDEC requested that the Company and Photocircuits enter into a joint Order on Consent for the remedial investigation. Photocircuits was not willing to enter into an Order and the Company was informed by NYSDEC that it would undertake the OU-2 investigation at the Photocircuits property. Photocircuits filed for Chapter 11 bankruptcy in October 2005 and, in or about March 2006, the assets of Photocircuits’ Glen Cove facility were sold to American Pacific Financial Corporation (“AMPAC”). AMPAC operated the facility under the Photocircuits name, but closed it on or about April 15, 2007. A Final Decree and Order closing Photocircuits’ Chapter 11 bankruptcy case was entered by the U.S. Bankruptcy Court on September 16, 2009 and no distributions were made to general unsecured creditors, which included the Company.
 
     In July 2007, NYSDEC commenced the OU-2 investigation at both the Photocircuits and Pall sites. The Company has retained an engineering consultant to oversee NYSDEC’s OU-2 work. NYSDEC's OU-2 investigation continues to be ongoing.
 
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     Effective August 14, 2010, the Company and the State entered into a Tolling Agreement pursuant to which the time between August 14, 2010 and January 31, 2012, or such date on which the State files suit, will not be included when computing the statute of limitations applicable to the commencement of any action by the State in connection with claims and losses arising out of OU-2 or natural resource damages associated with OU-1 or OU-2.
 
Hauppauge, New York:
 
     On December 3, 2004, a third-party action was commenced against the Company in the U.S. District Court for the Eastern District of New York in connection with groundwater contamination. In the primary action, plaintiff Anwar Chitayat (“Chitayat” or the “plaintiff”) sought recovery against defendants Vanderbilt Associates and Walter Gross for environmental costs allegedly incurred, and to be incurred, in connection with the disposal of hazardous substances from a property located in Hauppauge, New York (the “Site”). The Site is a property located in the same industrial park as a Company facility. Vanderbilt Associates is the prior owner of the site and Walter Gross was a partner in Vanderbilt Associates. Following Mr. Gross’ death in 2005, Barbara Gross was substituted as a third-party plaintiff. Ms. Gross claimed that the Company is responsible for releasing hazardous substances into the soil and groundwater at its property, which then migrated to the Site, and sought indemnification and contribution under Section 113 of CERCLA from third-party defendants, including the Company, in the event she was liable to Chitayat.
 
     Chitayat alleged that prior to 1985, Vanderbilt Associates leased the Site to Sands Textiles Finishers, Inc. for textile manufacturing and dry cleaning. Chitayat alleged that hazardous substances were disposed at the Site during the time period that Mr. Gross and Vanderbilt Associates owned and/or operated the Site, which migrated from the Site to surrounding areas. Chitayat alleged that in August 1998, he entered into a Consent Order with the NYSDEC which resulted in NYSDEC investigating the Site and developing a remediation plan, and required Chitayat to reimburse the State via a periodic payment plan and that the total response costs will exceed $3,000,000.
 
     In 2005, the plaintiff moved to amend his complaint to add a claim for contribution under Section 113 of CERCLA against the Company, and the Company opposed the proposed amendment. In March 2006, the Court terminated the plaintiff’s motion to amend, and plaintiff has not renewed his motion. As a result, the only claim asserted against the Company is by Barbara Gross.
 
     The NYSDEC designated two operable units (“OU”) associated with the Site. OU-1 relates to the “on-site” contamination at 90, 100 and 110 Oser Avenue, and represents the geographic area which Chitayat alleges will result in response costs in excess of $3,000,000. OU-2 relates to off-site groundwater contamination migrating away from the Site. In January 2006, the NYSDEC issued a ROD selecting a remedial program for OU-2 which is projected to cost approximately $4,500,000 to implement.
 
     Fact discovery in the case was completed in January 2006. Expert discovery was concluded in May 2006. Third-party defendants, including the Company, filed motions for summary judgment on October 6, 2006. Plaintiff filed opposition papers with the Court on November 6, 2006, and the moving third-party defendants, including the Company, filed reply papers on November 20, 2006.
 
     On March 22, 2010, the Court granted summary judgment in favor of all third-party defendants, including the Company, and dismissed the plaintiff’s complaint. Due to the plaintiff’s failure to file an appeal or extension within the applicable statute of limitations, the case is now closed.
 
ITEM 4. REMOVED AND RESERVED.
 
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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.
 
                              Cash Dividends
      2010   2009   Declared Per Share
Price per share   High       Low       High       Low       2010       2009
Quarter:  First   $      34.54   $      28.69   $      42.72   $      21.79   $      0.145   $      0.130
  Second     37.85     31.06     29.59     21.61     0.160     0.145
  Third     41.82     33.21     28.68     18.20     0.160     0.145
  Fourth     39.99     31.84     30.63     24.00     0.160     0.145

     As of September 21, 2010 there were approximately 3,159 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.
 
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     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 29, 2005 (the last trading day of the Company’s fiscal year 2005) and the reinvestment of all dividends paid during the last five fiscal years.
 
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Pall Corporation, the S&P 500 Index
and the S&P Industrial Machinery Index
 
 
Copyright© 2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
 
  29-Jul-05 31-Jul-06 31-Jul-07 31-Jul-08 31-Jul-09 30-Jul-10
Pall Corporation $ 100 $ 86 $ 138 $ 136 $ 103 $ 134
S&P 500 $ 100 $ 105 $ 122 $ 109 $ 87 $ 99
S&P Industrial Machinery $ 100 $ 105 $ 135 $ 124 $ 95 $ 125
 
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     The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” of the Company’s common stock during the quarter ended July 31, 2010.
 
    (In thousands, except per share data)
              Total Number of   Approximate
              Shares Purchased as   Dollar Value of Shares
    Total Number         Part of Publicly   that May Yet Be
    of Shares   Average Price   Announced Plans or   Purchased Under the
Period       Purchased       Paid Per Share       Programs (1)       Plans or Programs (1)
May 1, 2010 to May 31, 2010   360   $ 38.36   360   $ 402,940
June 1, 2010 to June 30, 2010   1,353   $ 35.80   1,353     354,498
July 1, 2010 to July 31, 2010   46   $ 33.79   46     352,944
                     
Total   1,759   $ 36.27   1,759      
                     
       (1)        On November 15, 2006, the board authorized an expenditure of $250,000 to repurchase shares. On October 16, 2008, the board authorized an additional expenditure of $350,000 to repurchase shares. The Company’s shares may be purchased over time, as market and business conditions warrant. There is no time restriction on this authorization. During the fourth quarter of fiscal year 2010, the Company purchased 1,759 shares in open-market transactions at an aggregate cost of $63,797, with an average price per share of $36.27. Total repurchases in fiscal year 2010 were 2,720 shares at an aggregate cost of $99,999, with an average price per share of $36.76. The aggregate cost of repurchases in fiscal years 2009 and 2008 was $96,439 (3,347 shares at an average price per share of $28.81) and $148,850 (4,056 shares at an average price per share of $36.70), respectively. As of July 31, 2010, $352,944 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.
 
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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.
 
(In millions, except per share data)       2010       2009       2008       2007(a)       2006(a)
RESULTS FOR THE YEAR:                                   
                                 
Net sales   $      2,401.9   $      2,329.2   $      2,571.6     $      2,249.9   $      2,016.8
Cost of sales     1,195.8     1,228.5     1,360.8       1,190.5     1,072.8
Gross profit     1,206.1     1,100.7     1,210.8       1,059.4     944.0
Selling, general and administrative expenses     739.9     699.9     749.5       675.0     641.0
Research and development     75.0     71.2     71.6       62.4     57.3
Restructuring and other charges, net     17.7     30.7     31.5       22.4     12.3
Interest expense, net (b)     14.3     28.1     32.6       39.1     30.2
Loss on extinguishment of debt (b)     31.5                  
Earnings before income taxes     327.7     270.8     325.6       260.5     203.2
Provision for income taxes     86.5     75.2     108.3       133.0     151.1
Net earnings   $ 241.2   $ 195.6   $ 217.3     $ 127.5   $ 52.1
Earnings per share:                                
       Basic   $ 2.05   $ 1.65   $ 1.77     $ 1.04   $ 0.42
       Diluted   $ 2.03   $ 1.64   $ 1.76     $ 1.02   $ 0.41
Dividends declared per share   $ 0.625   $ 0.565   $ 0.62     $ 0.35   $ 0.43
                                 
Capital expenditures   $ 136.3   $ 133.0   $ 123.9     $ 97.8   $ 96.0
Depreciation and amortization of long-lived assets   $ 93.6   $ 89.4   $ 93.2     $ 94.0   $ 95.7
                                 
YEAR-END POSITION:                                
Working capital   $ 1,065.6   $ 853.1   $ 1,085.7 (c)   $ 774.2   $ 653.3
Property, plant and equipment     706.4     681.7     663.0       607.9     621.0
Total assets     2,999.2     2,840.8     2,956.7       2,708.8     2,461.3
Long-term debt, net of current portion     741.4     577.7     747.1       591.6     640.0
Total liabilities     1,816.9     1,726.2     1,817.5       1,648.2     1,524.2
Stockholders’ equity     1,182.3     1,114.6     1,139.2       1,060.6     937.1

       a)        As discussed in the special note preceding Part I of the 2007 Form 10-K, on August 1, 2007, the audit committee of the Company’s board of directors, on the recommendation of management, concluded that the Company’s previously issued financial statements for each of the eight fiscal years in the period ended July 31, 2006 (including the interim periods within those years), and for each of the fiscal quarters ended October 31, 2006, January 31, 2007 and April 30, 2007, should no longer be relied upon. Accordingly, the Company restated its previously issued financial statements for those periods in the 2007 Form 10-K.
 
       b) Refer to Note 8, Notes Payable and Long-term Debt, to the accompanying consolidated financial statements.
 
       c) Non-cash working capital at July 31, 2008 has been impacted by the adoption of accounting guidance issued by the Financial Accounting Standards Board (“FASB”), regarding accounting for uncertainty in income taxes. Consistent with the provisions of this guidance, the Company has reclassified certain tax related assets and liabilities from current to non-current. Such reclassifications had the effect of increasing non-cash working capital at July 31, 2008 by approximately $137.0.
 
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Forward-Looking Statements and Risk Factors
 
     The following discussion should be read together with the accompanying consolidated financial statements and notes thereto and other financial information in this Form 10-K. The discussion under the subheading “Review of Operating Segments” below is in local currency (i.e., had exchange rates not changed year over year) unless otherwise indicated. Company management considers local currency change to be an important measure because by excluding the impact of volatility of exchange rates, underlying volume change is clearer. Dollar amounts discussed below are in thousands, unless otherwise indicated, except per share dollar amounts. In addition, per share dollar amounts are discussed on a diluted basis. The Company utilizes certain estimates and assumptions that affect the reported financial information as well as to quantify the impact of various significant factors that contribute to the changes in the Company’s periodic results included in the discussion below.
 
     The matters discussed in this 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 the Company or management intends, expects, projects, believes or anticipates will or may occur in the future. All statements regarding future performance, earnings projections, earnings guidance, management’s expectations about its future cash needs and effective tax rate, and other future events or developments are forward-looking statements. Forward-looking statements 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. The Company makes these statements as of the date of this disclosure and undertakes no obligation to update them, whether as a result of new information, future developments or otherwise.
 
Critical Accounting Policies and Estimates
 
     The Company’s accompanying consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). These accounting principles require the Company 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 Company management’s knowledge of current events and actions it may undertake in the future, actual results may differ from estimates. The following discussion addresses the Company’s critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results, and that require judgment. See also the notes to the accompanying consolidated financial statements, which contain additional information regarding the Company’s 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 the Company’s historical income tax provisions and accruals. Such differences could have a material effect on the Company’s income tax provision and net earnings in the period in which a final determination is made.
 
     The Company records 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 Company management has 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 the Company’s 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.
 
     The Company performs detailed impairment testing for goodwill at least annually during the Company’s fiscal third quarter, or more frequently if certain events or circumstances indicate impairment might have occurred. The Company evaluates the recoverability of goodwill using a two-step impairment test approach at the reporting unit level. The Company’s two reportable operating segments, Life Sciences and Industrial, are also deemed to be its 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.
 
     The Company completed its annual goodwill impairment tests as of March 1, 2010 and March 1, 2009. 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.
 
     The Company reorganized its operating segments, such that the Food & Beverage market, previously managed by and reported in the Industrial segment, is now managed by and reported in the Life Sciences segment. The reorganization was effective May 1, 2010. As a result of this reorganization the Company re-performed the goodwill impairment test as of May 1, 2010 on both a pre- and post-reorganization basis. 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, the Company uses significant estimates and assumptions to estimate the fair values of its reporting units. Fair value of the Company’s 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 the Company’s 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 is then determined using the average of the fair values derived from the minimum and median market multiples. The minimum and median market multiples used in the fiscal year 2010 impairment testing ranged from 0.9 to 3.3 times revenue, 12.6 to 19.7 times EBIT and 9.1 to 11.8 times EBITDA. The minimum and median market multiples used in the fiscal year 2009 impairment testing ranged from 0.2 to 2.4 times revenue, 5.4 to 14.5 times EBIT and 2.1 to 10.7 times EBITDA. To further substantiate the reasonableness of the fair value of its reporting units, the Company compares 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 its 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) the Company has 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 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
 
     Company management evaluates its 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, Company management records 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. The Company records 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 the Company’s expectations.
 
Recoverability of Available-for-Sale Investments
 
     Other than temporary losses relating to available-for-sale investments are recognized in earnings when Company management determines that the recoverability of the cost of the investment is unlikely. Such losses could result in a material adjustment in the period of the change. Company management considers numerous factors, on a case-by-case basis, in evaluating whether the decline in market value of an available-for-sale security below cost is other than temporary. Such factors include, but are not limited to, (i) the length of time and the extent to which the market value has been less than cost; (ii) the financial condition and the near-term prospects of the issuer of the investment; and (iii) whether Company management intends to retain the investment for a period of time that is sufficient to allow for any anticipated recovery in market value.
 
Defined Benefit Retirement Plans
 
     The Company sponsors 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 the Company, within certain guidelines. In addition, the Company’s actuarial consultants also use subjective factors, such as withdrawal and mortality rates, to calculate the liabilities and expense. The actuarial assumptions used by the Company 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) recorded by the Company.
 
     Pension expense associated with the Company’s defined benefit plans was $28,541 in fiscal year 2010, which was based on a weighted average discount rate of 5.79% (calculated using the projected benefit obligation) and a weighted average expected long-term rate of return on plan assets of 6.26% (calculated using the fair value of plan assets).
 
     The expected rates of return on the various defined benefit pension plans’ assets are based on the asset allocation of each plan and the long-term projected return of those assets. If the expected long-term rate of return on plan assets was reduced by 50 basis points, pension expense in fiscal year 2010 would have increased approximately $1,700.
 
     The objective of the discount rate assumption is to reflect the rate at which the pension benefits could be effectively settled. The Company’s methodology for selecting the discount rate for the U.S. plans as of July 31, 2010 was to match the plan’s cash flows to that of a yield curve that provides the equivalent yields on zero-coupon corporate bonds for each maturity. Benefit cash flows due in a particular year can be “settled” theoretically by “investing” them in the zero-coupon bond that matures in the same year. The discount rate is the single rate that produces the same present value of cash flows. The discount rate assumption for non-U.S. plans reflects the market rate for high-quality, fixed-income debt instruments. Both discount rate assumptions are based on the expected duration of benefit payments for each of the Company’s pension plans as of the annual measurement date and is subject to change each year. If the weighted average discount rate was reduced by 50 basis points, pension expense in fiscal year 2010 would have increased by approximately $3,200.
 
25
 

 

Accrued Expenses and Contingencies
 
     Company management estimates certain material expenses in an effort to record those expenses in the period incurred. When no estimate in a given range is deemed to be better than any other, the low end of the range is accrued. Differences between estimates and assumptions and actual results could result in an accrual requirement materially different from the calculated accrual.
 
     Environmental accruals are recorded based upon historical costs incurred and estimates for future costs of remediation and on going legal expenses which have a high degree of uncertainty.
 
     Self-insured workers’ compensation insurance accruals are recorded based on insurance claims processed, including applied loss development factors as well as historical claims experience for claims incurred but not yet reported. Self-insured employee medical insurance accruals are recorded based on medical claims processed as well as historical medical claims experience for claims incurred but not yet reported.
 
Segment and Market Reorganization
 
     Effective in the fourth quarter of fiscal year 2010, the Company reorganized its operating segments and markets in order to better align its technologies, market channel and management to customer needs. The changes are as follows:
  • The Food & Beverage market is now integrated within the Life Sciences segment. It was previously managed by the Industrial segment and reported within the Energy, Water and Process Technologies market (“EWPT”).
     
