10-K 1 pll201210k.htm 10-K PLL 2012 10K




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

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

For the fiscal year ended July 31, 2012
or

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

For the transition period from        to      

Commission File Number 001- 04311

PALL CORPORATION
(Exact name of registrant as specified in its charter)
 
New York
11-1541330
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
25 Harbor Park Drive, Port Washington, NY
11050
(Address of principal executive offices)
(Zip Code)
(516) 484-5400
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $.10 par value
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o      No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ      No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ      No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act).  Yes o      No þ
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, computed by reference to the closing price of a share of common stock on January 31, 2012 (the last business day of the registrant’s most recently completed second fiscal quarter) was $6,895,490,103.
On September 21, 2012, there were 114,436,725 outstanding shares of the registrant’s common stock, $.10 par value.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s proxy statement for the 2012 annual meeting of shareholders, scheduled to be held on December 12, 2012 (hereinafter referred to as the “Proxy Statement”), are incorporated by reference into Part III of this report. 






TABLE OF CONTENTS

 
 
Page No.
 
 
 
 
 
 
 
 






PART I
 
ITEM 1. BUSINESS.
 
As described in detail in Note 19, Discontinued Operations to the accompanying consolidated financial statements, the Company has sold to Haemonetics Corporation (“Haemonetics”), effective August 1, 2012, certain assets of its blood collection, filtration and processing product line (the “Blood Sale”), which was a component of the Life Sciences segment (the product line sales were reported in the Medical market), and met the criteria for discontinued operations and held for sale presentation during the third quarter of fiscal year 2012. As such, it has been reported as a discontinued operation in the Company’s consolidated financial statements, and all discussions regarding the Company results of operations throughout this Form 10-K are on a continuing operations basis.
GENERAL:
Pall Corporation, a New York corporation incorporated in July 1946, including 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 businesses 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 markets. The Industrial business group is focused on developing, manufacturing and selling products to customers in the Process Technologies, Aerospace and Microelectronics markets.
These businesses are supported by Corporate and Shared 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 businesses, as well as in the Company’s Corporate and Shared Services group infrastructure, while efficiently leveraging its entire intellectual property portfolio to the marketplaces.
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 $82,932,000 in fiscal year 2012, $80,506,000 in fiscal year 2011 and $68,796,000 in fiscal year 2010.
No one customer accounted for 10% or more of the Company’s consolidated sales in fiscal years 2012, 2011, or 2010.
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, 2012, the Company employed approximately 10,800 persons. As of August 1, 2012, approximately 1,400 employees transferred to Haemonetics in connection with the Blood Sale.
The Company is currently executing several structural cost improvement initiatives. Further details of these initiatives can be found in Note 2, Restructuring and Other Charges, Net, to the accompanying consolidated financial statements.
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.

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The Company’s website address is www.pall.com. In the Investor Relations Section of its website, the Company makes available, free of charge, 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 Company’s website.
Copies of financial and other information are also available free of charge by calling (516) 484-5400 or by sending a request to Pall Corporation, Attn: Investor Relations, 25 Harbor Park Drive, Port Washington, NY, 11050. Information on the Company’s 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, make vaccines, protect hospital patients as in the case of the Company’s 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 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 innovative 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/recyclable/dischargeable water and energy demands, emerging and mutating pathogens, changes in global demographics including rising standards of medical care in emerging economies, an aging population ingesting higher levels of preventative and/or personalized pharmaceuticals, 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, Africa 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 in which it engineers integrated filtration, purification and separation systems to enhance performance and economics. This 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 and appurtenant hardware. 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 14.2% of fiscal 2012 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.
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.

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During fiscal year 2012, the Company completed the last significant phase of the migration of operations to the Company’s new Enterprise Resource Planning (“ERP”) software system. 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 was accompanied by process changes and improvements, including the transition of financial activities to its shared service centers.

LIFE SCIENCES SEGMENT:
As noted above, the discussion for both the total Life Sciences segment and the Medical market exclude the blood collection, filtration and processing product line. 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 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. The backlog for the Life Sciences segment at July 31, 2012 was approximately $219,602,000 (all of which is expected to be shipped in fiscal year 2013) compared with $226,424,000 at July 31, 2011.
MEDICAL MARKET:
The Company’s medical products help control the spread of infections in hospitals. Hospital-acquired infections are a growing problem for patients and the world’s health care systems. The Company’s breathing-circuit, intravenous and point-of-use Pall-Aquasafe™ water filters help protect people from these infections. The Company’s cell therapy product portfolio provides enabling technologies for the emerging regenerative medicine market.
The backlog for the Medical market at July 31, 2012 was approximately $22,077,000 (all of which is expected to be shipped in fiscal year 2013) compared with $25,139,000 at July 31, 2011. The Company’s principal competitors in the Medical market include Merck Millipore (a division of Merck KGaA), GE Healthcare (a unit of General Electric Company (“GE”)), Teleflex Incorporated, Covidien plc and Intersurgical, Ltd..
BIOPHARMACEUTICALS MARKET:
The Company sells a broad line of filtration and purification technologies, appurtenant hardware 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, plasma 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 to commercialization. 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. In the Americas and Europe, laboratory products are sold to customers principally through the Company’s distribution partner, VWR International.
The fastest growing part of the market is the biotechnology industry, representing an increasingly important portion of total BioPharmaceuticals revenue. Biotechnology drugs, plasma and biologically derived vaccines are filtration and purification intensive. A key growth driver is increasing adoption of single-use processing technologies for drug production as a replacement for “hard-piped” steel factories. Disposable 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.
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 reflecting the high costs and safety risks associated with drug development and production. The backlog for the BioPharmaceuticals market at July 31, 2012 was approximately $156,594,000 (all of which is expected to be shipped in fiscal year 2013) compared with $155,321,000 at July 31, 2011. Principal competitors in the BioPharmaceuticals market include Merck Millipore (a division of Merck KGaA), The Sartorius Group, 3M Purification (formerly, CUNO, Inc.) and GE Healthcare (a unit of GE).

