COMMON STOCK

Stock Repurchase Programs

The following table highlights the share repurchase authorizations in effect during fiscal year 2014:



	Date of Authorization
	Sep 26, 2011			Jan 17, 2013			Jul 17, 2014		Total
Amount available for repurchases as of July 31, 2013	$	81,873		$	250,000		$	—	$	331,873
New authorizations	—			—			600,000		600,000
Utilized	(81,873		)	(168,127		)	—		(250,000		)
Amount available for repurchases as of July 31, 2014	$	—		$	81,873		$	600,000	$	681,873

The Company’s shares may be purchased over time, as market and business conditions warrant. There is no time restriction on these authorizations; however, any share repurchases above $300,000, either individually or in the aggregate, during fiscal year 2015 will require specific board approval. Total repurchases in fiscal year 2014 were 3,056 shares at an aggregate cost of $250,000, with an average price per share of $81.81. The aggregate cost of repurchases in fiscal years 2013 and 2012 was $250,000 (3,971 shares at an average price per share of $62.95) and $121,164 (2,281 shares at an average price per share of $53.12), respectively. As of July 31, 2014, $681,873 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.

Stock Plans

The Company currently has four stock-based employee and director compensation award types (Stock Option, Restricted Stock Unit (“RSU”) which include Performance-Based Restricted Stock Units (“PRSU”), Management Stock Purchase Plan (“MSPP”) and the Employee Stock Purchase Plan (“ESPP”)), which are described more fully below under the captions Stock Purchase Plans and Stock Option and Restricted Stock Unit Plans. The detailed components of stock-based compensation expense recorded in the consolidated statements of earnings for the years ended July 31, 2014, July 31, 2013 and July 31, 2012 are illustrated in the table below.



	July 31, 2014		July 31, 2013		July 31, 2012
Restricted stock units	$	20,138	$	18,444	$	17,113
Stock options	7,608		6,147		6,356
Employee stock purchase plan (“ESPP”)	1,045		1,217		4,348
Management stock purchase plan (“MSPP”)	2,892		3,970		4,221
Total	$	31,683	$	29,778	$	32,038

The following table illustrates the income tax effects related to stock-based compensation for the fiscal years:



	2014		2013		2012
Excess tax benefits in cash flows from financing activities	$	12,890	$	15,812	$	7,757
Tax benefit recognized related to total stock-based compensation expense	8,485		7,587		8,755
Actual tax benefit realized for tax deductions from option exercises of stock-based payment arrangements	21,347		29,558		16,831

The following weighted average assumptions were used in estimating the fair value of stock options and ESPP shares granted during the fiscal years using a Black-Scholes-Merton option pricing formula. With respect to the ESPP, the values for fiscal year 2012 only related to the offering period from November 1, 2011 to April 30, 2012. Beginning with the offering period that started on May 1, 2012, the ESPP changed such that there is no longer a look-back option, and as such the calculation of fair value no longer involves a Black-Scholes-Merton calculation.



	2014			2013			2012
Stock Options
Weighted average fair value at grant date	$	16.72		$	18.34		$	14.13
Valuation assumptions:
Expected dividend yield	1.5		%	1.5		%	2.0		%
Expected volatility	25.9		%	37.6		%	38.6		%
Expected life (years)	4.50			4.75			5.00
Risk-free interest rate	1.5		%	0.7		%	0.8		%



	2012
ESPP Shares
Weighted average fair value at grant date	$	13.06
Valuation assumptions:
Expected dividend yield	1.4		%
Expected volatility	41.5		%
Expected life (years)	½ year
Risk-free interest rate	0.1		%

The Company uses both implied volatility (using traded options) and historical volatility in its estimate of expected volatility. For historical volatility, the Company used a sequential period of historical data equal to the expected term (or expected life) of the options and ESPP shares granted using a simple average calculation based upon the daily closing prices of the aforementioned period.

The expected life (years) represents the period of time for which the options and ESPP shares granted are expected to be outstanding. This estimate was derived from historical share option exercise experience, which management believes provides the best estimate of the expected term.

The following paragraphs describe each of the aforementioned stock-based compensation plans in detail:

Stock Option and Restricted Stock Unit Plans

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

Similar to the 2005 Stock Plan, the 2012 Stock Plan permits the Company to grant to its employees, including the Company’s “named executive officers”, a variety of equity compensation (that is, stock options, restricted shares, restricted units, performance shares and performance units). In addition, the 2012 Stock Plan provides that (i) in January of each calendar year, each member of the board of directors who is not on such grant date an employee of the Company will be granted a number of annual award units as determined by the board of directors which may be received as shares or deferred until a date selected by the director, upon termination of the directorship or the earlier of date selected or termination, to be delivered in lump sum or five annual installments, (ii) each person who is elected a director of the Company for the first time at an annual meeting and who is not an employee of the Company on the date of such annual meeting will receive a number of annual award units as determined by the board of directors, and (iii) at the discretion of a non-employee director, 100% of the cash fees paid to such director in a calendar year may be deferred in and received in the form of additional units which will be paid out either in one lump sum or in five equal annual installments upon the director ceasing to be a member of the board. Up to 7,100 shares are issuable under the 2012 Stock Plan. The number of shares available for awards under the 2012 Stock Plan will be reduced by one share for every one share subject to a stock option granted under the 2012 Stock Plan and will be reduced by 2.31 shares for every one share subject to a Full Value Award (i.e., restricted shares, restricted units). For performance shares and performance units, the number of shares available under the 2012 Stock Plan will be reduced by 2.31 times the maximum number of shares that may be issued with respect to such award.