  • The Aerospace & Transportation market has been renamed Aeropower. Aeropower now includes Industrial Manufacturing, previously reported as part of EWPT, which was combined with Transportation to form the Machinery & Equipment submarket.
     
  • The Power Generation, Fuels & Chemicals and Municipal Water submarkets remaining within EWPT are now being reported as Energy & Water.
     Segment and market information for prior periods has been restated to reflect these changes. All discussions and amounts reported in this report are based on the reorganized segment and market structure.
 
Results of Operations 2010 Compared with 2009
 
Review of Consolidated Results
 
     Sales in fiscal year 2010 increased 3.1% to $2.4 billion from $2.3 billion in fiscal year 2009. Exchange rates used to translate foreign subsidiary results into U.S. Dollars increased reported sales by $58,289, primarily due to the weakening of the U.S. Dollar against the Japanese Yen (“JPY”), Australian Dollar, Euro, Korean Won, and Canadian Dollar. In local currency, sales increased 0.6%. Increased pricing contributed $12,449 to overall sales in the year, attributable to an improvement in the Life Sciences segment partly offset by a decline in Industrial.
 
     Life Sciences segment sales increased 4.1% (in local currency) in fiscal year 2010, reflecting double-digit growth in the BioPharmaceuticals market partly offset by a decline in the Food & Beverage market. Sales in the Medical market were up slightly year over year. Industrial segment sales decreased 2.8% (in local currency), reflecting declines in the Energy & Water and Aeropower markets partly offset by strong growth in the Microelectronics market. Overall systems sales decreased 15.0% (in local currency), reflecting decreases in both Life Sciences and Industrial. Systems sales represented 11.3% of total sales in fiscal year 2010 compared to 13.4% in fiscal year 2009. For a detailed discussion of sales, refer to the section “Review of Operating Segments” below.
 
     Gross margin in fiscal year 2010 increased to 50.2% from 47.3% in fiscal year 2009. Key drivers of the improvement in gross margin were:
  • favorable absorption of manufacturing overhead, due to increased volume and the estimated benefit of cost savings initiatives, including improved efficiency in manufacturing operations, that outpaced inflation, contributing an estimated 150-170 basis points in margin,
     
  • a change in mix estimated to have increased gross margin percentage by 100-120 basis points, comprised of:
              Ø       
a favorable impact from growth in sales in high margin markets and submarkets primarily Pharmaceuticals, Microelectronics and Machinery & Equipment, and
 
26
 

 

              Ø       
a favorable impact from a decrease in systems sales, which typically have lower gross margins than consumables,
  • an increase in pricing as well as the benefit of certain sales channel changes from distribution to direct contributing an estimated 20 basis points in margin.
     The increase in gross margin reflects improvements in both the Life Sciences and Industrial segments. For a detailed discussion of the factors impacting gross margin by segment, refer to the section “Review of Operating Segments” below.
 
     Selling, general and administrative (“SG&A”) expenses in fiscal year 2010 increased by $40,104, or 5.7% (an increase of $24,627, or 3.5%, in local currency). SG&A (in local currency) in Life Sciences and Industrial increased, while Corporate SG&A was down. The overall increase in SG&A (in local currency) reflects the impact of strategic and structural investments and company-wide inflationary increases in payroll and employee benefit costs partly offset by cost savings resulting from headcount reductions in the Industrial segment and reductions in discretionary spending company-wide. The strategic and structural investments made include:
  • costs incurred for changes in sales channels from distribution to direct that primarily impacted the Life Sciences segment,
     
  • costs related to the establishment of the Life Sciences European headquarters in Switzerland,
     
  • costs related to the purchase of a biotechnology company,
     
  • geographic expansion in Latin America, Middle East and Asia, primarily impacting Industrial, and
     
  • investments in information technology, impacting both Life Sciences and Industrial.
     It is estimated that these strategic and structural investments accounted for approximately 90% of the local currency increase in SG&A. As a percentage of sales, SG&A expenses were 30.8% compared to 30.0% in fiscal year 2009. For a detailed discussion of SG&A by segment, refer to the section “Review of Operating Segments” below.
 
     Research and development (“R&D”) expenses were $74,944 in fiscal year 2010 compared to $71,213 in fiscal year 2009, an increase of $3,731, or 5.2% ($3,641, or 5.1% in local currency). The increase in R&D reflects increased spending in the Life Sciences segment, while Industrial was flat. As a percentage of sales, R&D expenses were 3.1%, on par with fiscal year 2009. For a detailed discussion of R&D by segment, refer to the section “Review of Operating Segments” below.
 
     In fiscal year 2010, the Company recorded restructuring and other charges (“ROTC”) of $17,664. ROTC in the year was primarily comprised of severance and other costs related to the Company’s on-going cost reduction initiatives and an increase to previously established environmental reserves.
 
     In fiscal year 2009, the Company recorded ROTC of $30,723. ROTC in the year was primarily comprised of severance and other costs related to the Company’s ongoing cost reduction initiatives, a charge to write-off in-process R&D acquired in the acquisition of GeneSystems, SA, a charge primarily for the other-than-temporary diminution in value of certain equity investment securities held by the Company’s benefits protection trust, a charge for the impairment of capitalized software, increases to previously established environmental reserves, net of receipt of an insurance claim payment, and legal and other professional fees in connection with the Federal Securities Class Actions, Shareholder Derivative Lawsuits and Other Proceedings (see Note 14, Commitments and Contingencies, to the accompanying consolidated financial statements), net of receipt of insurance claim payments. Such charges were partly offset by the reversal of excess restructuring reserves that were previously recorded in the Company’s consolidated statements of earnings in fiscal years 2008 and 2007.
 
     The details of ROTC for the years ended July 31, 2010 and July 31, 2009 as well as the activity related to restructuring liabilities that were recorded in those years can be found in Note 2, Restructuring and Other Charges, Net, to the accompanying consolidated financial statements.
 
     In fiscal year 2010, the Company refinanced most of its long-term debt, which included the redemption of its $280,000 6.00% Senior Notes due August 1, 2012 (the “Prior Notes”). In connection with the redemption of these notes as well as the termination of the Company’s $500,000 revolving credit facility due in fiscal year 2011 (the “Prior Facility”), the Company recorded a loss on extinguishment of debt totaling $31,513, primarily comprised of a redemption premium and the write-off of other deferred financing costs. Refer to the section “Liquidity and Capital Resources” below for further discussion of the refinancing of the Company’s long-term debt.
 
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     EBIT were $342,045 in fiscal year 2010 compared to $298,922 in fiscal year 2009. The impact of foreign currency translation increased EBIT by $17,189 in fiscal year 2010. As a percentage of sales, EBIT were 14.2% compared to 12.8% in fiscal year 2009.
 
     Net interest expense in fiscal year 2010 was $14,324 compared to $28,136 in fiscal year 2009. Net interest expense reflects the reversal of $11,780 of accrued interest primarily related to the resolution of a foreign tax audit and expiring statutes of limitation for assessment. Excluding these items, net interest expense decreased $2,032 compared to fiscal year 2009, reflecting the repayment of higher interest bearing foreign debt in fiscal year 2009. A decline in interest income, related to lower interest rates, partly offset the above.
 
     In fiscal year 2010, the Company’s effective tax rate was 26.4% as compared to 27.8% in fiscal year 2009. The decrease in the effective tax rate was primarily driven by the favorable resolution of foreign tax audits, partially offset by tax costs associated with the establishment of the Company’s European headquarters and a higher effective tax rate related to the mix of foreign earnings. For the year ended July 31, 2010, the effective tax rate varied from the U.S. federal statutory rate primarily due to the benefits of foreign operations and the resolution of foreign tax audits resulting in the recognition of $16,200 of income tax benefit. For the year ended July 31, 2009, the effective tax rate varied from the U.S. federal statutory rate primarily due to the benefits related to foreign operations, the repatriation of foreign earnings, the restructuring of certain foreign operations, the retroactive extension of the federal research credit provided for in the Emergency Economic Stabilization Act of 2008 and the favorable resolution of a tax audit.
 
     Net earnings in fiscal year 2010 were $241,248, or $2.03 per share, compared with net earnings of $195,619, or $1.64 per share in fiscal year 2009. In summary, the increase in net earnings and earnings per share reflect the increase in EBIT, the decline in net interest expense and a decrease in the effective tax rate. Company management estimates that foreign currency translation increased net earnings per share by 10 cents in fiscal year 2010.
 
Review of Operating Segments
 
     The following table presents sales and operating profit by segment, reconciled to earnings before income taxes, for the fiscal years ended July 31, 2010 and July 31, 2009.
 
              %         %   %
    2010       Margin       2009       Margin       Change
  SALES:                        
  Life Sciences $      1,237,835       $      1,166,275       6.1  
  Industrial   1,164,097         1,162,883       0.1  
  Total $ 2,401,932       $ 2,329,158       3.1  
  OPERATING PROFIT:                        
  Life Sciences $ 280,089   22.6   $ 234,055        20.1   19.7  
  Industrial   164,544   14.1     152,068   13.1   8.2  
  Total operating profit   444,633   18.5     386,123   16.6        15.2  
  General corporate expenses   53,411         56,478       (5.4 )
  Earnings before ROTC, interest expense, net, loss                        
         on extinguishment of debt and income taxes   391,222   16.3     329,645   14.2   18.7  
  ROTC, net   17,664         30,723          
  Interest expense, net   14,324         28,136          
  Loss on extinguishment of debt   31,513                  
  Earnings before income taxes $ 327,721       $ 270,786          
                           
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     Life Sciences:
 
     Presented below are Summary Statements of Operating Profit for the Life Sciences segment for the fiscal years ended July 31, 2010 and July 31, 2009:
 
          % of         % of
        2010       Sales       2009       Sales
  Sales $      1,237,835       $      1,166,275    
  Cost of sales   569,097        46.0     578,439        49.6
  Gross margin   668,738   54.0     587,836   50.4
  SG&A   340,628   27.5     309,441   26.5
  R&D   48,021   3.9     44,340   3.8
  Operating profit $ 280,089   22.6   $ 234,055   20.1
                     
     The tables below present sales by market and geography within the Life Sciences segment for the fiscal years ended July 31, 2010 and July 31, 2009, including the effect of exchange rates for comparative purposes.
 
                            %
                      Exchange   Change in
                %   Rate   Local
        2010       2009       Change       Impact       Currency
  By Market                            
  BioPharmaceuticals $      620,279   $      550,620        12.7     $      13,304             10.2  
  Medical   399,507     389,841   2.5       6,449   0.8  
  Food & Beverage   218,049     225,814   (3.4 )     4,357   (5.4 )
  Total Life Sciences $ 1,237,835   $ 1,166,275   6.1     $ 24,110   4.1  
                               
  By Geography                            
  Western Hemisphere $ 430,285   $ 399,614   7.7     $ 1,602   7.3  
  Europe   595,719     578,319   3.0       6,881   1.8  
  Asia   211,831     188,342   12.5       15,627   4.2  
  Total Life Sciences $ 1,237,835   $ 1,166,275   6.1     $ 24,110   4.1  
                               
     Life Sciences segment sales increased 4.1% in fiscal year 2010 compared to fiscal year 2009. The increase in sales reflects growth in consumables sales of 6.6%, partly offset by a decline in systems sales of 21.3%. Increased pricing (driven by the BioPharmaceuticals and Food & Beverage markets) contributed $13,009, or 1.1%, to overall sales growth in the year and, as such, the volume increase was 3.0%. Life Sciences sales represented approximately 52% of total sales in fiscal year 2010 compared to 50% in fiscal year 2009.
 
     Sales in the BioPharmaceuticals market, which is comprised of two submarket groupings (Pharmaceuticals and Laboratory) increased 10.2%.
 
     Sales in the Pharmaceuticals submarket, which represented approximately 43% of total Life Sciences sales, increased 8.7% in fiscal year 2010 compared to fiscal year 2009. The growth reflects an increase in consumables sales of 12.0% (all geographies contributing), partly offset by a decline in systems sales of 17.9%. Consumables sales growth was driven by increased demand in the vaccine marketplace and the use of the Company’s single-use processing technologies. The Western Hemisphere also benefited from a change in route to market (from distributor to direct). In addition to growth in India and Korea, Asia also benefited from strong growth in China as drug producers are increasingly adopting Federal Drug Administration manufacturing standards to facilitate exporting their products to the U.S. and Europe. The decline in systems sales reflects a slowdown in capital investments by customers in the first half of fiscal year 2010. Growth in the Laboratory submarket (in all geographies), which represented less than 10% of Life Sciences sales, contributed to growth in the BioPharmaceuticals market as well.
 
29
 

 

     Sales in the Medical market, which is comprised of blood filtration product sales and other infection and patient protection products sold to hospitals, original equipment manufacturers (“OEM”) and cell therapy developers, increased 0.8% in fiscal year 2010 compared to fiscal year 2009. Sales of blood filtration products, which represented approximately 18% of total Life Sciences sales, increased 1.6% in fiscal year 2010 compared to fiscal year 2009. The growth in blood filtration sales was driven by the U.S., reflecting new product conversions at certain customers and increased sales to independent blood centers related to increased market share, and Asia, related to adoption of universal leukoreduction in certain countries and new tender wins. These increases were partly offset by reduced blood collections in the U.K. as well as decreased sales in Russia reflecting economic conditions in the region. Sales to Hospitals, which represented less than 10% of total Life Sciences sales, increased 6.8% driven by an increase in point of use water filter sales. All geographies reported growth in Hospital sales compared to fiscal year 2009.
 
     Sales in the Food & Beverage market decreased 5.4% reflecting a slowdown in capital investment in the beer, wine and bottled water sectors. Systems sales were down 24.6%. Consumables sales were up slightly as growth in the Western Hemisphere and Asia were offset by a decline in Europe, the largest region. An improving trend has emerged over the last few quarters, with high single-digit sales growth achieved in the fourth quarter as well as growth in orders over the last three quarters, particularly in systems.
 
     Life Sciences gross margin in fiscal year 2010 increased 360 basis points to 54.0% from 50.4% in fiscal year 2009. Key drivers of the improvement in gross margin were:
  • favorable absorption of manufacturing overhead, due to increased volume and the estimated benefit of cost savings initiatives, including improved efficiency in manufacturing operations, that outpaced inflation, contributing an estimated 160-180 basis points in margin,
     
  • a change in mix estimated to have increased gross margin percentage by 140-160 basis points, comprised of:
              Ø       
a favorable impact from a higher proportion of consumables sales to Pharmaceuticals customers versus Medical and Food & Beverage customers, the former generally carrying higher gross margin, and
   
              Ø       
a favorable impact from a decrease in systems sales, which typically have lower gross margins than consumables (the mix of systems sales to Pharmaceuticals and Food & Beverage customers decreased to 6.9% of total Life Sciences sales compared to 9.2% in fiscal year 2009). Furthermore, within systems sales, there was a higher proportion of sales of smaller scale standard systems, which generally carry higher margins,
  • an increase in pricing, as well as the benefit of certain sales channel changes from distribution to direct contributing an estimated 40 basis points in margin.
     SG&A expenses in fiscal year 2010 increased by $31,187, or 10.1% (an increase of $25,000, or 8.1% in local currency), compared to fiscal year 2009. The increase in SG&A in local currency principally reflects the impact of strategic and structural investments and inflationary increases in payroll and employee benefit costs. SG&A as a percentage of sales increased to 27.5% from 26.5% in fiscal year 2009, reflecting the increase in spending.
 
     R&D expenses were $48,021 compared to $44,340 in fiscal year 2009, an increase of $3,681, or 8.3% ($3,688, or 8.3% in local currency). As a percentage of sales, R&D expenses were 3.9% compared to 3.8% in fiscal year 2009.
 
     Operating profit dollars in fiscal year 2010 were $280,089, an increase of $46,034, or 19.7% ($36,627, or 15.6% in local currency) compared to fiscal year 2009. Operating margin improved to 22.6% from 20.1% in fiscal year 2009.
 
30
 

 

     Industrial:
 
     Presented below are summary Statements of Operating Profit for the Industrial segment for the fiscal years ended July 31, 2010 and July 31, 2009:
 
            % of         % of
          2010   Sales   2009       Sales
  Sales       $      1,164,097       $      1,162,883    
  Cost of sales     626,733   53.8     650,029   55.9
  Gross margin     537,364   46.2     512,854   44.1
  SG&A     345,897   29.7         333,913   28.7
  R&D     26,923   2.3     26,873   2.3
  Operating profit   $ 164,544       14.1   $ 152,068   13.1
                        
     The tables below present sales by market and geography within the Industrial segment for the fiscal years ended July 31, 2010 and July 31, 2009, including the effect of exchange rates for comparative purposes.
 