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FOOD & BEVERAGE MARKET:
Within the Food & Beverage market, the Company serves the filtration needs of the beer, wine, dairy, alcohol-free beverage, bottled water, and food ingredient markets. The Company’s comprehensive product portfolio 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, 2012 was approximately $40,931,000 (all of which is expected to be shipped in fiscal year 2013) compared with $45,964,000 at July 31, 2011. Principal competitors in the Food & Beverage market include 3M Purification (formerly, CUNO, Inc.), Pentair, Inc., Filtrox Group, The Sartorius Group, Eaton Corporation and Parker Domnick Hunter, a division of Parker Hannifin.

INDUSTRIAL SEGMENT:
Effective in the second quarter of fiscal year 2012, the Company reorganized its Industrial markets. The Machinery & Equipment submarket (previously part of the Aeropower market) and Energy & Water are now combined and are reported as the Process Technologies market. With the exclusion of Machinery & Equipment from Aeropower, Aerospace is now the stand-alone descriptor for that part of the business. Information by market for prior periods has been restated to reflect these changes. All discussions and amounts reported in this Form 10-K are based on the reorganized structure.
The Company provides enabling and process enhancing technologies throughout the industrial marketplace. This includes the Process Technologies, Aerospace and Microelectronics markets. The Company has the capability to provide customers with integrated solutions for their process fluids which typically include the Company’s proprietary consumable filtration products and appurtenant hardware as well as systems. When fully commissioned, Company management expects these systems to provide an ongoing annuity stream for the Company’s consumable filtration products. Systems sales account for 18.2% of the Industrial segment’s revenues in fiscal year 2012 compared to 17.3% in fiscal year 2011. 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, 2012 was approximately $572,074,000 (of which approximately 78% is expected to be shipped in fiscal year 2013) compared with $568,377,000 at July 31, 2011.
PROCESS TECHNOLOGIES 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.
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. The growing part of this submarket is in emerging regions, such as the Middle East, North Africa and Latin America.
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. The fastest growing part of this submarket is in emerging regions, such as the Middle East, Latin America and China.
Technologies that purify water for use and reuse represent an important opportunity. Industry, which consumes enormous quantities of water, increasingly needs to filter it before, during and after use both to conserve it and to ensure it meets discharge requirements. Also, 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.
Revenues in this market comprise the largest part of the Company’s capital-based revenues, including systems and appurtenant hardware. Approximately 50% of fiscal year 2012 revenues in this market were derived from capital-based revenues. The backlog at July 31, 2012 was approximately $374,647,000 (of which approximately 80% is expected to be shipped in fiscal year 2013) compared with $386,420,000 at July 31, 2011. Sales to Process Technologies customers are made through Company personnel, distributors, manufacturers’ representatives and architectural and engineering firms. The Company believes that its 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 Process Technologies market include 3M Purification (formerly, CUNO, Inc.), GE Infrastructure (a unit of GE), U.S. Filter (a Siemens business), Pentair, Inc., Donaldson Company, Inc., Parker Hannifin Corporation, ESCO Technologies Inc., HYDAC International GmbH and CLARCOR Inc. 

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AEROSPACE 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. Commercial and Military sales represented 45% and 55%, respectively, of total Aerospace sales in fiscal year 2012. Key drivers in this market include passenger air miles flown, military budgets, production of new military and commercial aircraft, and demand for new aircraft, particularly in countries such as Brazil, Africa, China and Australia. Increasing environmental regulation faced by the Company’s customers, as well as customer requirements for improved equipment reliability and fuel efficiency, impact demand.
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, 2012 was approximately $165,450,000 (of which approximately 71% is expected to be shipped in fiscal year 2013) compared with $149,115,000 at July 31, 2011. Competition varies by product and application. The Company’s principal competitors in the Aerospace market include Donaldson Company, Inc. and ESCO Technologies 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, solar 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. This convergence has enabled the Company to capitalize on demand for tablet computers, smart phones, 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, 2012 was approximately $31,977,000 (of which approximately 99% is expected to be shipped in fiscal year 2013) compared with $32,842,000 at July 31, 2011. 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 has a robust intellectual property portfolio comprised of patents, proprietary trade secrets and know-how, trademarks, and licensed technology. The Company owns numerous U.S. and foreign patents directed to filtration materials, devices, systems, and improvements and applications of these technologies; and has numerous patent applications pending in the U.S. and abroad. The Company possesses a wide array of proprietary trade secret technology and know-how directed to its manufacturing operations and quality systems, business methods and competitive intelligence. In addition to its patent position and trade secrets, the Company also holds numerous U.S. and foreign trademarks and has applications pending for registration of trademarks throughout the world. Finally, the Company also licenses intellectual property rights from third parties, some of which bear royalties and are terminable in specified circumstances. The Company believes that its patents, proprietary trade secret rights, and trademarks are important to the competitive strength of the Company. The Company believes that its trade secrets and know-how described above coupled with its continuous product improvement innovations create barriers to entry from competitors. The Company, therefore, does not believe that the expiration of any individual patent or any patents due to expire in the foreseeable future will have a material impact on its business, financial condition or results of operations in any one year.