The fair value of stock options is estimated using a Black-Scholes-Merton option pricing formula and are charged to earnings over the service periods during which the options are deemed to be earned; which is generally either three years or four years. The forms of options currently approved for use in awarding options provide that the options may not be exercised within one year from the date of grant, and expire if not fully exercised within seven years from the date of grant. Generally, in any year after the first year, the options can be exercised with respect to only up to 33% (for three year service periods) or 25% (for four year service periods) of the shares subject to the option, computed cumulatively.

The fair value of the restricted unit awards are determined by reference to the closing price of the stock on the date of the award, and are charged to earnings over the service periods during which the awards are deemed to be earned; four years, in the case of units awarded to employees and upon grant, in the case of the annual award units to non-employee directors. The annual award units granted to non-employee directors of the Company (and any related dividends paid in the form of additional units) are converted to shares once the director ceases to be a member of the board of directors, other than for removal for cause, for units granted before December 31, 2012. With respect to units granted after December 31, 2013, the units are converted to shares on the date of grant or if deferred, on (i) a date selected by the director, (ii) upon termination of the directors’ service on the Board, or (iii) the earlier of the date selected by the director or termination of his or her service on the Board. A total of 15 and 16 annual award units were granted during the years ended July 31, 2014 and July 31, 2013, respectively, with weighted-average fair market values of $84.52 and $63.63 per share, respectively. Restricted stock units granted to employees cliff-vest after the fourth anniversary of the date of grant. In addition to the awards noted above, in fiscal year 2013, the Company made performance-based RSU (“PRSU”) awards to a small group of employees. These awards cliff vest at the end of fiscal year 2015, based upon achievement of preset operating return on capital metrics, as defined in the form of award. Dividends on unvested restricted stock units vest at the same time as the restricted units for which the dividends were recorded and are forfeitable if the participant does not vest in the original award.

A summary of restricted stock unit activity, excluding annual award units, for the 2005 Stock Plan and 2012 Stock Plan during the year ended July 31, 2014, is presented below:



	Shares		Weighted- Average Grant-Date Fair Value
Nonvested at July 31, 2013	1,363		$	52.50
Granted	240		82.33
Vested	(362	)	39.16
Forfeited	(65	)	60.10
Nonvested at July 31, 2014	1,176		$	62.27

As of July 31, 2014 there was $37,449 of total unrecognized compensation cost related to nonvested restricted stock units granted under the 2005 Stock Plan and 2012 Stock Plan, which is expected to be recognized over a weighted-average period of 2.2 years.

A summary of option activity for all stock option plans during the year ended July 31, 2014 is presented below:



Options	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at August 1, 2013	2,209		$	49.31
Granted	503		82.48
Exercised	(638	)	38.86
Forfeited or Expired	(52	)	62.26
Outstanding at July 31, 2014	2,022		$	60.53	4.9	$	36,760
Expected to vest at July 31, 2014	1,315		$	65.80	5.4	$	17,720
Exercisable at July 31, 2014	678		$	49.59	4.1	$	18,911

As of July 31, 2014, there was $16,569 of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted-average period of 2.3 years. The total intrinsic value of options exercised during the years ended July 31, 2014, July 31, 2013 and July 31, 2012 was $26,657, $30,604 and $17,326, respectively. The intrinsic value is the result of multiplying shares by the amount by which the current market value of the underlying stock exceeds the exercise price of the option.

Stock Purchase Plans

During fiscal year 2000, the Company’s shareholders approved two stock purchase plans, the MSPP and the ESPP. Participation in the MSPP is limited to certain executives as approved by the compensation committee of the board of directors, which also established common stock ownership targets for participants. Participation in the ESPP is available to substantially all employees that are not included in the MSPP, except for named executive officers who cannot participate in either plan.

The purpose of the MSPP is to encourage key employees of the Company to increase their ownership of shares of the Company’s common stock by providing such employees with an opportunity to elect to have portions of their total annual compensation paid in the form of restricted units, to make cash purchases of restricted units and to earn additional matching restricted units which cliff vest after four years. Such restricted units aggregated 543 and 681 as of July 31, 2014 and July 31, 2013, respectively. As of July 31, 2014, there was $8,090 of total unrecognized compensation cost related to nonvested restricted stock units granted under the MSPP, which is expected to be recognized over a weighted-average period of 2.7 years. In December 2013, the Compensation Committee of the Board of Directors instructed management not to add any more participants to the MSPP.

The following is a summary of MSPP activity during the fiscal years:



	2014		2013		2012
Deferred compensation and cash contributions	$	5,886	$	6,819	$	5,336
Fair value of restricted stock units vested	$	4,091	$	5,364	$	3,950
Vested units distributed	259		410		205

For the offering periods ending October 31, 2011 and April 30, 2012, the ESPP enabled participants to purchase shares of the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the market price at the beginning or end of each semi-annual stock purchase period. Effective with the offering period beginning on May 1, 2012, the ESPP enables participants to purchase shares of the Company’s common stock through payroll deductions at a price equal to 85% of the market price at the end of each semi-annual stock purchase period. The semi-annual offering periods end in April and October. For the years ended July 31, 2014, July 31, 2013 and July 31, 2012, the Company issued 85, 116 and 470 shares at an average price of $70.00, $54.95 and $43.02, respectively, related to the ESPP.

All plans provide for accelerated vesting if there is a change in control (as defined in, and subject to the terms and conditions of, the plans). All of the above shares were issued from treasury stock.

As of July 31, 2014, approximately 3,949 shares of common stock of the Company were reserved for stock-based compensation plans (approximately 1,154 shares are reserved for vested awards and approximately 2,795 shares are reserved for unvested awards). The Company currently uses treasury shares that have been repurchased through the Company’s stock repurchase program to satisfy share award exercises.