                                  %
                        Exchange   Change in
                  %   Rate   Local
      2010   2009       Change       Impact       Currency
  By Market                              
  Energy & Water   $ 479,866   $ 505,468   (5.1 )   $ 14,177   (7.9 )
  Aeropower     418,203     446,386   (6.3 )     8,641   (8.3 )
  Microelectronics     266,028     211,029   26.1       11,361   20.7  
  Total Industrial   $ 1,164,097   $ 1,162,883   0.1     $ 34,179   (2.8 )
                                  
  By Geography                              
  Western Hemisphere   $ 359,076   $ 370,088   (3.0 )   $ 2,527   (3.7 )
  Europe     350,233     381,988   (8.3 )     3,396   (9.2 )
  Asia     454,788     410,807   10.7       28,256   3.8  
  Total Industrial       $      1,164,097       $      1,162,883   0.1     $      34,179   (2.8 )
                                  
     Industrial segment sales decreased 2.8% in fiscal year 2010, reflecting declines of 7.9% in the Energy & Water market and 8.3% in the Aeropower market, partly offset by growth of 20.7% in the Microelectronics market. The overall decline in Industrial sales reflects a decrease in systems sales of 11.7%, while consumables sales were down slightly. Industrial sales represented approximately 48% of total sales in fiscal year 2010 compared to 50% in fiscal year 2009.
 
     The Energy & Water market sells process related products to producers of fuels & chemicals, municipal water, and power generation. The sales results by the submarkets that comprise the Energy & Water market are discussed below:
  • Sales in the Fuels & Chemicals submarkets, which represented approximately 23% of total Industrial sales, were down 8.3% reflecting a decrease in demand in the chemical and refining sectors. Sales in the oil & gas and alternative energy sectors grew, partly mitigating this impact. Consumables sales decreased 8.6% (all geographies were down), while systems sales declined 7.6% (Western Hemisphere and Europe were down).
     
  • Municipal Water submarket sales, which represented slightly less than 10% of total Industrial sales, decreased 13.8%. By geography, sales in the Western Hemisphere (the company’s largest Municipal Water geographic market) were down about 1%, while sales in Europe and Asia were down 25.4% and 33.9%, respectively. The overall sales decline in the year reflects the slowing of orders in fiscal year 2009 (order to shipment in the Municipal Water submarket can be one to two years). Europe was also negatively impacted by a reduction in publicly funded projects related to the fiscal challenges of local governments and overall weak economic conditions in the region. Order activity has been strong in fiscal year 2010 in the Western Hemisphere. As a result, overall backlog increased over 30% at July 31, 2010 compared to July 31, 2009.
31
 

 
 
 

  • Sales in the Power Generation submarket, which represented less than 10% of total Industrial sales, increased 0.8% in fiscal year 2010 compared to fiscal year 2009 as growth in Asia, fueled by demand in the wind-turbine market, was offset by declines in the Western Hemisphere and Europe related to weakness in the turbo machinery sector in light of reduced demand for power.
     The Aeropower market is comprised of sales of air, water, lubrication, fuel and machinery and hydraulic protection products to OEM manufacturers and end-user customers in Military and Commercial Aerospace as well as in the Machinery & Equipment submarkets, which consist of a grouping of producers of mobile equipment and trucks, pulp and paper, mining, automotive and metals. The sales results by the submarkets that comprise Aeropower are discussed below:
  • Sales to the Military Aerospace submarket, which represented slightly less than 10% of total Industrial sales, decreased 24.4% reflecting delay in orders, and projects in fiscal year 2009 that did not repeat this fiscal year.
     
  • Sales to the Commercial Aerospace submarket, which represented less than 10% of total Industrial sales, decreased 10.6% primarily reflecting reductions in the Western Hemisphere related to weakness in the regional and private jet marketplace.
     
  • Sales in the Machinery & Equipment submarkets, which represented approximately 19% of total Industrial sales, increased 3.9%. These submarkets, which had been negatively impacted by the global macroeconomic environment, rebounded in the second half of fiscal year 2010 as customers began to replenish depleted inventories and OEM production rates increased. By geography, sales in both the Western Hemisphere and Asia grew year over year, while sales in Europe were down.
     Microelectronics sales increased 20.7% reflecting strong growth in all geographies. Overall, the sales growth in the year reflects a recovery in the semiconductor market as well as an increase in OEM activity. Sales in the macroelectronics marketplace, such as the inkjet and LED sectors, also contributed to the growth in the year.
 
     Industrial gross margin in fiscal year 2010 increased 210 basis points to 46.2% from 44.1% in fiscal year 2009. Key drivers of the improvement in gross margin were:
  • favorable absorption of manufacturing overhead and the estimated benefit of cost savings initiatives, including improved efficiency in manufacturing operations, that outpaced inflation and increased warranty costs, contributing an estimated 130-150 basis points in margin,
     
  • a change in mix estimated to have increased gross margin percentage by 60-80 basis points, comprised of:
              Ø       
a favorable impact from the growth in sales in high margin markets, such as Microelectronics, and Machinery & Equipment, and
   
              Ø        a decrease in systems sales, which typically have lower gross margins than consumables. The mix of systems sales decreased to 16.0% of total Industrial sales compared to 17.6% in fiscal year 2009.
 
     SG&A expenses in fiscal year 2010 increased by $11,984, or 3.6% (an increase of $2,726, or 0.8% in local currency), compared to fiscal year 2009. The increase in SG&A in local currency principally reflects the impact of strategic and structural investments, principally investments in information technology and geographic expansion, inflationary increases (principally payroll and employee benefit costs), and increased incentive compensation partly offset by cost savings as discussed above. SG&A expenses as a percentage of sales were 29.7% compared to 28.7% in fiscal year 2009.
 
     R&D expenses were essentially flat in fiscal year 2010 coming in at $26,923 compared to $26,873 in fiscal year 2009. As a percentage of sales, R&D expenses were 2.3%, on par with fiscal year 2009.
 
     Operating profit dollars in fiscal year 2010 were $164,544, an increase of $12,476, or 8.2% ($4,557, or 3.0% in local currency) compared to fiscal year 2009. Operating margin increased to 14.1% from 13.1% in fiscal year 2009.
 
     Corporate:
 
     Corporate expenses in fiscal year 2010 were $53,411 compared to $56,478 in fiscal year 2009, a decrease of $3,067 or 5.4% ($3,099, or 5.5% in local currency). The decrease in Corporate expenses primarily reflects a decline in consulting fees, a gain on the sale of investment securities held by the Company’s benefit protection trust and a decrease in foreign currency transaction losses partly offset by an increase in incentive compensation.
 
32
 

 
 
 

Results of Operations 2009 Compared with 2008
 
Review of Consolidated Results
 
     Sales for the fiscal year 2009 decreased 9.4% to $2.3 billion from $2.6 billion in fiscal year 2008. Exchange rates used to translate foreign subsidiary results into U.S. dollars, reduced reported sales by $155,096, primarily due to the strengthening of the U.S. dollar against the Euro, the British Pound and several Asian currencies, partly offset by the weakening of the U.S. dollar against the Japanese Yen and Chinese Renminbi. In local currency, sales decreased 3.4%. Increased pricing achieved in both the Life Sciences and Industrial segments contributed $30,905 to overall sales in the year.
 
     Life Sciences segment sales increased 1.9% (in local currency), reflecting growth in the BioPharmaceuticals market partly offset by a decline in the Food & Beverage market. Sales in the Medical market were up slightly year over year. Industrial segment sales decreased 8.2% (in local currency) in the year reflecting declines in the Microelectronics and Aeropower markets, partly offset by growth in the Energy & Water market. Overall systems sales increased 6.9% (in local currency) reflecting growth in both Life Sciences and Industrial. Systems sales represented 13.4% of total sales compared to 12.5% in fiscal year 2008. For a detailed discussion of sales, refer to the section “Review of Operating Segments” below.
 
     Gross margin was 47.3% in fiscal year 2009 compared to 47.1% in fiscal year 2008. The gross margin reflects an improvement in the Life Sciences segment gross margin partly offset by a decline in the Industrial segment gross margin. An increase in pricing contributed about 70 basis points to the gross margin improvement year over year. For a detailed discussion of gross margin by segment, refer to the section “Review of Operating Segments” below.
 
     SG&A expenses in fiscal year 2009 decreased by $49,687, or 6.6% ($6,438, or 1% in local currency). As a percentage of sales, SG&A expenses were 30% compared to 29.1% in fiscal year 2008. The increase in SG&A as a percentage of sales primarily reflects the impact of decreased sales period over period, increased selling and marketing personnel-related costs, including those related to the expansion into Latin American and other geographies, increased stock compensation expense, as well as consulting costs, mainly related to the Company’s Pricing Excellence and Enterprise Risk Management initiatives, partly offset by the impact of the Company’s cost reduction initiatives.
 
     R&D expenses were $71,213 in fiscal year 2009 compared to $71,647 in fiscal year 2008, a decrease of $434, or less than 1% (an increase of $2,512, or 3.5% in local currency). As a percentage of sales, R&D expenses were 3.1% compared to 2.8% in fiscal year 2008. For a detailed discussion of R&D by segment, refer to the section “Review of Operating Segments” below.
 
     In fiscal year 2009, the Company recorded ROTC of $30,723. ROTC in the year was primarily comprised of severance and other costs related to the Company’s ongoing cost reduction initiatives, a charge to write-off in-process R&D acquired in the acquisition of GeneSystems, SA, a charge primarily for the other-than-temporary diminution in value of certain equity investment securities held by the Company’s benefits protection trust, a charge for the impairment of capitalized software, increases to previously established environmental reserves, net of an insurance settlement and legal and other professional fees in connection with the Federal Securities Class Actions, Shareholder Derivative Lawsuits and Other Proceedings, net of an insurance settlement (see Note 14, Commitments and Contingencies to the accompanying consolidated financial statements). Such charges were partly offset by the reversal of excess restructuring reserves that were previously recorded in the Company’s consolidated statements of earnings in fiscal years 2008 and 2007.
 
     In fiscal year 2008, the Company recorded ROTC of $31,538. ROTC in the year was primarily comprised of legal and other professional fees related to matters that were under inquiry by the audit committee (see Note 2, Audit Committee Inquiry and Restatement, to the consolidated financial statements included in the 2007 Form 10-K). Additionally, ROTC includes severance and other exit costs related to the Company’s cost reduction initiatives, as well as an increase to previously established environmental reserves. Such charges were partly offset by the reversal of excess restructuring reserves previously recorded in the Company’s consolidated statements of earnings in fiscal years 2007, 2006 and 2005.
 
     The details of ROTC for the years ended July 31, 2009 and July 31, 2008 can be found in Note 2, Restructuring and Other Charges, Net, to the accompanying consolidated financial statements.
 
     EBIT were $298,922 in fiscal year 2009 compared to $358,131 in fiscal year 2008. The impact of foreign currency translation reduced EBIT by $25,314 in fiscal year 2009. As a percentage of sales, EBIT were 12.8% compared to 13.9% in fiscal year 2008.
 
33
 

 

     Net interest expense in fiscal year 2009 decreased to $28,136 from $32,576 in fiscal year 2008. The reduction in net interest expense was primarily attributable to a decrease in interest expense, which was related to lower interest rates and a reduced level of debt due to the repayment of higher interest bearing European debt. A decrease in interest income related to reduced cash balances and lower returns compared to the same period last year partly offset the above.
 
     In fiscal year 2009, the Company’s effective tax rate was 27.8% as compared to 33.2% in fiscal year 2008. For the year ended July 31, 2009, the effective tax rate varied from the U.S. federal statutory rate primarily due to the benefits related to foreign operations, the repatriation of foreign earnings, the restructuring of certain foreign operations, the retroactive extension of the federal research credit provided for in the Emergency Economic Stabilization Act of 2008 and the favorable resolution of a tax audit. For the year ended July 31, 2008, the effective tax rate varied from the U.S. federal statutory rate primarily due to the net impact of foreign operations and a tax charge resulting from new tax legislation in Germany.
 
     Net earnings in fiscal year 2009 were $195,619, or $1.64 per share, compared with net earnings of $217,279, or $1.76 per share in fiscal year 2008. In summary, the decline in net earnings dollars reflects the decrease in EBIT partly offset by a decline in net interest expense and a decrease in the effective tax rate. The decline in earnings per share reflects the decrease in net earnings partly offset by the impact of reduced shares outstanding due to stock buybacks. Company management estimates that foreign currency translation reduced net earnings per share by 16 cents in the year. The acquisition of GeneSystems was dilutive to earnings by 5 cents per share in the year.
 
Review of Operating Segments
 
     The following table presents sales and operating profit by segment, reconciled to earnings before income taxes, for the fiscal years ended July 31, 2009 and July 31, 2008.
 
                %         %   %
        2009       Margin       2008       Margin       Change
  SALES:                          
  Life Sciences       $ 1,166,275       $ 1,227,736       (5.0 )
  Industrial     1,162,883         1,343,909       (13.5 )
  Total   $ 2,329,158       $      2,571,645       (9.4 )
  OPERATING PROFIT:                          
  Life Sciences   $ 234,055   20.1   $ 237,292   19.3   (1.4 )
  Industrial     152,068   13.1     206,337   15.4   (26.3 )
  Total operating profit     386,123   16.6     443,629   17.3   (13.0 )
  General corporate expenses     56,478         53,960       4.7  
  Earnings before ROTC, interest expense, net                          
         and income taxes     329,645   14.2     389,669   15.2   (15.4 )
  ROTC, net     30,723         31,538          
  Interest expense, net     28,136         32,576          
  Earnings before income taxes   $      270,786       $ 325,555          
                              
     Life Sciences:
 
     Presented below are Summary Statements of Operating Profit for the Life Sciences segment for the fiscal years ended July 31, 2009 and July 31, 2008:
 
                % of         % of
      2009       Sales   2008       Sales
  Sales       $      1,166,275       $      1,227,736    
  Cost of sales     578,439   49.6     610,581   49.7
  Gross margin     587,836   50.4     617,155   50.3
  SG&A     309,441   26.5         335,456   27.3
  R&D     44,340   3.8     44,407   3.6
  Operating profit   $ 234,055   20.1   $ 237,292   19.3
                       
34
 


 

     The tables below present sales by market and geography within the Life Sciences segment for the fiscal years ended July 31, 2009 and July 31, 2008, including the effect of exchange rates for comparative purposes.
 
                                    %
                        Exchange   Change in
                  %   Rate   Local
      2009   2008       Change       Impact       Currency
  By Market                                
  BioPharmaceuticals       $ 550,620       $      564,815   (2.5 )   $      (40,858 )   4.7  
  Medical     389,841     410,416   (5.0 )     (23,190 )   0.6  
  Food & Beverage     225,814     252,505   (10.6 )     (20,428 )   (2.5 )
  Total Life Sciences   $      1,166,275   $ 1,227,736   (5.0 )   $ (84,476 )   1.9  
                                    
  By Geography                                
  Western Hemisphere   $ 399,614   $ 413,400   (3.3 )   $ (3,144 )   (2.6 )
  Europe     578,319     637,153   (9.2 )     (74,987 )   2.5  
  Asia     188,342     177,183   6.3       (6,345 )   9.9  
  Total Life Sciences   $ 1,166,275   $ 1,227,736   (5.0 )   $ (84,476 )   1.9  
                                    
     Life Sciences segment sales increased 1.9% in fiscal year 2009 compared to fiscal year 2008. The growth in Life Sciences sales reflects an increase in systems and consumables sales of 9.1% and 1.2%, respectively. Increased pricing (driven by the BioPharmaceuticals and Food & Beverage markets) contributed $16,928, or 1.4% to overall sales growth in the year. Life Sciences sales represented approximately 50% of total sales in fiscal year 2009 compared to 48% in fiscal year 2008.
 
     Sales in the BioPharmaceuticals market, which is comprised of two submarket groupings (Pharmaceuticals and Laboratory) increased 4.7%. The sales growth was primarily driven by the Pharmaceuticals submarket as discussed below. Growth in the Laboratory submarket, which represented less than 10% of Life Sciences sales, contributed to this result as well.
 
     Sales in the Pharmaceuticals submarket, which represented approximately 41% of total Life Sciences sales, increased 5% reflecting an increase in systems sales of 7.3% (Europe and Asia) accompanied by growth in consumables sales of 4.9% contributed by all geographies. Sales growth in the Pharmaceuticals market was driven by increased demand in the vaccine and plasma derivatives marketplace (including investment by customers in new production facilities) and expanding adoption of single-use technologies for biotechnology and vaccine production.
 