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EXECUTIVE OFFICERS OF THE REGISTRANT:
Name
 
Age(1)
 
Current Positions Held
 
First Appointed an Executive Officer
Lawrence D. Kingsley
 
49
 
President and Chief Executive Officer
 
2011
Lisa McDermott
 
47
 
Chief Financial Officer and Treasurer
 
2006
Michael Egholm, Ph.D
 
49
 
Chief Technology Officer
 
2012
Linda Villa
 
63
 
Chief Human Resources Officer
 
2012
Yves Baratelli
 
47
 
Group Vice President and President, Life Sciences
 
2010
Ruby Chandy
 
50
 
Group Vice President and President, Industrial
 
2012
Edward F. Hoare
 
48
 
President, Pall Americas
 
2012
Wolfgang Platz
 
54
 
President, Pall Europe
 
2011
Eric Garnier
 
51
 
President, Pall Asia
 
2012
Roya Behnia
 
46
 
Senior Vice President, General Counsel and Corporate Secretary
 
2012
Kenneth V. Camarco
 
49
 
Senior Vice President, Global Operations and Business Systems
 
2012
H. Alex Kim
 
41
 
Senior Vice President, Business Development and Strategic Planning
 
2012
     (1)  Age as of September 21, 2012.
None of the persons listed above is related.
Lawrence D. Kingsley has served as President and Chief Executive Officer (“CEO”) since October 2011. Prior to joining the Company, Mr. Kingsley served as President and Chief Executive Officer of IDEX Corporation (“IDEX”) from March 2005 until October 2011, and as Chairman of IDEX from April 2006 until December 2011.
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.
Michael Egholm, Ph.D. was appointed Chief Technology Officer in June 2010. Prior to joining the Company, Dr. Egholm served in various roles for 454 Life Sciences, a center of excellence at Roche Applied Science, including as Vice President of Research and Development, Vice President of Molecular Biology and most recently, Chief Technology Officer from 2008 to 2010. Dr. Egholm was appointed as an executive officer of the Company in 2012.
Linda Villa has served as Chief Human Resources Officer since March 2012. Ms. Villa began her employment with the Company in 2008 as Executive Vice President, Human Resources. Previously, Ms. Villa served as Executive Vice President, Human Resources and Corporate Security at Telcordia Technologies, Inc. Ms. Villa was appointed as an executive officer of the Company in 2012.
Yves Baratelli has served as Group Vice President and 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 thereafter, assumed the additional responsibility for Pall Life Sciences Asia.
Ruby Chandy has served as Group Vice President and President, Industrial, since April 2012. Prior to joining the Company, Ms. Chandy was Chief Marketing Officer of Rohm and Haas from 2007 until 2009. She subsequently served as Chief Marketing Officer and later as Managing Director at Dow Chemical Company until 2012.
Edward F. Hoare has served as President, Pall Americas since March 2012. Mr. Hoare began his employment with the Company in 1986 as Area Sales Engineer and Key Account Manager for the Pall Ultrafine Division. He has held increasingly senior positions including President Biopharmaceuticals, Americas, Senior Vice President Global Commercial Operations, Biopharmaceuticals, and President, Life Sciences Europe. Mr. Hoare was appointed as an executive officer of the Company in 2012.
Wolfgang Platz has served as President, Pall Europe, since March 2012. Mr. Platz began his employment with the Company in 1981 as a Sales Engineer. He has held many management positions with the Company, including President, Food and Beverage, President Industrial, Europe, and President, Pall Industrial. Mr. Platz was appointed as an executive officer of the Company in 2011.