     Sales in the Medical market, which is comprised of blood filtration product sales and other infection and patient protection products sold to hospitals, original equipment manufacturers (“OEM”) and cell therapy developers, increased 0.6% in fiscal year 2009 compared to fiscal year 2008. Sales of blood filtration products, which represented approximately 19% of total Life Sciences sales, decreased 2.4% in fiscal year 2009 compared to fiscal year 2008. The decline in Blood Filtration sales primarily relates to decreased volume to several large blood center customers in the Western Hemisphere and Europe (Spain, Germany and Switzerland) partly offset by increased sales to independent blood centers in the U.S., growth in Asia, driven by the adoption of universal leukoreduction in Australia and increased sales in Singapore as well as increased Hospital Transfusion and Cardiovascular sales in Europe. Sales to Hospitals, which represented less than 10% of total Life Sciences sales, increased 5% reflecting growth in all geographies. Increased point of use water filter sales was a key contributor to growth, particularly in the U.S.
 
     Sales in the Food & Beverage market decreased 2.5% reflecting a decline in consumables of 5.5% (all geographies), partly offset by growth in systems sales of 10.9% (Western Hemisphere and Asia contributing). By geography, sales in Europe (the largest market) were down 8.7% partly mitigated by growth in the Western Hemisphere of 17.2% and in Asia of 4.9%. The decline in sales in Europe reflects decreased sales in Eastern Europe due to economic conditions in the region, a slowdown in the beer and bottled water sector and a general slowing in capital projects. The growth in the Western Hemisphere and Asia were driven by systems sales in the wine and beer sectors. These two regions also have benefited from expanded market share.
 
35
 


 

     Life Sciences gross margins increased 10 basis points to 50.4% from 50.3% in fiscal year 2008. The improvement in gross margins was principally driven by improved pricing that contributed approximately 75 basis points in margin, a change in market mix (higher percentage of consumable sales to Pharmaceuticals customers versus Medical and Food & Beverage customers) and savings from the Company’s cost reduction and lean manufacturing initiatives partly offset by a shift in product mix to a higher percentage of systems sales (about 9.2% of total Life Sciences sales compared to 8.7% in fiscal year 2008) and inflation of manufacturing costs.
 
     SG&A expenses decreased by $26,015, or 7.8% (a decrease of $3,125, or 1% in local currency), compared to fiscal year 2008. The decrease in SG&A in local currency was primarily due to the impact of cost reduction initiatives partly offset by an increase in selling expenses. SG&A as a percentage of sales decreased to 26.5% from 27.3% in fiscal year 2008. The improvement in SG&A as a percentage of sales reflects the impact of the Company’s cost reduction initiatives.
 
     R&D expenses were essentially flat at $44,340 compared to $44,407 in fiscal year 2008. In local currency, R&D expenses increased $2,868, or 6.5%. As a percentage of sales, R&D expenses were 3.8% compared to 3.6% in fiscal year 2008. Increased spending primarily reflects investments in the BioPharmaceuticals market, including spending at GeneSystems, which was acquired on September 2, 2008.
 
     Operating profit dollars decreased $3,237, or 1.4% to $234,055. In local currency, operating profit increased $14,288, or 6% in the year. Operating margin improved to 20.1% from 19.3% in fiscal year 2008.
 
     Industrial:
 
     Presented below are summary Statements of Operating Profit for the Industrial segment for the fiscal years ended July 31, 2009 and July 31, 2008:
 
                % of         % of
      2009   Sales   2008       Sales
  Sales   $ 1,162,883       $      1,343,909    
  Cost of sales     650,029   55.9     750,229   55.8
  Gross margin     512,854   44.1         593,680   44.2
  SG&A     333,913       28.7     360,103   26.8
  R&D         26,873   2.3     27,240   2.0
  Operating profit   $      152,068   13.1   $ 206,337   15.4
                       
     The tables below present sales by market and geography within the Industrial segment for the fiscal years ended July 31, 2009 and July 31, 2008, including the effect of exchange rates for comparative purposes.
 
                                    %
                        Exchange   Change in
                  %   Rate   Local
      2009   2008       Change   Impact       Currency
  By Market                                
  Energy & Water       $      505,468   $ 522,300   (3.2 )       $ (33,172 )   3.1  
  Aeropower     446,386     513,057   (13.0 )     (33,004 )   (6.6 )
  Microelectronics     211,029     308,552   (31.6 )     (4,444 )   (30.2 )
  Total Industrial   $ 1,162,883       $      1,343,909   (13.5 )   $      (70,620 )   (8.2 )
                                    
  By Geography                                
  Western Hemisphere   $ 370,088   $ 397,259   (6.8 )   $ (5,651 )   (5.4 )
  Europe     381,988     469,830   (18.7 )     (53,109 )   (7.4 )
  Asia     410,807     476,820   (13.8 )     (11,860 )   (11.4 )
  Total Industrial   $ 1,162,883   $ 1,343,909   (13.5 )   $ (70,620 )   (8.2 )
                                      
     Industrial segment sales decreased 8.2% in fiscal year 2009, as declines in the Aeropower and Microelectronics markets were partly offset by growth in the Energy & Water market. Increased pricing, largely driven by the Aeropower and Energy & Water markets, contributed $13,977 to overall sales in the year. Industrial systems sales increased 5.7% compared to fiscal year 2008. The increase in systems sales reflects growth in the Energy & Water market, partly offset by declines in the Aeropower and Microelectronics markets. Industrial consumables sales decreased 11% in the year, reflecting declines in all markets. Industrial represented approximately 50% of the Company’s total sales in fiscal year 2009, compared to 52% in fiscal year 2008.
 
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     The Energy & Water market sells process related products to producers of fuels & chemicals, municipal water and power generation. The sales results by the submarkets that comprise the Energy & Water market are discussed below:
  • Sales in the Fuels & Chemicals submarkets, which represented approximately 24% of total Industrial sales, decreased 2.8%. The decrease in sales reflects growth in Asia, offset by declines in the Western Hemisphere and Europe related to reduced element demand by chemical producers, particularly related to the automotive, electronics and housing and construction sectors. Asia benefited from increased systems sales due to robust investment activity in the region.
     
  • Municipal Water submarket sales, which represented approximately 11% of total Industrial sales, increased 11.8% in fiscal year 2009 compared to fiscal year 2008. By geography, the sales growth was driven by the Western Hemisphere and Asia. The growth in the Western Hemisphere was primarily attributable to surface water treatment projects driven by federal and local government regulations and scarcity of potable water. The growth in Asia was attributable to systems projects for drinking water driven by emerging regulations. Municipal Water sales were down in Europe primarily related to a slowdown of projects in Eastern Europe, due to economic conditions in the region, as well as in the Middle East, which is a result of decreased funding related to lower oil prices.
     
  • Sales in the Power Generation submarket, which represented less than 10% of total Industrial sales, increased 11.6% driven by an increase in systems sales of 36.7% (contributed by Europe and Asia) and an increase in consumables sales of 7.2% (all geographies contributing). Growth in systems sales was driven by customer investment in new plant capacity, especially nuclear and wind, as well as in water treatment and condensate systems. The growth in consumables sales reflects good aftermarket demand and growth in capital goods, such as housings.
The Aeropower market is comprised of sales of air, water, lubrication, fuel and machinery and hydraulic protection products to OEM manufacturers and end-user customers in Military and Commercial Aerospace, as well as in the Machinery & Equipment submarkets, which consist of a grouping of producers of mobile equipment and trucks, pulp and paper, mining, automotive and metals. The sales results by the submarkets that comprise Aeropower are discussed below:
  • Sales to the Military Aerospace submarket, which represented approximately 12% of total Industrial sales, increased 18.1%. The growth in Military sales was primarily driven by CH-47 helicopter product shipments, increased OEM platform builds in the Western Hemisphere and growth in Europe, primarily in Germany and France.
     
  • Sales to the Commercial Aerospace submarket, which represented less than 10% of total Industrial sales, increased 1%. The Commercial market result primarily reflects strong sales in Europe largely offset by a reduction in the Western Hemisphere.
     
  • Sales in the Machinery & Equipment submarkets, which represented approximately 18% of total Industrial sales, decreased 20.5%. All geographies reported decreased sales compared to the prior period. Sales growth was negatively impacted by the global macroeconomic recessionary environment, particularly in the steel, automotive, metals, paper sectors. Weakness in the construction and truck sectors in Europe, also negatively impacted sales year over year.
     Microelectronics sales declined 30.2% reflecting decreases in all geographies. Overall, the sales decrease reflects weakness in the semiconductor and consumer electronics markets related to the global economic environment.
 
     Industrial gross margins in fiscal year 2009 decreased 10 basis points to 44.1% from 44.2% in fiscal year 2008. The decrease in gross margins reflects underabsorption of manufacturing overhead due to volume reduction, a change in market mix resulting from decreased sales in higher margin markets such as Microelectronics, and a shift in product mix to a higher percentage of systems sales (about 17.6% of total Industrial sales compared to about 15.9% in fiscal year 2008). These negative factors were partly offset by improved pricing, which contributed about 70 basis points in margin as well as the effects of cost reduction and lean manufacturing initiatives which offset inflationary increases in manufacturing costs.
 
     SG&A expenses decreased by $26,190, or 7.3% ($6,767, or 1.9% in local currency), compared to fiscal year 2008. The decrease in SG&A reflects the impact of cost reduction initiatives, including global workforce reductions made in response to economic conditions. SG&A expenses as a percentage of sales were 28.7% compared to 26.8% in fiscal year 2008 reflecting the decline in sales.
 
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     R&D expenses were $26,873 compared to $27,240 in fiscal year 2008, a decrease of $367, or 1.3% ($354, or 1.3% in local currency). The decrease in R&D expenses was primarily related to control of short-term spending due to the economic downturn. As a percentage of sales, R&D expenses were 2.3% compared to 2.0% in fiscal year 2008.
 
     As a result of the above factors, operating profit dollars decreased $54,269, or 26.3% to $152,068. In local currency, operating profit decreased $43,730, or 21.2%. Operating margin decreased to 13.1% from 15.4% in fiscal year 2008.
 
     Corporate:
 
     Corporate expenses in fiscal year 2009 increased by $2,518 or 4.7% (6% in local currency) to $56,478 from $53,960 in fiscal year 2008. The increase in Corporate expenses primarily reflects increased consulting costs related to the Company’s pricing and enterprise risk management initiatives, foreign currency transaction losses, increased stock compensation and increased payroll related to additions to Corporate staff.
 
Liquidity and Capital Resources
 
     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 $608,000 at July 31, 2010 as compared with $577,900 at July 31, 2009. Excluding the effect of foreign exchange (discussed below), non-cash working capital increased approximately $37,700 compared to July 31, 2009.
 
     The Company’s 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, 2010 to those at July 31, 2009, the Japanese Yen has strengthened against the U.S. Dollar, while the Euro and the British Pound have weakened against the U.S. Dollar. The effect of foreign currency translation decreased non-cash working capital by $7,562, including net inventory, net accounts receivable and other current assets by $5,730, $8,609 and $3,376, respectively, as compared to July 31, 2009. Additionally, foreign currency translation decreased accounts payable and other current liabilities by $10,691 and increased current income taxes payable by $538.
 
     Net cash provided by operating activities in fiscal year 2010 was $377,860 as compared to $327,495 in fiscal year 2009, an increase of $50,365, or about 15.4%. The increase in net cash provided by operating activities primarily reflects a 13-day improvement in the Company’s cash conversion cycle as discussed below and a decrease in interest paid, partly offset by increased income taxes paid and pension contributions, and timing of cash collections associated with fourth quarter sales.
 
     The Company’s full cash conversion cycle, defined as days in inventory outstanding (“DIO”) plus days sales outstanding (“DSO”) less days payable outstanding (“DPO”), decreased to 115 days in the quarter ended July 31, 2010 from 128 days in the quarter ended July 31, 2009. This improvement reflects a decrease in DIO and DSO, as well as an increase in DPO.
 
     Free cash flow, which is defined as net cash provided by operating activities less capital expenditures, was $241,547 in fiscal year 2010, as compared with $194,446 in fiscal year 2009. The increase in free cash flow reflects the increase in net cash provided by operating activities as discussed above, partly offset by an increase in capital expenditures. The Company utilizes free cash flow as one way to measure its current and future financial performance. Company management believes this measure is important because it is a key element of its planning. The following table reconciles net cash provided by operating activities to free cash flow.
 
          2010   2009   2008
  Net cash provided by operating activities       $      377,860       $      327,495       $      190,806
  Less capital expenditures     136,313     133,049     123,854
  Free cash flow   $ 241,547   $ 194,446   $ 66,952
                      
     Overall, net debt (debt net of cash and cash equivalents) as a percentage of total capitalization (net debt plus equity) was 19.4% at July 31, 2010 as compared to 21.4% at July 31, 2009. Net debt decreased by approximately $18,600 compared with July 31, 2009, comprised of an increase in cash and cash equivalents of $87,900 partly offset by an increase in gross debt of $63,800. The impact of foreign exchange rates increased net debt by about $5,500, including the revaluation of the JPY 9 billion loan.
 
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     On July 13, 2010, the Company entered into a five-year $500,000 unsecured senior revolving credit facility (the “New Facility”) with a syndicate of banks, which expires on July 13, 2015 and terminated its Prior Facility. Simultaneous with entry into the New Facility, the Company borrowed approximately $295,000, principally to: (1) redeem its Prior Notes and, (2) pay a portion of the redemption premium on the Prior Notes of $28,268 (other funds were used to pay the balance of approximately $13,268).
 
     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 contains financial covenants which are substantially similar to those in the Prior Facility. The New Facility requires the Company to maintain a minimum consolidated net interest coverage ratio of 3.5:1, based upon trailing four quarters results, and a maximum consolidated leverage ratio of 3.5:1, based upon trailing four quarters results. In addition, the New Facility includes other covenants that under certain circumstances can restrict the Company’s 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, 2010, the Company was in compliance with all related financial and other restrictive covenants, including limitations on indebtedness.
 
     On June 18, 2010, the Company issued $375,000 of publicly traded notes with an aggregate principal amount of its 5.00% Senior Notes, due 2020 (the “New Notes”). After the closing of the New Notes, the Company received proceeds (net of the discount on the New Notes of $2,006 and underwriting fees of $2,438) of $370,556. The Company used the net proceeds from this offering principally (1) to repay its then outstanding balance on the Prior Facility, and (2) for general corporate purposes. The Prior Notes, originally due August 1, 2012, were fully redeemed in July 2010 after the satisfaction of a 30-day notice period. In connection with the New Notes, the Company incurred deferred financing costs of $3,455, which will be amortized to interest expense over the term of the New Notes.
 
     On May 26, 2010, the Company refinanced its loan of JPY 9 billion (approximately $104,166 as of July 31, 2010), which was due on June 20, 2010, to May 26, 2015. Under the new financing agreement, interest is fixed at a rate of 2.33%. Previously, the interest payments were at a variable rate based upon Yen LIBOR. The Company designated this borrowing as a non-derivative hedge of a portion of its net JPY investment in a Japanese subsidiary.
 
     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 and Poor’s and Moody’s Investor Services, in accordance with the Company’s policies. The Company does not utilize derivative instruments for trading or speculative purposes.
 
     The Company conducts transactions in currencies other than their functional currency. 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 changing foreign exchange rates. 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, 2010 was $1,427,295. The notional amount of foreign currency forward contracts outstanding as of July 31, 2010 was $207,098. The Company’s foreign currency balance sheet exposures resulted in the recognition of a gain within SG&A of approximately $1,338 in fiscal year 2010 before the impact of the measures described above. Including the impact of the Company’s foreign exchange derivative instruments, the net recognition within SG&A was a loss of approximately $816 in fiscal year 2010.
 
     The Company utilizes cash flow generated from operations and its revolving credit facility to meet its short-term liquidity needs. Company management considers its existing cash balances, lines of credit, along with the cash typically generated from operations, to be sufficient to meet its short-term liquidity needs.
 
     Capital expenditures were $136,313 in fiscal year 2010. Depreciation expense was $81,861 and amortization expense was $11,767 in fiscal year 2010.
 
     On November 15, 2006, the board of directors authorized an expenditure of $250,000 to repurchase shares of the Company’s common stock. On October 16, 2008, the board authorized an additional expenditure of $350,000 to repurchase shares. At July 31, 2009, there was $452,943 remaining under the current stock repurchase programs. The Company repurchased stock of $99,999 in fiscal year 2010 leaving $352,944 remaining at July 31, 2010 under the current stock repurchase programs. Net proceeds from stock plans were $23,929 in fiscal year 2010.
 
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     In fiscal year 2010, the Company paid dividends of $71,284 compared to $64,914 in fiscal year 2009, an increase of approximately 10%. The Company increased its quarterly dividend by 10.3% from 14.5 cents to 16 cents per share, effective with the dividend declared on January 21, 2010.
 
     The following is a summary of the Company’s contractual payment commitments as of July 31, 2010 (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, 2010):
 
Year Ended
    2011   2012   2013   2014   2015   Thereafter   Total
Long-term debt   $      1,956   $ 1,568       $ 1,590   $      1,639       $ 355,887       $ 382,642   $ 745,282
Interest on long-term debt     27,760     27,673     27,593     27,514     26,785     92,216     229,541
Operating leases         23,128     17,732     10,911     7,092     3,022     6,283     68,168
Purchase commitments     23,119     6,421     6,285     3,516     396     2,306         42,043
Other commitments     671         413     214     148     175     4,206     5,827
Total commitments   $ 76,634   $      53,807   $      46,593       $ 39,909   $      386,265   $      487,653   $      1,090,861
                                            
     The Company had gross liabilities for unrecognized tax benefits of approximately $227,256 and related accrued interest of $42,594 as of July 31, 2010, which were excluded from the table above. See Note 11, Income Taxes, to the accompanying consolidated financial statements for further discussion of these amounts.
 
Adoption of New Accounting Pronouncements
 
     In January 2010, the FASB issued updated guidance that amends the disclosure requirements for fair value measurements. This updated guidance: (i) requires that the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements be disclosed separately along with the reasons for the transfer; (ii) clarifies the requirement that a reporting entity should provide fair value measurement disclosures for each class of assets and liabilities; and (iii) clarifies the requirement that a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring Level 2 and Level 3 fair value measurements. This new guidance was effective with the Company’s third quarter of fiscal year 2010. Effective for the Company’s first quarter of fiscal year 2012, this guidance requires that in the reconciliation of Level 3 fair value measurements, information about purchases, sales, issuances and settlements be presented separately on a gross basis. See Note 9, Fair Value Measurements, to the accompanying consolidated financial statements for the required disclosures.
 
     In June 2009, the FASB issued authoritative guidance that established the FASB Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with U.S. GAAP. In addition, this guidance also recognizes rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. This new guidance was effective for the Company beginning with its first quarter of fiscal year 2010. The ASC does not change current GAAP other than the manner in which new accounting guidance is referenced, and the adoption of this authoritative guidance did not have an impact on the Company’s consolidated financial statements.
 
     In April 2009, the FASB issued authoritative guidance that requires publicly traded companies to provide disclosures about fair value of financial instruments in interim financial information. This new guidance was effective for the Company beginning with its first quarter of fiscal year 2010. The Company has provided the related disclosure in the first, second and third quarters of fiscal year 2010 Form 10-Q’s as filed with the SEC.
 
     In April 2009, the FASB issued authoritative guidance to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably determined. If the fair value of such assets or liabilities cannot be reasonably determined, then they would generally be recognized in accordance with certain other pre-existing authoritative guidance. This new guidance also amends the subsequent accounting for assets and liabilities arising from contingencies in a business combination and certain other disclosure requirements. This new guidance was effective for the Company beginning with its first quarter of fiscal year 2010. The adoption of this authoritative guidance did not have a material impact on the Company’s consolidated financial statements.
 
     In December 2008, the FASB issued authoritative guidance that requires employers to provide disclosures about plan assets of defined benefit pensions or other post-retirement plans. This disclosure only requirement was effective for the Company beginning with the fiscal year 2010 Annual Report on Form 10-K for assets as at July 31, 2010 and prospectively. These disclosures include information about investment policies and strategies, the classes of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets and an understanding of significant concentrations of risk within plan assets. See Note 13, Pension and Profit Sharing Plans and Arrangements, to the accompanying consolidated financial statements for the required disclosures.
 
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     In April 2008, the FASB issued authoritative guidance that amends the factors that should be considered in developing renewal or extension assumptions that are used to determine the useful life of a recognized intangible asset and requires enhanced related disclosures. This new guidance was effective for the Company beginning with its first quarter of fiscal year 2010. The adoption of this authoritative guidance did not have any impact on the Company’s consolidated financial statements.
 
     In February 2008, the FASB issued authoritative guidance that permitted the delayed application of fair value measurement guidance for non-financial assets and liabilities that are recognized or disclosed at fair value on a non-recurring basis which, including consideration of the delay, was effective for the Company beginning with its first quarter of fiscal year 2010. The Company’s non-financial assets and liabilities subject to this guidance principally consist of intangible assets acquired through business combinations and long-lived assets. The adoption of this authoritative guidance did not impact the Company’s consolidated financial statements. See Note 9, Fair Value Measurements, to the accompanying consolidated financial statements for further discussion.
 
     In December 2007, the FASB issued authoritative guidance related to the accounting for business combinations. This guidance establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This new guidance was effective for the Company beginning with its first quarter of fiscal year 2010. The impact of adopting this authoritative guidance generally impacts the accounting for future business combinations; specifically, certain aspects of business combination accounting, such as transaction costs and certain merger-related restructuring reserves. One exception to the prospective application of this guidance relates to accounting for income taxes associated with business combinations that closed prior to the beginning of the Company’s first quarter of fiscal year 2010. Once the purchase accounting measurement period closes for these acquisitions, any further adjustments to income taxes recorded as part of these business combinations will impact income tax expense. Previously, further adjustments were predominantly recorded as adjustments to goodwill. The Company did not have any material acquisitions during fiscal year 2010. The total amount of such unrecognized income tax benefits as of August 1, 2009 that would impact the effective tax rate was $15,288.
 
     In December 2007, the FASB issued authoritative guidance related to the accounting for noncontrolling interests in consolidated financial statements. This guidance establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. In addition, this guidance also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This new guidance was effective for the Company beginning with its first quarter of fiscal year 2010. The adoption of this authoritative guidance did not have any impact on the Company’s consolidated financial statements.
 
Recently Issued Accounting Pronouncements
 
     In March 2010, the FASB ratified a consensus of the FASB Emerging Issues Task Force that recognizes the milestone method as an acceptable revenue recognition method for substantive milestones in research or development arrangements. This consensus would require its provisions be met in order for an entity to recognize consideration that is contingent upon achievement of a substantive milestone as revenue in its entirety in the period in which the milestone is achieved. In addition, this consensus would require disclosure of certain information with respect to arrangements that contain milestones. This guidance is effective for the Company beginning with fiscal year 2011. The Company is in the process of assessing the effect this updated guidance may have on its consolidated financial statements.
 
     In October 2009, the FASB issued updated guidance amending existing revenue recognition accounting pronouncements that have multiple element arrangements. This guidance requires companies to allocate revenue in arrangements involving multiple deliverables based on the estimated selling price of each deliverable, even though such deliverables are not sold separately either by the company or other vendors. This guidance eliminates the requirement that all undelivered elements must have objective and reliable evidence of fair value before a company can recognize the portion of the overall arrangement fee that is attributable to items that already have been delivered. As a result, some companies may recognize revenue on transactions that involve multiple deliverables earlier than under current requirements. This guidance is effective for the Company beginning with fiscal year 2011. The Company is in the process of assessing the effect this updated guidance may have on its consolidated financial statements.
 
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
 
     The Company’s primary market risks relate to adverse changes in foreign currency exchange rates and interest rates. The sensitivity analyses presented below assume simultaneous shifts in each respective rate, and quantify the impact on the Company’s earnings and cash flows. The changes used for these analyses reflect the Company’s view of changes that are reasonably possible over a one-year period. Actual changes that differ from the changes used for these analyses could yield materially different results.
 
Foreign Currency
 
     The Company’s reporting currency is the U.S. dollar. Because the Company operates through subsidiaries or branches in over thirty countries around the world, its 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. Company management estimates that foreign exchange translation increased earnings per share by 10 cents in fiscal year 2010.
 
     Most of the Company’s products are manufactured in the U.S., Puerto Rico, Germany and the United Kingdom, and then sold into many countries. The primary foreign currency exposures relate to adverse changes in the relationships of the U.S. dollar to the Euro, the Japanese Yen (the “Yen”), the British Pound (the “Pound”), the Australian Dollar, the Canadian Dollar, Swiss Franc and the Singapore Dollar, as well as adverse changes in the relationship of the Pound to the Euro. Exposure exists when the functional currency of the buying subsidiaries weakens against the U.S. dollar, the Pound or the Euro, thus causing an increase of the product cost to the buying subsidiary or a reduction in the sales price from the selling subsidiary, which adversely affects the Company’s consolidated gross margin and net earnings. The effect of foreign exchange is partially mitigated because of the significant level of manufacturing done in Europe. In fiscal year 2010, the Euro, Yen, Australian Dollar, Canadian Dollar, Swiss Franc and Singapore Dollar strengthened by approximately 0.9%, 8.1%, 20.8%, 12.3%, 6.9%, and 5.5%, respectively, against the U.S. dollar compared with the average exchange rates in effect in fiscal year 2009. Additionally, the Pound weakened by approximately 0.9% against the U.S. dollar and the Euro strengthened against the Pound by approximately 1.8%. Due to the difficulty in estimating the economic effect of foreign currency rates, particularly in periods of high volatility of such rates, Company management does not provide such estimated effects and reports only the translation effect to earnings per share disclosed above.
 
     The Company is also exposed to transaction risk from adverse changes in exchange rates. These short-term transaction exposures are primarily Yen, Euro, Pound and Swiss Franc denominated receivables and payables. These short-term exposures to changing foreign currency exchange rates are managed by opening forward foreign exchange contracts (“forwards”) to offset the earnings and cash flow impact of non-functional currency denominated receivables and payables as well as the expeditious payment of balances. The Company does not enter into forwards for trading purposes. At July 31, 2010, these exposures amounted to approximately $211,080 and were offset by forwards with a notional principal amount of $207,098. If a hypothetical 10% simultaneous adverse change had occurred in exchange rates as of July 31, 2010, net earnings would have decreased by approximately $3,594, or approximately 3 cents per share.
 
Interest Rates
 
     The Company is exposed to changes in interest rates, primarily due to its financing and cash management activities, which include long and short-term debt as well as cash and certain short-term, highly liquid investments considered to be cash equivalents.
 
     The Company’s debt portfolio is comprised of both fixed and variable rate borrowings. The Company manages interest rate exposure by portfolio balancing including employing interest rate swaps. The Company’s debt portfolio was approximately 37% variable rate at July 31, 2010, compared to 45% variable rate at July 31, 2009.
 
     For the year ended July 31, 2010, interest expense, net of interest income, was $14,324. A hypothetical 10% shift in market interest rates for fiscal year 2010 (e.g., if an assumed market interest rate of 5.0% increased to 5.5%) could have an adverse affect on interest of approximately $273.
 
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
     The financial statements required by this item are located immediately following the signature pages of this Form 10-K. See Item 15.(a)(1) for a listing of financial statements provided.
 
     QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
      (In thousands,   First   Second   Third   Fourth   Full
  except per share data)       Quarter       Quarter       Quarter       Quarter       Year
  2010:                              
  Net sales   $      546,939   $      560,401   $      615,982   $      678,610   $      2,401,932
  Gross profit     270,198     284,285     313,532     338,087     1,206,102
  Restructuring and other                              
         charges, net (a)     4,057     572     2,030     11,005     17,664
  Loss on extinguishment of                              
         debt (b)                 31,513     31,513
  Earnings before income taxes     74,840     72,368     101,959     78,554     327,721
  Net earnings     66,983     49,619     69,691     54,955     241,248
  Earnings per share:                              
         Basic   $ 0.57   $ 0.42   $ 0.59   $ 0.47   $ 2.05
         Diluted   $ 0.56   $ 0.42   $ 0.58   $ 0.46   $ 2.03
                                 
  2009:                              
  Net sales   $ 578,022   $ 543,296   $ 555,883   $ 651,957   $ 2,329,158
  Gross profit     279,391     256,349     264,230     300,720     1,100,690
  Restructuring and other                              
         charges, net (a)     8,175     8,747     8,369     5,432     30,723
  Earnings before income taxes     62,351     56,546     64,320     87,569     270,786
  Net earnings     43,087     38,871     44,162     69,499     195,619
  Earnings per share:                              
         Basic   $ 0.36   $ 0.33   $ 0.37   $ 0.59   $ 1.65
         Diluted   $ 0.36   $ 0.33   $ 0.37   $ 0.58   $ 1.64

       (a)        Refer to Note 2, Restructuring and Other Charges, Net, to the accompanying consolidated financial statements.
       (b) Refer to Note 8, Notes Payable and Long-term Debt, to the accompanying consolidated financial statements.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
     Not applicable.
 
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ITEM 9A. CONTROLS AND PROCEDURES.
 
DISCLOSURE CONTROLS AND PROCEDURES
 
     The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s chief executive officer and chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures as of July 31, 2010. Based on this evaluation, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
 
INTERNAL CONTROL OVER FINANCIAL REPORTING
 
(a) Management’s annual report on internal control over financial reporting.
 
     The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
 
     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
     Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of July 31, 2010.
 
     The attestation report of the independent registered public accounting firm on the Company’s internal control over financial reporting is included in this report under Item 9A.(b).
 
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(b) Attestation report of the registered public accounting firm.
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders
Pall Corporation:
 
     We have audited Pall Corporation and subsidiaries’ internal control over financial reporting as of July 31, 2010, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Pall Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s report on internal control over financial reporting (Item 9A(a)). Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
 
     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
     In our opinion, Pall Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of July 31, 2010, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Pall Corporation and subsidiaries as of July 31, 2010 and 2009, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the years in the three-year period ended July 31, 2010 and our report dated September 28, 2010 expressed an unqualified opinion on those consolidated financial statements.
 
  /s/ 
KPMG LLP
    KPMG LLP
 
Melville, New York
September 28, 2010
 
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(c) Changes in internal control over financial reporting.
 
     There are a number of significant business improvement initiatives designed to improve processes and enhance customer and supplier relationships and opportunities. These include information systems upgrades and integrations that are in various phases of planning or implementation and contemplate enhancements of ongoing activities to support the growth of the Company’s financial shared service capabilities and standardization of its financial systems. When taken together, these changes, which have and will occur over a multi year period, are expected to have a favorable impact on the Company’s internal control over financial reporting. The Company is employing a project management and phased implementation approach that will provide continued monitoring and assessment in order to maintain the effectiveness of internal control over financial reporting during and subsequent to implementation of these initiatives.
 
     In connection with the aforementioned business improvement initiatives, during the second and fourth quarters of fiscal year 2010, certain significant operations migrated to the Company’s global enterprise resource planning (“ERP”) software system which encompassed significant changes in transactional processes and internal controls over financial reporting. The purpose of the ERP system is to facilitate the flow of information between all business functions inside the boundaries of the Company and manage the connections to outside stake holders. Built on a centralized database and utilizing a common computing platform, the ERP system consolidates business operations into a more uniform, enterprise wide system environment. The Company's ERP implementation is accompanied by process changes and improvements, including those that impact internal controls over financial reporting. During the fourth quarter, the Company also centralized the management of its European Life Sciences operations resulting in significant changes to aspects of the internal control environment. In connection with these migrations and accompanying process changes, the Company has instituted material changes in its internal control over financial reporting.
 
     Any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
 
ITEM 9B. OTHER INFORMATION.
 
None.
 
PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
 
     (a) Identification of directors and corporate governance:
 
          Amy E. Alving, age 47, is the chief technology officer and a senior vice president at Science Applications International Corporation (“SAIC”), an engineering and technology applications company. Prior to joining SAIC in 2005, she served as the Director of the Special Projects Office at the Defense Advanced Research Projects Agency where she was also a member of the Senior Executive Service. Earlier, Dr. Alving was a White House Fellow serving at the Department of Commerce. Dr. Alving has been a member or advisor to the Army Science Board, Defense Science Board and National Academies Studies and is currently a member of the Naval Research Advisory Committee and of the Council on Foreign Relations. She has been a director of the Company since April 2010 and is a member of the nominating/governance committee.
 
          Dr. Alving brings a unique blend of business, government and academic experience to the board. Dr. Alving offers senior leadership, operations, strategic and policy experience to the board. From her tenure at SAIC, Dr. Alving also brings to the board valuable insight into the scientific and technical aspects of our business and, based on her engineering background, provides an in-depth understanding of and valuable guidance to the Industrial segment of our business.
 