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Eric Garnier has served as President, Pall Corporation Asia since February 2011. Mr. Garnier began his employment with the Company in 2004 as President, Pall Medical Europe, and served in increasingly senior positions including Vice President Life Sciences, South Europe and President, Life Sciences, Asia. Mr. Garnier was appointed as an executive officer of the Company in 2012.
Roya Behnia has served as Senior Vice President, General Counsel and Corporate Secretary since June 2012. Prior to joining the Company, Ms. Behnia served as Senior Vice President, General Counsel and Secretary of Rewards Network Inc. from 2006 to 2010. Ms. Behnia served as Assistant General Counsel and Group General Counsel of SPX Corporation from 2001 to 2005.
Kenneth V. Camarco was appointed Senior Vice President of Global Operations and Business Systems in March 2012. Prior to joining the Company, Mr. Camarco was President and Owner of WaxWing Group, LLC, a strategic business advisory practice. Mr. Camarco held several management positions with Cooper Industries, Ltd., including serving as President of Cooper Notification from 2006 to 2009.
H. Alex Kim was appointed Senior Vice President, Business Development and Strategic Planning in August 2012. Prior to joining the Company, Mr. Kim served in various roles with Danaher Corporation since 2002. Most recently, from 2007 to 2012, as Vice President of Business Development for Danaher Corporation's Water Quality Group.
None of the above persons has been involved in any legal proceeding required to be disclosed by Item 401(f) of Regulation S-K during the past ten years.
ITEM 1A. RISK FACTORS.
The risk factors described below 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.
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 global macroeconomic environment, particularly the current economic concerns in Europe wherein the Company derives approximately 38% of sales, and other countries in which the Company derives significant sales could continue to have a negative impact on demand for the Company’s products. The prospects, strength, sustainability and timing of an improvement in the current environment remain uncertain as does the possibility of a return to a recession in the U.S. and other countries around the globe.
The uncertainty or deterioration of the global economic environment could adversely affect the Company. Customers or suppliers may experience 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, amounts 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 sales, 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.
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 its 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 the Company or result in greater pressure to commercialize developments rapidly or at prices that may not fully recover the associated investment, and the effect on demand resulting from customers’ research and development, capital expenditure plans and capacity utilization.

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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, especially those materials that are single-sourced or have a limited number of suppliers, could be impacted by the availability and price of those raw materials and related commodities and maintaining relationships with key suppliers. If the Company’s supply of raw materials is adversely affected, it may not be able to quickly establish or qualify replacement sources.
The Company’s future growth depends on new products and new technology innovation.
The Company’s future growth depends in part on maintaining its competitive advantage with current products in new and existing markets, as well as its ability to develop new products and technologies to serve such markets. To the extent that competitors develop competitive products and technologies, or new products or technologies which achieve higher customer satisfaction, the Company’s business prospects could be adversely impacted. In addition, regulatory approvals for new products or technologies may be required, which approvals may not be obtained in a timely or cost effective manner, adversely impacting the Company’s business prospects.
The Company may not successfully enforce patents or protect proprietary products and manufacturing techniques.
The Company owns numerous patents, trademarks, trade secrets and other intellectual property and licenses to intellectual property owned by others. Some of these patented technologies and other intellectual property require substantial resources to develop. The Company’s intellectual property rights may not be sufficiently broad or otherwise may not provide the Company with a significant competitive advantage, and patents may not be issued for pending or future patent applications owned by or licensed to the Company. In addition, steps taken to maintain and protect the Company’s intellectual property may not prevent it from being challenged, invalidated, circumvented or designed-around. The failure to obtain or maintain the Company’s intellectual property rights or the costs to adequately protect its intellectual property, including costs to detect or prevent circumvention, unauthorized use and enforcement of rights, could adversely impact the Company’s competitive position and operating results.
Increases in manufacturing and operating costs and/or the ability to achieve the savings anticipated from the Company’s structural cost improvement initiatives 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 continues to pursue a number of structural cost improvement initiatives. These efforts may not improve the Company’s financial performance or produce the full efficiencies and benefits the Company expects due to delays or other factors affecting the Company’s execution of these initiatives.
Fluctuations in foreign currency exchange rates and interest rates may materially affect operating results.
In fiscal year 2012, the Company derived approximately 70% of sales from outside the U.S. Although sales and expenditures outside the U.S. with third parties are typically made in the local currencies of those countries providing a natural hedge against fluctuations in foreign currency rates, the Company retains significant exposure to the value of foreign currencies relative to the U.S. dollar and the currencies of inter-company trading partners. Accordingly, operating results may be materially affected by changes in foreign currency rates. The primary foreign currency exposures relate to adverse changes in the U.S. dollar compared to each of the Euro, the British Pound, the Brazilian Real, the Japanese Yen, the Australian Dollar, the Canadian Dollar, the Swiss Franc and the Singapore Dollar, as well as adverse changes in the relationship of the British Pound to the Euro.
The Company’s debt portfolio was approximately 29% variable rate and cash and cash equivalents was 100% variable rate at July 31, 2012. Pension obligations, and attendant pension expense, are recognized on a discounted basis using long-term interest rates. Accordingly, fluctuations in short and long-term interest rates may also materially affect operating results.

10





The Company is subject to significant regulatory obligations.
The Company’s operations are subject to a broad array of regulatory requirements globally. In particular, a number of its Life Science business units must satisfy domestic and international standards in the medical, biopharmaceuticals and other health sciences areas involving products and technologies which impact human health and safety. To a lesser degree, some of its Industrial operations must meet governmental requirements in terms of contracting, financial accounting standards, product testing and reporting. There are also business operations which produce products regulated by import/export regulations because their actual or potential use is considered sensitive and involves substantial licensing and record-keeping obligations. Lastly, given the Company’s substantial operations and sales abroad, there are risks associated with doing business in foreign countries particularly in connection with governmental sales, notably the risk of non-compliance with U.S., United Kingdom (“U.K.”) or other local anti-corruption regulations. Failure to meet one or more of these various regulatory obligations could have adverse consequences in the event of material non-compliance. Conversely, compliance with these regulatory obligations may require the Company to incur significant expenses.
The Company is subject to a variety of litigation and similar proceedings in the course of its business that could adversely affect its financial statements.