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          Daniel J. Carroll, Jr., age 65, was the chief executive officer of Telcordia Technologies (“Telcordia”) from September 2005 until May 2007. He continues to serve on the Telcordia board. Telcordia is a global provider of telecommunications network software and services for internet protocol, wireline, wireless and cable customers. Mr. Carroll held a number of executive positions with AT&T Corp. (“AT&T”) until its spin-off of Lucent Technologies Inc. He retired from his employment as an officer of Lucent in 2000. He has been a director of the Company since 1999 and lead director since 2003. He is a member of the audit committee and the compensation committee.
 
          Mr. Carroll’s experience as a chief executive officer allows him to bring senior leadership, management expertise and business acumen to the board and makes him well qualified to serve as lead director. Mr. Carroll also has significant financial expertise and operational experience gained through his various executive positions at AT&T and as chief executive officer of Telcordia. In addition, as a licensed engineer, Mr. Carroll has a thorough understanding of, and brings valuable insight into, the Industrial segment of our business.
 
          Robert B. Coutts, age 60, was executive vice president of Lockheed Martin from October 1998 until his retirement in April 2008. While serving in this capacity, he was elected chairman of the board of Sandia Corporation, a subsidiary of Lockheed Martin that manages Sandia National Laboratories for the U.S. Department of Energy’s Nuclear Security Administration. Prior to this, Mr. Coutts ran Lockheed Martin’s Electronic Systems business, was executive vice president of the Systems Integration business area, and president and chief operating officer of the former Electronics Sector. Earlier in his career, Mr. Coutts was president of Martin Marietta Aero & Naval Systems and general manager of the GE Aerospace Operations Division. Mr. Coutts serves on the board of Hovnanian Enterprises, Inc., Stanley Black & Decker and several not-for-profit organizations. He has been a director of the Company since 2009 and is a member of the compensation committee.
 
          As a former executive vice president of Lockheed Martin, a large, diversified company with international operations, and responsibility for the electronic systems business area, with sales over $11 billion and over 32,000 employees, Mr. Coutts brings critical business, operational and strategic insight. Mr. Coutts also has valuable senior leadership, management and regulatory experience and possesses broad knowledge of the technology and aerospace fields, both of which are important to the Company’s business and particularly the Industrial segment of the Company’s business. In addition, Mr. Coutts’ service on the board of two other public companies allows him to bring insight into current issues facing public companies and corporate governance and compensation practices at other public companies.
 
          Cheryl W. Grisé, age 58, was executive vice president of Northeast Utilities, a public utility holding company, from December 2005 until her retirement in July 2007. Ms. Grisé also served in various senior management positions at Northeast Utilities since 1998, including President-Utility Group and chief executive officer of all Northeast Utilities operating subsidiaries. Ms. Grisé was a director of Dana Corporation until February 1, 2008 and currently serves on the boards of MetLife, Inc. (where she is lead director) and Pulte Group, Inc. She is also a member of the boards of the University of Connecticut Foundation and Kingswood-Oxford School. Ms. Grisé has been a director of the Company since August 2007. She is a member of the audit committee and the compensation committee, and has served as Chair of the compensation committee since August 2009.
 
          Ms. Grisé brings to the board senior leadership, extensive business, operating, finance, legal and policy experience acquired during her executive level experiences at Northeast Utilities. Ms. Grisé’s service on other public company boards and their committees also allows her to bring insight into corporate governance practices, financial issues, compensation and related matters and other current issues facing public companies.
 
          Ronald L. Hoffman, age 62, was chief executive officer since January 2005 and a director and president since 2003 of Dover Corporation, a public company that manufactures industrial products, until his retirement in December 2008. Mr. Hoffman began his career at Allis Chalmers. He joined Dover Corporation in 1996 when it acquired Tulsa Winch, an Oklahoma company of which he was then president and part owner. He served as president of Tulsa Winch until 2000 and as executive vice president of Dover Resources from 2000 to 2002. He was vice president of Dover Corporation from 2002 to July 2003. He was then chief operating officer of Dover Corporation from July 2003 to December 2004. He has been a director of the Company since 2008 and is a member of the nominating/governance committee and the compensation committee.
 
          Mr. Hoffman’s service as chief executive officer and president of Dover Corporation provided him with significant experience in the operations, challenges and complex issues facing major corporations competing in technology-driven markets. In addition, Mr. Hoffman brings to the board extensive business, merger and acquisitions, senior leadership and management experience gained during his tenure at Dover Corporation.
 
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          Eric Krasnoff, age 58, has been chairman and chief executive officer of the Company since July 1994 and has at various times, including currently, served as president of the Company. He serves on the board of three not-for-profit organizations. Mr. Krasnoff has also been a director of the Company since 1994 and is a member of the executive committee.
 
          Mr. Krasnoff has served the Company for 35 years in various positions, including group vice president and chief operating officer. As the chairman and chief executive officer of the Company since 1994, Mr. Krasnoff brings to the board a deep and comprehensive knowledge of the Company, the filtration industry and each of the Company’s end-markets.
 
          Dennis N. Longstreet, age 65, was from 1998 until his retirement in late 2005 company group chairman of Johnson & Johnson Medical Devices, the culmination of a 36-year career in operational and sales management roles with Johnson & Johnson, a manufacturer of health care products and provider of related services for the consumer, pharmaceutical and medical devices and diagnostic markets. He is a former chairman of the AdvaMed Industry Association and serves on the board of In Health, a not-for-profit organization formed by AdvaMed. Mr. Longstreet also serves on the board of Avalign Technologies, Inc. He has been a director of the Company since 2006 and is a member of the nominating/governance committee and the executive committee.
 
          As a result of his tenure at Johnson & Johnson, Mr. Longstreet brings to the board extensive senior executive level expertise in the healthcare industry, a major market of the Company’s Life Sciences business, and insight into the complex issues, challenges and regulatory landscape in this industry. Mr. Longstreet also brings business, senior leadership, merger and acquisitions, and management experience to the board.
 
          Edwin W. Martin, Jr., age 79, was associate and deputy U.S. commissioner of education from 1969 to 1979. He was nominated by President Carter as the nation’s first Assistant Secretary for Special Education and Rehabilitative Services and confirmed unanimously by the Senate, serving as assistant secretary of education from 1979 to 1981. From 1981 to 1994, Dr. Martin was president and chief executive officer of the National Center for Disability Services and a board member. He was named in 1994 and since then has been president-emeritus. Dr. Martin served as a Lecturer in Education at Harvard University, and as an Adjunct Professor of Education at Teacher’s College, Columbia University. In 2007, Dr. Martin was also elected mayor of Venice, Florida for a three year term. He has been a director of the Company since 1993 and is a member of the compensation committee and executive committee.
 
          Dr. Martin contributes to the board a strong understanding of policy and regulation acquired during his tenure in various positions with the federal government. Dr. Martin also brings valuable business, senior leadership and management experience acquired during his service as chief executive officer, a board member of the National Center for Disability Services and as mayor of Venice, Florida. In addition, Dr. Martin possesses extensive knowledge of the Company’s business and operations as a result of his 16 years of service on the Company’s board.
 
          Katharine L. Plourde, age 58, was a principal and analyst at the investment banking firm of Donaldson, Lufkin & Jenrette, Inc. (“DLJ”), until November 1997. Since that time, she has engaged in private investing and is currently serving on the board of one private corporation. Since February 2002, she has also served on the board of OM Group Inc. Ms. Plourde has been a director of the Company since 1995 and is a member of the audit committee and the nominating/governance committee. Ms. Plourde has served as Chair of the nominating/governance committee since 2006.
 
          As a result of her tenure at DLJ and two other investment firms, Ms. Plourde brings significant financial expertise to the board, including with respect to all aspects of financial reporting, accounting, corporate finance and capital markets. At those firms, Ms. Plourde was responsible for covering specialty chemical, specialty material and industrial gas companies, which provides her with additional insight into the Company’s business, including particularly the fuels and chemicals industry, a major market of the Company’s Industrial segment. In addition, Ms. Plourde’s service on the board of another public company has given her experience with current issues facing public companies and corporate governance and compensation practices.
 
          Edward L. Snyder, age 64, is professor of laboratory medicine and associate chair for clinical affairs of the Department of Laboratory Medicine at Yale University School of Medicine. He is also director of Blood Bank/Apheresis Service and assistant chief/associate chair for clinical affairs at the Department of Laboratory Medicine at Yale-New Haven Hospital. Dr. Snyder has “appointed consultant” status with the Food and Drug Administration Medical Devices Advisory Committee—Hematology and Pathology Devices Panel, and is a past president of the American Association of Blood Banks. He is the chairman of the volunteer board of both the National Marrow Donor Program and the Be The Match Foundation and a member of the American Association of Blood Banks National Blood Foundation board of trustees. Dr. Snyder has been a director of the Company since 2000 and is a member of the nominating/governance committee.
 
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          Dr. Snyder’s training, experience and achievements in hematology give him a critical perspective into a major market of the Company’s Life Sciences segment, enabling him to bring valuable insight to the board. In addition, Dr. Snyder’s participation on several not-for-profit boards enables him to bring to the board leadership and management experience, as well as experience in governance practices.
 
          Edward Travaglianti, age 62, had, until July 2001, been chairman and chief executive officer of European American Bank (“EAB”). Upon the acquisition of EAB by Citibank N.A. (“Citibank”) in 2001, Mr. Travaglianti served as president of Commercial Markets, heading Citibank’s national middle-market and small business activities. He retired in 2002 and in 2004 resumed his banking career as President, Commerce Bank Long Island. With Toronto Dominion Bank’s acquisition of Commerce Bank in 2008, Mr. Travaglianti became and continues to serve as president, TD Bank Long Island. Mr. Travaglianti serves as the chairman of the board and a director of several not-for-profit and health-related organizations. He has been a director of the Company since 2001 and is a member of the audit committee. He has served as Chair of the audit committee since 2003.
 
          As a result of his current experience leading TD Bank Long Island, as well as his previous experiences with EAB and Citibank, Mr. Travaglianti brings significant financial expertise to the board, including with respect to all aspects of financial reporting, accounting, corporate finance and capital markets. In addition, Mr. Travaglianti’s participation on several not-for-profit boards and organizations enables him to bring to the board leadership and management experience, as well as experience in governance practices.
 
     Information required by this item is included in the Proxy Statement under the captions “Proposal 1 - Election of Directors,” “Structure and Practices of the Board” and “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated by reference in this report.
 
     (b) Identification of executive officers:
 
     Information regarding executive officers is contained in Part I, Item 1. Business- Executive Officers of The Registrant of this report.
 
*       *       *
 
     The Company has adopted a code of ethics applicable to its chief executive officer, chief financial officer, controller and other employees with important roles in the financial reporting process. The code of ethics is available on the Company’s website located at www.pall.com/policies. In addition, the Company will provide to any person, without charge, upon request, a copy of the code of ethics, by addressing your request in writing to the Corporate Compliance and Ethics Officer, Pall Corporation, 25 Harbor Park Drive, Port Washington, NY, 11050.
 
     The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on the website specified above.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
     The information required by this item is included in the Proxy Statement under the caption “Executive Compensation,” “Director Compensation for Fiscal Year 2010” and “Structure and Practices of the Board–Board Committees” and is incorporated by reference in this report.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
 
     The information required by this item is included in the Proxy Statement under the captions “Beneficial Ownership of Common Stock and Restricted Stock Units” and “Executive Compensation–Equity Compensation Plans,” and is incorporated by reference in this report.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
 
     The information required by this item is included in the Proxy Statement under the captions “Proposal 1 – Election of Directors,” “Structure and Practices of the Board,” “Policies and Procedures for Related Person Transactions” and “Related Person Transactions,” and is incorporated by reference in this report.
 
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
 
     The information required by this item is included in the Proxy Statement under the captions “Audit and Non-Audit Fees” and “Policy on Audit Committee Pre-Approval of Audit and Permitted Non-Audit Services,” and is incorporated by reference in this report.
 
     PART IV
 
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
 
(a) Documents filed as part of the Form 10-K:
 
(1) The following items are filed as part of this report: 
       Report of Independent Registered Public Accounting Firm
       Consolidated Balance Sheets – July 31, 2010 and July 31, 2009 
       Consolidated Statements of Earnings – years ended July 31, 2010, July 31, 2009 and July 31, 2008
       Consolidated Statements of Stockholders’ Equity – years ended July 31, 2010, July 31, 2009 and July 31, 2008
       Consolidated Statements of Cash Flows – years ended July 31, 2010, July 31, 2009 and July 31, 2008
       Notes to consolidated financial statements
 
(2) The following financial statement schedule is filed as part of this report:
       Schedule II – Valuation and Qualifying Accounts
 
     All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or in the notes thereto.
 
(3) Exhibits: 
      
The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this report.
 
Exhibit Index
 
Exhibit
Number
     
Description of Exhibit
 
3.1(i)†
 
Restated Certificate of Incorporation of the Registrant as amended through September 1, 2010.
     
3.1(ii)*  
By-Laws of the Registrant as amended through April 23, 2010, filed as Exhibit 3(ii) to the Registrant’s Form 8-K filed on April 29, 2010.
     
4.1(i)*  
Indenture dated as of June 15, 2010, by and among the Registrant, as Issuer, and The Bank of New York Mellon, as Trustee, relating to the Registrant’s 5.00% Senior Notes due June 15, 2020 filed as Exhibit 4.1 to the Registrant’s Form 8-K filed on June 16, 2010.
 
The exhibits filed herewith do not include other instruments with respect to long-term debt of the Registrant and its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant agrees, pursuant to Item 601(b) (4) (iii) of Regulation S-K, that it will furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
     
10.1(i)*  
Five-Year Credit Agreement dated July 13, 2010, between the Registrant and JPMorgan Chase Bank and the Other Lenders Party Thereto, filed as Exhibit 4(ii) to the Registrant’s Form 8-K filed on July 19, 2010.
     
10.2*‡  
Employment Agreement dated January 21, 2004, as amended and restated effective July 20, 2005, between the Registrant and Eric Krasnoff, filed as Exhibit 10.5 to the Registrant’s Form 8-K filed on July 25, 2005.
 
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10.3*‡       Amendment dated May 3, 2006 to Employment Agreement dated January 21, 2004, as amended and restated effective July 20, 2005, between the Registrant and Eric Krasnoff, filed as Exhibit 10.28 to the Registrant’s 2006 Form 10-K.
 
10.4*‡   Amendment dated July 18, 2006 to Employment Agreement dated January 21, 2004, as amended and restated effective July 20, 2005, between the Registrant and Eric Krasnoff, filed as Exhibit 10.29 to the Registrant’s 2006 Form 10-K.
 
10.5*‡   Amendment to Employment Agreement effective December 31, 2008 between the Registrant and Eric Krasnoff, filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2009.
 
10.6*‡   Employment Agreement dated April 24, 2008, between the Registrant and Donald B. Stevens, filed as Exhibit 10 to the Registrant’s Form 8-K filed on April 28, 2008.
 
10.7*‡(a)   Loan Agreement between the Company and Donald Stevens, effective on or about May 27, 2005, filed as Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2009.
 
10.8*‡   Employment Agreement dated August 18, 2010 between the Registrant and Roberto Perez, filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on August 24, 2010.
 
10.9*‡(a)   Mortgage Note by Roberto Perez and Astrid Perez in favor of the Registrant, dated March 2000, filed as Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2009.
 
10.10*‡   Employment Agreement dated October 1, 2009 between the Registrant and Lisa McDermott, filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on October 7, 2009.
 
10.11*‡   Employment Agreement dated October 1, 2009 between the Registrant and Sandra Marino, filed as Exhibit 10.2 to the Registrant’s Form 8-K filed on October 7, 2009.
 
10.12*‡   Pall Corporation Supplementary Pension Plan, effective December 31, 2008, filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2009.
 
10.13*‡   Pall Corporation Supplementary Profit-Sharing Plan as amended effective July 19, 2005, filed as Exhibit 10.3 to the Registrant’s Form 8-K filed on July 25, 2005.
 
10.14*‡   Pall Corporation Profit-Sharing Plan as amended and restated as of July 1, 1998, filed as Exhibit 10.15 to the Registrant’s 2002 Form 10-K.
 
10.15*‡   Pall Corporation Profit-Sharing Plan amended pursuant to provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, filed as Exhibit 10.17 to the Registrant’s 2003 Form 10-K.
 
10.16*‡   Pall Corporation 2004 Executive Incentive Bonus Plan, as amended effective November 18, 2009, filed as Appendix A to the Registrant’s Proxy Statement filed on October 9, 2009.
 