The Company is subject to various litigations and similar proceedings incidental to its business that arise in the ordinary course of its business, including claims for damages arising out of the use of its products and claims relating to intellectual property matters, employment matters, tax matters, commercial disputes, environmental matters and personal injury. These lawsuits may include claims for compensatory damages, punitive and consequential damages and/or injunctive relief. The defense of these lawsuits may divert management’s attention, the Company may incur significant expenses in defending these lawsuits and it may be required to pay damage awards or settlements or become subject to equitable remedies that could adversely affect its financial statements. Moreover, any insurance or indemnification rights that the Company may have may be insufficient or unavailable to protect it against such losses and expenses. In addition, developments in legal proceedings in any given period may require the Company to revise its expectations regarding the outcome of certain matters or adjust the loss contingency estimate that is recorded in its financial statements, which could adversely affect the Company’s results of operations or cash flows in any particular period. It cannot be assured that the Company’s liabilities in connection with litigation and similar proceedings will not exceed estimates or adversely affect the Company’s financial statements or reputation.

The Company’s operations and products are subject to environmental, health and safety laws and regulations, and violations could adversely affect the Company’s operating results.

The Company’s operations and products are subject to environmental laws and regulations that impose limitations on the discharge of pollutants into the environment and establish standards for the use, generation, treatment, storage and disposal of hazardous and non-hazardous wastes. The Company must also comply with various health and safety regulations in the U.S. and other jurisdictions with its operations and products. The Company cannot assure that its environmental, health and safety compliance program has been, or will at all times, be effective. Failure to comply with any of these laws could result in civil and criminal, monetary and non-monetary penalties and damage to the Company’s reputation. In addition, the Company cannot provide assurance that its costs of complying with current or future environmental protection and health and safety laws will not exceed its estimates or adversely affect its financial statements.

The Company may incur costs related to remedial efforts of alleged environmental damage associated with past or current waste disposal practices or other hazardous materials handling practices. It may also become subject to additional remedial or compliance costs due to future events such as changes in existing laws or regulations, changes in agency direction or enforcement policies, developments in remediation technologies, changes in the conduct of its operations and changes in accounting rules. The Company cannot make assurance that its liabilities arising from past or future releases of, or exposures to, hazardous substances will not exceed its estimates or adversely affect its financial statements and reputation or that it will not be subject to additional claims for cleanup in the future based on its past, present or future business activities.
Changes in product mix and product pricing may affect the Company’s operating results particularly with systems products and appurtenant hardware & devices (together “Capital Goods”) for the Company’s consumable filtration products, 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 business strategy is partially reliant on sales of Capital Goods. Because these are generally sold at lower gross margins than many other products, gross margins could decline if these Capital Goods sales continue to grow as a percentage of total sales and the anticipated future revenue streams from related consumable product offerings and services are not realized.

11





The Company’s Capital Goods generally also experience significantly longer sales cycles and involve less predictable revenue and uncertainty of future revenue streams from related consumable product offerings and services. In addition, the profitability of the Company’s Capital Goods sales depends substantially on the ability of management to accurately estimate the costs involved in manufacturing and implementing the relevant capital product according to the customer’s specifications. 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 Capital Goods 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.
If the Company experiences a disruption of its information technology systems, or if the Company fails to successfully implement, 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. The Company cannot reasonably estimate the cost that would be associated with remedial actions that may be needed to repair or replace the IT systems impacted or lost revenues resulting from a serious IT disruption.
In addition, the Company recently migrated certain significant operations to its global enterprise resource planning software system. During the third quarter of fiscal year 2012, the migration caused disruption in our operations and additional unforeseen costs and significant use of Company resources. Additional disruptions can adversely impact the Company’s operating results and business.
Furthermore, 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 financial results.
Fluctuations in the Company’s effective tax rate may affect financial 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;
the nature, timing and impact of permanent or temporary changes in tax rates, 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
acquisitions and dispositions of businesses; 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. 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 below.

12





The Company may not be able to successfully complete or integrate acquisitions.
In so far as acquisitions are completed, there is no assurance of the Company’s ability to complete any such transactions due to a number of risks and uncertainties, including, but not limited to, competition for opportunities, increase in costs and price for acquisition candidates and the ability to obtain any necessary financing. In addition, the Company may experience delays or unexpected difficulties in the integration process which could adversely impact the Company’s business. Moreover, even if the Company is successful in integrating acquired business, it may not achieve the operating efficiencies and synergies or other expected transaction benefits that the Company expects or such benefits may not be achieved within the expected time frame.
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. The Company’s inability to compete effectively may adversely affect its operating results.
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 continue 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”). Although the Company has reached a settlement agreement in the securities class action lawsuit concerning the restatement, other related proceedings including investigations by the SEC and the Department of Justice, which have been inactive since fiscal year 2010, and derivative lawsuits seeking relief against certain of the Company’s officers and directors are still ongoing. The ongoing governmental proceedings could result in civil or criminal fines and other non-monetary penalties.
The Company cannot predict whether all possible monetary losses it ultimately 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 such proceedings, 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 is also subject to the ongoing audits of the Company’s tax returns for some of the periods affected by the restatement.
The Company may be adversely affected by the loss of one or more members of its senior management team or if it is unable to recruit and retain qualified management personnel.
The Company’s business depends, in large part, on the continued efforts of its senior management team. The unplanned loss of key personnel could negatively impact the Company’s ability to manage its business. In addition, if the Company is unable to hire and retain highly qualified individuals, its business and operations may be impaired or disrupted. There is substantial competition for highly qualified individuals and there is no assurance that the Company will be successful in attracting or retaining individuals to fill vacant or newly created positions.
Product defects and unanticipated use or inadequate disclosure with respect to the Company’s products could adversely affect its business, reputation and financial statements.

Manufacturing or design defects (including in products or components that the Company sources from third parties), unanticipated use of, or inadequate disclosure of risks relating to, the use of products that the Company makes and sells may lead to personal injury, death or property damage. These events could lead to recalls or alerts relating to the Company products, result in the removal of a product from the market or result in product liability claims being brought against the Company. Product recalls, removals and liability claims can lead to significant costs, as well as negative publicity and damage to the Company’s reputation that could reduce demand for its products.

13





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.

ITEM 1B. UNRESOLVED STAFF COMMENTS.
 
None.

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

 
Leased (Square Footage)

 
Total (Square Footage)

Americas
 
1,956,000

 
499,000

 
2,455,000

Europe
 
1,754,000

 
87,000

 
1,841,000

Asia
 
122,000

 
657,000

 
779,000

Total
 
3,832,000

 
1,243,000

 
5,075,000


ITEM 3. LEGAL PROCEEDINGS.
Certain legal proceedings in which the Company is involved are discussed in Note 14, Contingencies and Commitments, to the accompanying consolidated financial statements, which is incorporated herein by reference.

 ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.


14





PART II
 
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
The Company’s common stock is listed on the New York Stock Exchange under the symbol PLL. The table below sets forth quarterly data relating to the Company’s common stock prices and cash dividends declared per share for the past two fiscal years.
 
 
 
Price per share
 
 
 
 
 
 
2012
 
2011
 
Cash Dividends Declared Per Share
 
High

 
Low

 
High

 
Low

 
2012

 
2011

Quarter: 
First
$
54.08

 
$
39.81

 
$
44.65

 
$
33.72

 
$
0.175

 
$
0.160

 
Second
60.75

 
48.86

 
55.47

 
42.40

 
0.210

 
0.175

 
Third
64.55

 
56.91

 
59.50

 
52.35

 
0.210

 
0.175

 
Fourth
59.97

 
49.97

 
58.83

 
49.49

 
0.210

 
0.175


As of September 21, 2012 there were approximately 2,239 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.
 
PERFORMANCE GRAPH
 
The following graph compares the annual change in the cumulative total return on the Company’s common stock during the Company’s last five fiscal years with the annual change in the cumulative total return of the Standard & Poor’s Composite-500 Index and the Standard & Poor’s Industrial Machinery Index (which includes the Company). The graph assumes an investment of $100 on July 31, 2007 (the last trading day of the Company’s fiscal year 2007) and the reinvestment of all dividends paid during the last five fiscal years.


15





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, 2012.
 
 
 
(In thousands, except per share data)
Period
 
Total Number
of Shares Purchased

 
Average Price Paid Per Share

 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or Programs (1)

 
Approximate
Dollar Value of Shares
that May Yet Be
Purchased Under the Plans or Programs (1)

May 1, 2012 to May 31, 2012
 
42

 
$
55.00

 
42

 
$
450,733

June 1, 2012 to June 30, 2012
 
1,854

 
53.43

 
1,854

 
351,645

July 1, 2012 to July 31, 2012
 
385

 
51.30

 
385

 
331,873

Total
 
2,281

 
$
53.12

 
2,281

 
 

(1)
On October 16, 2008, the board authorized an expenditure of $350,000 to repurchase shares of the Company's common stock. On September 26, 2011, the board authorized an additional $250,000. The Company’s shares may be purchased over time, as market and business conditions warrant. There is no time restriction on this authorization. Total repurchases in fiscal year 2012 were 2,281 shares at an aggregate cost of $121,164, with an average price per share of $53.12. The aggregate cost of repurchases in fiscal years 2011 and 2010 was $149,907 (2,867 shares at an average price per share of $52.29) and $99,999 (2,720 shares at an average price per share of $36.76), respectively. As of July 31, 2012, $331,873 remains to be expended under the current board repurchase authorization. Repurchased shares are held in treasury for use in connection with the Company’s stock plans and for general corporate purposes.

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.
 

16





(In millions, except per share data)
 
2012
 
2011
 
2010
 
2009
 
2008
RESULTS FOR THE YEAR:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
2,671.7

 
$
2,517.2

 
$
2,185.7

 
$
2,119.6

 
$
2,352.8

Cost of sales
 
1,291.6

 
1,232.3

 
1,064.2

 
1,094.4

 
1,221.3

Gross profit
 
1,380.1

 
1,284.9

 
1,121.5

 
1,025.2

 
1,131.5

Selling, general and administrative expenses
 
843.2

 
790.3

 
716.6

 
675.6

 
724.1

Research and development
 
82.9

 
80.5

 
68.8

 
64.8

 
64.6

Restructuring and other charges, net
 
66.9

 
26.5

 
17.7

 
30.7

 
31.5

Interest expense, net (a)
 
20.2

 
18.9

 
14.3

 
28.1

 
32.6

Loss on extinguishment of debt (a)
 