10.17*‡   Pall Corporation 1991 Stock Option Plan, as amended effective April 17, 2002, filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002.
 
10.18*‡   Pall Corporation 1993 Stock Option Plan, as amended effective April 17, 2002, filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002.
 
10.19*‡   Pall Corporation 1995 Stock Option Plan, as amended effective April 17, 2002, filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002.
 
10.20*‡   Pall Corporation 1998 Stock Option Plan, as amended effective April 17, 2002, filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002.
 
10.21†‡   Form of Notice of Grant of Restricted Stock Units Under Pall Corporation 2005 Stock Compensation Plan.

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10.22†‡   Form of Notice of Grant of Annual Award Units Under Pall Corporation 2005 Stock Compensation Plan.
  
10.23*‡   Form of Notice of Grant of Stock Option Grant Agreement Under Pall Corporation 2005 Stock Compensation Plan, filed as Exhibit 10.20 to the Registrant’s 2007 Form 10-K.
 
10.24*‡   Pall Corporation 2005 Stock Compensation Plan, as amended effective November 18, 2009, filed as Appendix D to the Registrant’s Proxy Statement filed on October 9, 2009.
 
10.25*‡   Pall Corporation Stock Option Plan for Non-Employee Directors, as amended effective November 19, 1998, filed as Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1998.
 
10.26*‡   Pall Corporation 2001 Stock Option Plan for Non-Employee Directors, as amended September 17, 2004, filed as Exhibit 10.25 to the Registrant’s 2004 Form 10-K.
 
10.27*‡   Pall Corporation Management Stock Purchase Plan as amended effective November 18, 2009, filed as Appendix C to the Registrant’s Proxy Statement filed on October 9, 2009.
 
10.28*‡   Pall Corporation Employee Stock Purchase Plan as amended effective November 18, 2009, filed as Appendix B to the Registrant’s Proxy Statement filed on October 9, 2009.
 
10.29*‡   Principal Rules of the Pall Supplementary Pension Scheme, filed as Exhibit 10.25 to the Registrant’s 1995 Form 10-K.
 
12†   Ratio of Earnings to Fixed Charges.
 
14*       Pall Corporation Code of Ethics applicable to its Chief Executive Officer, Chief Financial Officer, Controller and other employees with important roles in the financial reporting process, filed as Exhibit 99.1 to the Registrant’s 2004 Form 10-K.
 
21†   Subsidiaries of the Registrant.
 
23†   Consent of Independent Registered Public Accounting Firm.
 
31.1†   Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2†   Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1†   Certification of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2†   Certification of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

*   Incorporated herein by reference. The Registrant’s SEC file number is 001- 04311.
     
  Filed herewith.
     
  Denotes management contract or compensatory plan or arrangement.
     
(a)       Confidential treatment has been granted for certain information contained in the document. Such information has been omitted and filed separately with the Securities and Exchange Commission.

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SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  Pall Corporation
  
              September 28, 2010 By: /s/  LISA MCDERMOTT  
    Lisa McDermott,
    Chief Financial Officer and Treasurer
  
  /s/  FRANCIS MOSCHELLA  
    Francis Moschella,
    Vice President – Corporate Controller
    Chief Accounting Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
/s/ ERIC KRASNOFF Chairman of the Board, September 28, 2010
       Eric Krasnoff        Chief Executive Officer and President  
 
/s/ LISA MCDERMOTT Chief Financial Officer and Treasurer September 28, 2010
       Lisa McDermott    
 
/s/ FRANCIS MOSCHELLA Vice President – Corporate Controller September 28, 2010
       Francis Moschella Chief Accounting Officer  
 
/s/ AMY ALVING Director September 28, 2010
       Amy Alving    
 
/s/ DANIEL J. CARROLL, JR. Director September 28, 2010
       Daniel J. Carroll, Jr.    
 
/s/ ROBERT B. COUTTS Director September 28, 2010
       Robert B. Coutts    
 
/s/ CHERYL W. GRISÉ Director September 28, 2010
       Cheryl W. Grisé    
 
/s/ ULRIC S. HAYNES, JR. Director September 28, 2010
       Ulric S. Haynes, Jr.    
 
/s/ RONALD HOFFMAN Director September 28, 2010
       Ronald Hoffman    
 
/s/ DENNIS N. LONGSTREET Director September 28, 2010
       Dennis N. Longstreet    
 
/s/ EDWIN W. MARTIN, JR. Director September 28, 2010
       Edwin W. Martin, Jr.    
 
/s/ KATHARINE L. PLOURDE Director September 28, 2010
       Katharine L. Plourde    
 
/s/ EDWARD L. SNYDER Director September 28, 2010
       Edward L. Snyder    
 
/s/ EDWARD TRAVAGLIANTI Director September 28, 2010
       Edward Travaglianti    

53
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders
Pall Corporation:
 
     We have audited the accompanying consolidated balance sheets of Pall Corporation and subsidiaries as of July 31, 2010 and 2009, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the years in the three-year period ended July 31, 2010. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial statement schedule. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
 
     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pall Corporation and subsidiaries as of July 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 2010, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Pall Corporation and subsidiaries’ internal control over financial reporting as of July 31, 2010, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 28, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
     As discussed in the notes to the consolidated financial statements, effective August 1, 2007, the Company changed its method of accounting for uncertainty in income taxes due to the adoption of a new accounting standard.
 
/s/  KPMG LLP  
  KPMG LLP
 
Melville, New York  
September 28, 2010  

54
 

 

PALL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
(In thousands, except per share data)
 
  July 31, 2010       July 31, 2009
ASSETS              
Current assets:              
       Cash and cash equivalents $ 498,563     $ 414,011  
       Accounts receivable   566,499       561,063  
       Inventories   415,046       413,278  
       Other current assets   222,651       182,098  
              Total current assets   1,702,759       1,570,450  
Property, plant and equipment   706,435       681,658  
Goodwill   283,822       282,777  
Intangible assets   68,827       63,751  
Other non-current assets   237,369       242,176  
              Total assets $ 2,999,212     $ 2,840,812  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY              
Current liabilities:              
       Notes payable $ 40,072     $ 42,371  
       Accounts payable   186,407       171,956  
       Accrued liabilities   270,244       250,838  
       Income taxes payable   120,051       137,846  
       Current portion of long-term debt   1,956       97,432  
       Dividends payable   18,475       16,947  
              Total current liabilities   637,205       717,390  
Long-term debt, net of current portion   741,353       577,666  
Income taxes payable – non-current   134,851       133,919  
Deferred income taxes   7,864       9,293  
Other non-current liabilities   295,589       287,946  
              Total liabilities   1,816,862       1,726,214  
 
Stockholders’ equity:              
       Common stock, par value $.10 per share; 500,000 shares              
              authorized; 127,958 shares issued   12,796       12,796  
       Capital in excess of par value   217,696       197,759  
       Retained earnings   1,394,321       1,237,735  
       Treasury stock, at cost (2010 – 12,490 shares, 2009 – 11,083              
              shares)   (412,335 )     (354,274 )
       Stock option loans   (224 )     (435 )
       Accumulated other comprehensive (loss)/income:              
              Foreign currency translation   97,249       127,015  
              Pension liability adjustment   (132,577 )     (108,977 )
              Unrealized investment gains   5,424       3,423  
              Unrealized loss on derivatives   -       (444 )
    (29,904 )     21,017  
Total stockholders’ equity   1,182,350       1,114,598  
Total liabilities and stockholders’ equity $      2,999,212     $      2,840,812  
 
See accompanying notes to consolidated financial statements.
 
55
 

 

PALL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF EARNINGS
 
(In thousands, except per share data)
 
  Years Ended
  July 31, 2010       July 31, 2009       July 31, 2008
Net sales $      2,401,932   $      2,329,158   $      2,571,645
Cost of sales   1,195,830     1,228,468     1,360,810
Gross profit   1,206,102     1,100,690     1,210,835
 
Selling, general and administrative expenses   739,936     699,832     749,519
Research and development   74,944     71,213     71,647
Restructuring and other charges, net   17,664     30,723     31,538
Interest expense, net   14,324     28,136     32,576
Loss on extinguishment of debt   31,513        
Earnings before income taxes   327,721     270,786     325,555
Provision for income taxes   86,473     75,167     108,276
 
Net earnings $ 241,248   $ 195,619   $ 217,279
 
Earnings per share:                
       Basic $ 2.05   $ 1.65   $ 1.77
       Diluted $ 2.03   $ 1.64   $ 1.76
 
Average shares outstanding:                
       Basic   117,437     118,631     122,445
       Diluted   118,846     119,571     123,686

See accompanying notes to consolidated financial statements.
 
56
 

 

PALL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
(In thousands)
 
          Capital                           Accumulated                
          in Excess                   Stock   Other                
Years Ended July 31, 2008, July 31, 2009   Common   of Par   Retained   Treasury   Option   Comprehensive           Comprehensive
and July 31, 2010    Stock    Value    Earnings    Stock    Loans    Income/(Loss)    Total    Income
Balance at July 31, 2007   $     12,796   $     159,620     $     974,945     $     (164,454 )   $     (679 )   $     78,373     $     1,060,601          
Impact of adoption of new accounting guidance                                                              
       (see Note 1, Accounting Policies and Related                                                              
       Matters)                   5,570                               5,570          
Balance at August 1, 2007     12,796     159,620       980,515       (164,454 )     (679 )     78,373       1,066,171          
Comprehensive income:                                                              
       Net earnings                   217,279                               217,279     $       217,279  
       Other comprehensive income/(loss):                                                              
              Foreign currency translation                                           36,738       36,738       36,738  
              Pension liability adjustment                                           5,714       5,714       5,714  
              Unrealized investment losses                                           (458 )     (458 )     (458 )
              Unrealized loss on derivatives                                           (194 )     (194 )     (194 )
Comprehensive income                                                         $ 259,079  
Dividends declared                   (76,407 )                             (76,407 )        
Issuance of 751 shares for stock plans and tax                                                              
       benefit related to stock plans           (2,058 )     (2,771 )     22,796                       17,967          
Restricted stock units related to stock plans           4,987                                       4,987          
Stock based compensation expense           16,059                                       16,059          
Purchase of 4,056 shares                           (148,850 )                     (148,850 )        
Stock option loans                                   229               229          
Balance at July 31, 2008     12,796     178,608       1,118,616       (290,508 )     (450 )     120,173       1,139,235          
Comprehensive income:                                                              
       Net earnings                   195,619                               195,619     $ 195,619  
       Other comprehensive income/(loss):                                                              
              Foreign currency translation                                           (52,414 )     (52,414 )     (52,414 )
              Pension liability adjustment                                           (47,655 )     (47,655 )     (47,655 )
              Unrealized investment gains                                           1,080       1,080       1,080  
              Unrealized loss on derivatives                                           (167 )     (167 )     (167 )
Comprehensive income                                                         $ 96,463  
Dividends declared                   (67,523 )                             (67,523 )        
Issuance of 981 shares for stock plans and tax                                                              
       benefit related to stock plans           (10,872 )     (8,977 )     32,673                       12,824          
Restricted stock units related to stock plans           6,539                                       6,539          
Stock based compensation expense           23,484                                       23,484          
Purchase of 3,347 shares                           (96,439 )                     (96,439 )        
Stock option loans                                   15               15          
Balance at July 31, 2009     12,796     197,759       1,237,735       (354,274 )     (435 )     21,017       1,114,598          
Comprehensive income:                                                              
       Net earnings                   241,248                               241,248     $ 241,248  
       Other comprehensive income/(loss):                                                              
              Foreign currency translation                                           (29,766 )     (29,766 )     (29,766 )
              Pension liability adjustment                                           (23,600 )     (23,600 )     (23,600 )
              Unrealized investment gains                                           2,001       2,001       2,001  
              Unrealized gain on derivatives                                           444       444       444  
Comprehensive income                                                         $ 190,327  
Dividends declared                   (74,263 )                             (74,263 )        
Issuance of 1,313 shares for stock plans and tax                                                              
       benefit related to stock plans           (9,483 )     (10,399 )     41,938                       22,056          
Restricted stock units related to stock plans           4,804                                       4,804          
Stock based compensation expense           24,616                                       24,616          
Purchase of 2,720 shares                           (99,999 )                     (99,999 )        
Stock option loans                                   211               211          
Balance at July 31, 2010   $ 12,796   $ 217,696     $ 1,394,321     $ (412,335 )   $ (224 )   $ (29,904 )   $ 1,182,350          
 
See accompanying notes to consolidated financial statements.
 
57
 

 

PALL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(In thousands)
 
  Years Ended
  July 31, 2010       July 31, 2009       July 31, 2008
Operating activities:                      
Net earnings $ 241,248     $ 195,619     $ 217,279  
Adjustments to reconcile net earnings to net cash provided                      
by operating activities:                      
       Restructuring and other charges, net   976       4,317       1,721  
       Depreciation and amortization of long-lived assets   93,628       89,439       93,205  
       Non-cash stock compensation   24,616       23,484       16,059  
       Write-off of deferred financing costs   3,245              
       Redemption premium on senior notes   28,268              
       Excess tax benefits from stock based compensation                      
              arrangements   (2,671 )     (457 )     (1,802 )
       Amortization of deferred revenue   (2,154 )     (2,154 )     (2,154 )
       Deferred income taxes   (4,976 )     (10,642 )     (19,374 )
       Provisions for doubtful accounts   1,349       2,864       2,544  
       Other   1,421       (355 )     (27 )
       Changes in operating assets and liabilities, net of                      
              effects of acquisitions and dispositions:                      
       Inventories   (8,415 )     57,147       (4,996 )
       Accounts receivable   (14,806 )     19,954       (31,996 )
       Income taxes receivable/payable   (7,368 )     656       (113,756 )
       Accounts payable and accrued expenses   67,098       (42,071 )     (11,003 )
       Other assets   (23,972 )     20,412       27,756  
       Other liabilities   (19,627 )     (30,718 )     17,350  
Net cash provided by operating activities   377,860       327,495       190,806  
Investing activities:                      
Capital expenditures   (136,313 )     (133,049 )     (123,854 )
Purchases of retirement benefit assets   (58,599 )     (20,555 )     (26,177 )
Proceeds from sale of retirement benefit assets   47,442       18,737       23,055  
Disposals of fixed assets   1,603       4,241       10,137  
Acquisitions of businesses, net of disposals                      
       and cash acquired   (8,984 )     (37,249 )      
Other   (13,883 )     (14,155 )     (4,848 )
Net cash used by investing activities   (168,734 )     (182,030 )     (121,687 )
Financing activities:                      
Long-term borrowings   798,290       171,010       211,549  
Repayments of long-term debt   (737,675 )     (213,974 )     (82,884 )
Redemption premium on senior notes   (28,268 )            
Additions to deferred financing costs   (6,311 )            
Notes payable   (2,016 )     19,493       (16,420 )
Purchase of treasury stock   (99,999 )     (96,439 )     (148,850 )
Dividends paid   (71,284 )     (64,914 )     (59,945 )
Net proceeds from stock plans   23,929       15,757       18,407  
Excess tax benefits from stock based compensation                      
arrangements   2,671       457       1,802  
Net cash used by financing activities          (120,663 )            (168,610 )     (76,341 )
Cash flow for year   88,463       (23,145 )     (7,222 )
Cash and cash equivalents at beginning of year   414,011       454,065       443,036  
Effect of exchange rate changes on cash   (3,911 )     (16,909 )     18,251  
Cash and cash equivalents at end of year $ 498,563     $ 414,011     $ 454,065  
Supplemental disclosures:                      
       Interest paid $ 35,611     $ 40,740     $ 43,287  
       Income taxes paid (net of refunds) $ 91,871     $ 84,680     $        231,030  

See accompanying notes to consolidated financial statements.
 
58
 

 

PALL CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(In thousands, except per share data)
 
NOTE 1 ACCOUNTING POLICIES AND RELATED MATTERS
 
The Company
 
     Pall Corporation and its subsidiaries (hereinafter collectively called the “Company” unless the context requires otherwise) manufacture and market filtration, purification and separation products and integrated systems solutions throughout the world to a diverse group of customers. As discussed in Note 18, Segment Information and Geographies, management has determined that the Company’s reportable segments, which are also its operating segments, consist of its two vertically integrated businesses: Life Sciences and Industrial.
 
     Effective in the fourth quarter of fiscal year 2010, the Company reorganized its operating segments. The Food & Beverage market is now reported within the Life Sciences segment. It was previously managed by and reported in the Industrial segment. Segment information for prior periods has been restated to reflect these changes. All discussions and amounts reported in this report are based on the reorganized segment structure.
 