 

 
31.5

 

 

Earnings from continuing operations before income taxes
 
366.9

 
368.7

 
272.6

 
226.0

 
278.7

Provision for income taxes
 
86.0

 
89.5

 
70.2

 
62.4

 
95.0

Net earnings from continuing operations
 
280.9

 
279.2

 
202.4

 
163.6

 
183.7

Earnings from discontinued operations, net of income taxes
 
38.4

 
36.3

 
38.8

 
32.0

 
33.6

Net earnings
 
$
319.3

 
$
315.5

 
$
241.2

 
$
195.6

 
$
217.3

Earnings per share from continuing operations:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
2.42

 
$
2.40

 
$
1.72

 
$
1.38

 
$
1.50

Diluted
 
$
2.39

 
$
2.36

 
$
1.70

 
$
1.37

 
$
1.49

Earnings per share from discontinued operations:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.33

 
$
0.31

 
$
0.33

 
$
0.27

 
$
0.27

Diluted
 
$
0.32

 
$
0.31

 
$
0.33

 
$
0.27

 
$
0.27

Earnings per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
2.75

 
$
2.71

 
$
2.05

 
$
1.65

 
$
1.77

Diluted
 
$
2.71

 
$
2.67

 
$
2.03

 
$
1.64

 
$
1.76

 
 
 
 
 
 
 
 
 
 
 
Dividends declared per share
 
$
0.805

 
$
0.685

 
$
0.625

 
$
0.565

 
$
0.620

 
 
 
 
 
 
 
 
 
 
 
Capital expenditures(c)
 
$
158.9

 
$
160.8

 
$
136.3

 
$
133.0

 
$
123.9

Depreciation & amortization of long-lived assets(c)
 
$
111.1

 
$
98.1

 
$
93.6

 
$
89.4

 
$
93.2

 
 
 
 
 
 
 
 
 
 
 
YEAR-END POSITION:
 
 
 
 
 
 
 
 
 
 
Working capital
 
$
1,000.3
 (d)
 
$
1,019.2

 
$
1,065.6

 
$
853.1

 
$
1,085.7
 (b)
Property, plant and equipment
 
751.0
 (d)
 
794.6

 
706.4

 
681.7

 
663.0

Total assets
 
3,347.9

 
3,232.4

 
2,999.2

 
2,840.8

 
2,956.7

Long-term debt, net of current portion
 
490.7

 
492.0

 
741.4

 
577.7

 
747.1

Total liabilities
 
1,837.9

 
1,742.6

 
1,816.9

 
1,726.2

 
1,817.5

Stockholders’ equity
 
1,510.0

 
1,489.8

 
1,182.3

 
1,114.6

 
1,139.2


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


17





ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion should be read together with the accompanying consolidated financial statements and notes thereto and other financial information in this Form 10-K. 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.
Forward-Looking Statements and Risk Factors
The matters discussed in this Annual Report on Form 10-K contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that address activities, events or developments that 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 management’s knowledge of current events and actions the Company 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.

18





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 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, 2012 and March 1, 2011. 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 for the purposes of the goodwill impairment test 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 2012 impairment testing ranged from 1.2 to 2.4 times revenue, 6.9 to 12.1 times EBIT and 5.8 to 9.2 times EBITDA. The minimum and median market multiples used in the fiscal year 2011 impairment testing ranged from 1.4 to 2.6 times revenue, 7.0 to 14.8 times EBIT and 6.5 to 10.6 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 recognition is based upon the ratio of costs incurred to date compared with estimated total costs to complete. The cumulative impact of revisions to total estimated costs is reflected in the period of the change, including anticipated losses.
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.

19





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 $35,188 in fiscal year 2012, which was based on a weighted average discount rate of 4.94% (calculated using the projected benefit obligation) and a weighted average expected long-term rate of return on plan assets of 6.25% (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 2012 would have increased approximately $2,000.
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, 2012 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. This is under the premise that cash flows for benefits due in a particular year can be theoretically “settled” 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 2012 would have increased by approximately $2,900.
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.