     The Company’s fiscal year ends on July 31, and the Company’s fiscal quarters end on October 31, January 31 and April 30.
 
Presentation and Use of Estimates
 
     The financial statements of the Company are presented on a consolidated basis with its subsidiaries, substantially all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated in consolidation.
 
     Financial statements of foreign subsidiaries have been translated into United States (“U.S.”) dollars at exchange rates as follows: (i) balance sheet accounts at year-end rates, except equity accounts which are translated at historic rates, and (ii) income statement accounts at weighted average rates. Translation gains and losses are reflected in stockholders’ equity, while transaction gains and losses, which result from the settlement of foreign denominated receivables and payables at rates that differ from rates in effect at the transaction date, are reflected in earnings. Net transaction gains/(losses) inclusive of offsetting gains/(losses) on foreign currency forward contracts in fiscal years 2010, 2009 and 2008 amounted to ($816), $191 and ($2,949), respectively, and were recorded in selling, general and administrative expenses.
 
     To prepare the Company’s consolidated financial statements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), management is required to make assumptions that may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates are used for, but not limited to, inventory valuation; provisions for doubtful accounts; asset recoverability; depreciable lives of fixed assets and useful lives of patents and amortizable intangibles; fair value of financial instruments; income tax assets and liabilities; pension valuations; restructuring and other charges; valuation of assets acquired and liabilities assumed in business combinations; allocation of costs to operating segments; revenue recognition and liabilities for items such as environmental remediation. The Company is subject to uncertainties such as the impact of future events, economic, environmental and political factors, and changes in the business climate; therefore, actual results may differ from those estimates. When no estimate in a given range is deemed to be better than any other when estimating contingent liabilities, the low end of the range is accrued. Accordingly, the accounting estimates used in the preparation of the Company’s consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Changes in estimates are made when circumstances warrant. Such changes and refinements in estimation methodologies are reflected in reported results of operations; if material, the effects of changes in estimates are disclosed in the notes to the consolidated financial statements.
 
Cash and Cash Equivalents
 
     All financial instruments purchased with a maturity of three months or less, other than amounts held in the benefits protection trust, are considered cash equivalents.
 
59
 

 

PALL CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
(In thousands, except per share data)
 
Inventories
 
     Inventories are valued at the lower of cost (on the first-in, first-out method) or market.
 
Investments
 
     Investments (which includes equity interests of less than 20%) are considered available-for-sale securities, as such, these investments are carried at fair value. Unrealized gains and losses on these securities are reported as a separate component of stockholders’ equity until realized from sale or when unrealized losses are deemed by management to be other than temporary. Management considers numerous factors, on a case-by-case basis, in evaluating whether the decline in market value of an available-for-sale security below cost is other than temporary. Such factors include, but are not limited to, (i) the length of time and the extent to which the market value has been less than cost; (ii) the financial condition and the near-term prospects of the issuer of the investment; and (iii) whether the Company’s intent to retain the investment for the period of time is sufficient to allow for any anticipated recovery in market value. Investments are included in “Other non-current assets” in the consolidated balance sheets.
 
Acquisition Accounting
 
     Acquisitions of businesses are accounted for using the acquisition method of accounting. The acquisition method of accounting requires, among other things, that most assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date and that the fair value of acquired in-process research & development (IPR&D) be recorded on the balance sheet. Also, transaction costs are expensed as incurred. Any excess of the purchase price over the assigned values of the net assets acquired is recorded as goodwill. For acquisitions consummated prior to August 1, 2009, amounts allocated to IPR&D were expensed at the date of acquisition. When the Company acquires net assets that do not constitute a business under U.S. GAAP, no goodwill is recognized.
 
Long-Lived Assets
 
     The Company performs detailed impairment testing for goodwill at least annually during the Company’s fiscal third quarter, or more frequently if certain events or circumstances indicate impairment might have occurred. The Company evaluates the recoverability of goodwill using a two-step impairment test approach at the reporting unit level. The Company’s two operating segments, Life Sciences and Industrial, were also determined to be its reporting units. 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. In fiscal years 2010 and 2009, the estimated fair values of the Company’s reporting units substantially exceeded the carrying values of these reporting units, and as such, step two was not performed.
 
     Effective in the fourth quarter of fiscal year 2010, the Company reorganized its operating segments, such that the Food & Beverage market, previously managed by and reported in the Industrial segment, is now managed by and reported in the Life Sciences segment. As a result of this reorganization, the Company re-performed the goodwill impairment test on both a pre- and post-reorganization basis. 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.
 
     The Company’s amortizable intangible assets, which are comprised almost entirely of patented and unpatented technology, customer-related intangibles and trademarks, are subject to amortization for periods ranging up to 20 years, principally on a straight-line basis. Property, plant and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the respective assets, principally on the straight-line basis. The estimated useful lives range from 30 to 50 years for buildings, three to ten years for machinery and equipment and eight to ten years for furniture and fixtures. Leasehold improvements are depreciated over the shorter of the remaining life or the remaining lease term.
 
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PALL CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
(In thousands, except per share data)
 
     The Company reviews its depreciable and amortizable long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. If the sum of the expected cash flows, undiscounted, is less than the carrying amount of the asset (or asset group), an impairment loss is recognized as the amount by which the carrying amount of the asset (or asset group) exceeds its fair value.
 
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) the Company has 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 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.
 
Stock Plans
 
     The Company currently has four stock-based employee compensation plans (collectively, the “Stock Plans”), which are described more fully in Note 15, Common Stock. The Company records stock-based compensation, measured at the fair value of the award on the grant date, as an expense in the consolidated statements of earnings. Upon the exercise of stock options or the vesting of restricted stock units, the resulting excess tax benefits, if any, are credited to additional paid-in capital. Any resulting tax deficiencies are offset against those cumulative credits to additional paid-in capital. If the cumulative credits to additional paid-in capital are exhausted, tax deficiencies are recorded to the provision for income taxes. Excess tax benefits are reflected as financing cash inflows in the accompanying consolidated statements of cash flows.
 
Environmental Matters
 
     Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as facts and circumstances change, assessment and remediation efforts progress or as additional technical or legal information becomes available. Costs of future expenditures for environmental remediation obligations are not discounted to their present value and are expected to be disbursed over an extended period of time. Accruals for environmental liabilities are included in “Accrued liabilities” and “Other non-current liabilities” in the consolidated balance sheets.
 
Income Taxes
 
     Income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s assessment of estimated future taxes to be paid. The Company is subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.
 
     The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period that includes the enactment date.
 
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PALL CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
(In thousands, except per share data)
 
     In evaluating the Company’s ability to recover deferred tax assets within the jurisdiction from which they arise, management assesses the generation of sufficient taxable income from all sources, including the scheduled reversal of taxable temporary differences, tax-planning strategies and projected future operating income. To the extent the Company does not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established.
 
     Effective August 1, 2007, the Company adopted new accounting guidance regarding accounting for uncertainty in income taxes, resulting in a cumulative effect adjustment of $5,570, reducing its liability for unrecognized income tax benefits and interest and increasing the August 1, 2007 balance of retained earnings.
 
     When evaluating uncertain tax positions, the Company determines whether the position is more-likely-than-not to be sustained upon examination based upon its technical merits or administrative practices or precedents. Any tax position that meets the more-likely-than-not recognition threshold is measured and recognized in the consolidated financial statements. The amount of tax benefit to be recognized is the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.
 
     The Company recognizes accrued interest expense related to unrecognized income tax benefits in interest expense and the balance at the end of a reporting period is recorded in current or non-current interest payable on the Company’s consolidated balance sheet. Penalties are accrued as part of the provision for income taxes and the unpaid balance at the end of a reporting period is recorded as part of current or non-current income taxes payable.
 
     For further discussion, refer to Note 11, Income Taxes.
 
Earnings Per Share
 
     The consolidated statements of earnings present basic and diluted earnings per share. Basic earnings per share is determined by dividing income available to common stockholders 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 securities that meet certain criteria, such as stock options, were outstanding since issuance. The treasury stock method is used to determine the dilutive effect of potentially dilutive securities. Employee stock options and restricted stock units of 1,234, 2,933 and 1,235 for fiscal years 2010, 2009 and 2008, respectively, were not included in the computation of diluted shares because their effect would have been antidilutive.
 
     The following is a reconciliation between basic shares outstanding and diluted shares outstanding:
 
        2010       2009        2008
  Basic shares outstanding      117,437        118,631        122,445
  Effect of dilutive securities (a) 1,409   940   1,241
  Diluted shares outstanding 118,846   119,571   123,686
             
       (a)       Refer to Note 15, Common Stock, for a description of the Company’s stock plans.
 
Derivative Instruments
 
     The Company’s derivative instruments are recorded as either assets or liabilities in the consolidated balance sheets based on their fair values. Changes in the fair values are reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. Derivative instruments are designated and accounted for as either a hedge of a recognized asset or liability (fair value hedge) or a hedge of a forecasted transaction (cash flow hedge). For derivatives designated as effective cash flow hedges, changes in fair values are recognized in other comprehensive income/(loss). Changes in fair values related to fair value hedges as well as the ineffective portion of cash flow hedges are recognized in earnings. Changes in the fair value of the underlying hedged item of a fair value hedge are also recognized in earnings. For further discussion, refer to Note 10, Financial Instruments and Risks & Uncertainties.
 
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PALL CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
(In thousands, except per share data)
 
Subsequent Events
 
     The Company has evaluated subsequent events for possible disclosure through the date the consolidated financial statements were issued, noting no events that would require adjustment to, or disclosures in, the consolidated financial statements as of and for the year ended July 31, 2010.
 
Adoption of New Accounting Pronouncement
 
     In January 2010, the Financial Accounting Standards Board (“FASB”) issued updated guidance that amends the disclosure requirements for fair value measurements. This updated guidance: (i) requires that the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements be disclosed separately along with the reasons for the transfer; (ii) clarifies the requirement that a reporting entity should provide fair value measurement disclosures for each class of assets and liabilities; and (iii) clarifies the requirement that a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring Level 2 and Level 3 fair value measurements. This new guidance was effective with the Company’s third quarter of fiscal year 2010. Effective for the Company’s first quarter of fiscal year 2012, this guidance requires that in the reconciliation of Level 3 fair value measurements, information about purchases, sales, issuances and settlements be presented separately on a gross basis. See Note 9, Fair Value Measurements, for the required disclosures.
 
     In June 2009, the FASB issued authoritative guidance that established the FASB Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with U.S. GAAP. In addition, this guidance also recognizes rules and interpretive releases of the U.S. Securities and Exchange Commission (“SEC”) as authoritative GAAP for SEC registrants. This new guidance was effective for the Company beginning with its first quarter of fiscal year 2010. The ASC does not change current GAAP other than the manner in which new accounting guidance is referenced, and the adoption of this authoritative guidance did not have an impact on the Company’s consolidated financial statements.
 
     In April 2009, the FASB issued authoritative guidance to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably determined. If the fair value of such assets or liabilities cannot be reasonably determined, then they would generally be recognized in accordance with certain other pre-existing authoritative guidance. This new guidance also amends the subsequent accounting for assets and liabilities arising from contingencies in a business combination and certain other disclosure requirements. This new guidance was effective for the Company beginning with its first quarter of fiscal year 2010. The adoption of this authoritative guidance did not have a material impact on the Company’s consolidated financial statements.
 
     In December 2008, the FASB issued authoritative guidance that requires employers to provide disclosures about plan assets of defined benefit pensions or other post-retirement plans. This disclosure only requirement was effective for the Company beginning with the fiscal year 2010 Annual Report on Form 10-K for assets as at July 31, 2010 and prospectively. These disclosures include information about investment policies and strategies, the classes of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets and an understanding of significant concentrations of risk within plan assets. See Note 13, Pension and Profit Sharing Plans and Arrangements, for the required disclosures.
 
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PALL CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
(In thousands, except per share data)
 
     In April 2008, the FASB issued authoritative guidance that amends the factors that should be considered in developing renewal or extension assumptions that are used to determine the useful life of a recognized intangible asset and requires enhanced related disclosures. This new guidance was effective for the Company beginning with its first quarter of fiscal year 2010. The adoption of this authoritative guidance did not have any impact on the Company’s consolidated financial statements.
 
     In February 2008, the FASB issued authoritative guidance that permitted the delayed application of fair value measurement guidance for non-financial assets and liabilities that are recognized or disclosed at fair value on a non-recurring basis which, including consideration of the delay, was effective for the Company beginning with its first quarter of fiscal year 2010. The Company’s non-financial assets and liabilities subject to this guidance principally consist of intangible assets acquired through business combinations and long-lived assets. The adoption of this authoritative guidance did not impact the Company’s consolidated financial statements. See Note 9, Fair Value Measurements, for further discussion.
 
     In December 2007, the FASB issued authoritative guidance related to the accounting for business combinations. This guidance establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This new guidance was effective for the Company beginning with its first quarter of fiscal year 2010. The impact of adopting this authoritative guidance generally impacts the accounting for future business combinations; specifically, certain aspects of business combination accounting, such as transaction costs and certain merger-related restructuring reserves. One exception to the prospective application of this guidance relates to accounting for income taxes associated with business combinations that closed prior to the beginning of the Company’s first quarter of fiscal year 2010. Once the purchase accounting measurement period closes for these acquisitions, any further adjustments to income taxes recorded as part of these business combinations will impact income tax expense. Previously, further adjustments were predominantly recorded as adjustments to goodwill. The total amount of such unrecognized income tax benefits as of August 1, 2009 that would impact the effective tax rate pursuant to the new guidance was $15,288. The Company did not have any material acquisitions during fiscal year 2010.
 
     In December 2007, the FASB issued authoritative guidance related to the accounting for noncontrolling interests in consolidated financial statements. This guidance establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. In addition, this guidance also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This new guidance was effective for the Company beginning with its first quarter of fiscal year 2010. The adoption of this authoritative guidance did not have any impact on the Company’s consolidated financial statements.
 
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PALL CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
(In thousands, except per share data)
 
NOTE 2 – RESTRUCTURING AND OTHER CHARGES, NET
 
     The following tables summarize the restructuring and other charges (“ROTC”) recorded in fiscal years 2010, 2009 and 2008:
 
            Other        
        Charges/(Gains)        
2010       Restructuring (1)       (2)       Total
Severance   $                   6,637     $                     $      6,637  
Other     5,581             5,581  
Environmental matters (2a)           6,911       6,911  
Legal related costs, net of insurance claim                        
       payments (2b)           (691 )     (691 )
Asset impairment/(gain on sale) (2c)     237       (774 )     (537 )
      12,455       5,446       17,901  
Reversal of excess restructuring reserves     (237 )           (237 )
    $ 12,218     $ 5,446     $ 17,664  
                         
Cash   $ 10,639     $ 5,446     $ 16,085  
Non-cash     1,579             1,579  
    $ 12,218     $ 5,446     $ 17,664  
                         
2009                        
Severance   $ 18,938     $     $ 18,938  
Impairment and loss on disposal of assets (2c)     174       3,477       3,651  
Other     4,734       (942 )     3,792  
In-process research and development (2d)           1,743       1,743  
Legal related costs, net of insurance claim                        
       payments (2b)              955        955  
Environmental matters (2a)           1,808       1,808  
      23,846       7,041       30,887  
Reversal of excess restructuring reserves     (164 )           (164 )
    $ 23,682     $ 7,041     $ 30,723  
                         
Cash   $ 24,585     $ 1,821     $ 26,406  
Non-cash     (903 )     5,220       4,317  
    $ 23,682     $ 7,041     $ 30,723  
                         
2008                        
Legal related costs (2b)   $     $ 19,081     $ 19,081  
Severance     8,814             8,814  
Other     3,110       482       3,592  
Gain on disposal of assets, net     (158 )     (484 )     (642 )
Environmental matters (2a)           1,275       1,275  
      11,766       20,354       32,120  
Reversal of excess restructuring reserves     (582 )           (582 )
    $ 11,184     $ 20,354     $ 31,538  
                         
Cash   $ 11,154     $ 19,895     $ 31,049  
Non-cash     30       459       489  
    $ 11,184     $ 20,354     $ 31,538  
                         
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PALL CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
(In thousands, except per share data)
 
(1) Restructuring:
 
     Restructuring charges reflect the expenses incurred in connection with the Company’s cost reduction initiatives, including severance liabilities for the termination of certain employees worldwide as well as various other costs related to these initiatives.
 
     The following table summarizes the activity related to restructuring liabilities that were recorded in fiscal years 2010 and 2009.
 
            Lease        
            Termination        
            Liabilities &        
    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