20





Market Reorganization
Effective in the second quarter of fiscal year 2012, the Company reorganized its Industrial markets. The Machinery & Equipment submarket (previously part of the Aeropower market) and Energy & Water are now combined and are reported as the Process Technologies market. With the exclusion of Machinery & Equipment from Aeropower, Aerospace is now the stand-alone descriptor for that part of the business. Sales information by market for prior periods has been restated to reflect these changes. All discussions and amounts reported in this filing are based on the reorganized structure.
Discontinued Operations
On April 28, 2012, the Company entered into an asset purchase agreement (“APA”) to sell certain assets of its blood collection, filtration and processing product line (the “Product Line”) to Haemonetics Corporation (“Haemonetics”) for approximately $550,000. The transaction involved the transfer of manufacturing facilities and equipment in Covina, California; Tijuana, Mexico; Ascoli, Italy and a portion of the Company’s operations in Fajardo, Puerto Rico. The sale closed on August 1, 2012, and approximately 1,400 employees transitioned to Haemonetics at that time. In addition to the manufacturing facilities and related equipment, the Company transferred Product Line related inventory and intangible assets. Haemonetics also assumed certain employee related liabilities.
Separate from these manufacturing facilities, the Company also agreed to transfer related blood media manufacturing capabilities and assets to Haemonetics. The transfer of the related media manufacturing lines is expected to be completed by calendar year 2016. Until that time, the Company will provide these media products under a supply agreement. Under the terms of the APA, approximately $535,000 was paid upon closing, with the balance of the purchase price payable upon the Company’s delivery of the aforementioned blood media manufacturing capability and related assets. Final determination of cash proceeds, gain on sale and tax impact are subject to working capital and certain other adjustments and final allocation of proceeds by jurisdiction.
The Product Line, which was a component of the Company’s Life Sciences segment, met the criteria for discontinued operations and held for sale presentation during the third quarter of fiscal year 2012. As such, it has been reported as a discontinued operation in the Company’s consolidated financial statements. The Company did not allocate any portion of the Company’s interest expense to discontinued operations. Furthermore, Life Sciences and Industrial segment profit have been restated to reflect a change in the allocation of certain shared expenses on a continuing operations basis.
Results of Operations 2012 Compared with 2011
Review of Consolidated Results from Continuing Operations
Sales in fiscal year 2012 increased 6.1% to $2.7 billion from $2.5 billion in fiscal year 2011. Exchange rates used to translate foreign subsidiary results into U.S. Dollars reduced reported sales by $26,718 primarily related to the strengthening of the U.S. Dollar against the Euro, partly offset by the weakening of the U.S. Dollar against the the Japanese Yen (“JPY”) and the Chinese Renminbi. In local currency, sales increased 7.2%.
Life Sciences segment sales increased 7.3% (in local currency), while Industrial segment sales grew 7.1% (in local currency). For a detailed discussion of sales by segment, refer to the section “Review of Operating Segments Results From Continuing Operations” below.
Consumable filtration products sales (including appurtenant hardware) increased 6.2% (in local currency) reflecting growth of 7.0% in Life Sciences and 5.5% in Industrial. Increased pricing contributed $17,733, or about 80 basis points, to consumables sales growth in the year, reflecting increases in both segments.
Systems sales increased 13.4% (in local currency) reflecting growth of 10.5% in Life Sciences and 14.8% in Industrial. Systems sales represented 14.2% of total sales in fiscal year 2012 compared to 13.6% in fiscal year 2011.
Sales in emerging markets grew approximately 18% in fiscal year 2012, and represented approximately 20% of total sales. Emerging markets are defined as high growth and/or developing areas of the world in which the Company has focused growth resources. In the Americas, emerging markets include Latin America, primarily the countries of Brazil, Argentina and Mexico. In Europe, emerging markets include Eastern European countries, primarily Russia, Turkey and Poland, as well as various countries in the Middle East and Africa. In Asia, emerging markets primarily include the countries of China, India, Philippines, Indonesia and Vietnam.

21





Gross margin in fiscal year 2012 increased 70 basis points to 51.7% from 51.0% in fiscal year 2011. This reflects an increase in gross margin in the Life Sciences and Industrial segments of 130 basis points and 10 basis points, respectively. For a detailed discussion of the factors impacting gross margin by segment, refer to the section “Review of Operating Segments Results From Continuing Operations” below.
The Company has risks to gross margin from the fluctuation of the costs of products that are sourced in a currency different than the currency they are sold in (transactional impact). With the Company’s current manufacturing footprint, a significant portion of products purchased by the Company in the Eurozone are sourced outside of the Eurozone. Sales in the Eurozone are approximately 25% of total Company sales. About 70% of the cost of goods on those sales are denominated in British Pounds or U.S. Dollars.The Company currently estimates that the transactional impact of a 5% fluctuation in the U.S. Dollar or the British Pound relationship to the Euro would impact the Company’s consolidated gross margin by a range of approximately 40-60 basis points on an annualized basis. On average, in fiscal year 2012, the Euro was 1.32 against the U.S. Dollar and was 0.84 against the British Pound, which was a 5% and 4% depreciation, respectively, compared to the average rates in fiscal year 2011. The average Euro rate in the first half of fiscal year 2012 was stronger when compared to the first half of fiscal year 2011; however, this was more than offset by a weakening of the Euro in the second half of fiscal year 2012 when compared to the second half of fiscal year 2011.
Selling, general and administrative (“SG&A”) expenses in fiscal year 2012 increased by $52,942, or 6.7% (approximately $62,000, or 8%, in local currency). These increases are reflected in both segments and in the Corporate Services Group. Selling expenses increased about 2%, while General and administrative (“G&A”) expenses increased approximately 13%. In addition to inflationary increases in payroll and related costs affecting both selling and G&A expenses, the overall increase in SG&A (in local currency) year over year primarily reflects:
project related costs in information technology, including incremental costs incurred as the Company concluded the last significant phase of its global ERP system implementation,
increased expenses driven by resource deployment related to regional expansion in Latin America (including incremental costs related to an acquisition in Brazil (selling and G&A), impacting both segments), Middle East and Asia, impacting both segments,
incremental costs related to the acquisition of ForteBio (selling and G&A), impacting Life Sciences, and
costs related to bringing Industrial into the European and Asian hubs.
These increases were partly offset by savings realized from the Company’s cost reduction programs.
As a percentage of sales, SG&A expenses were 31.6% compared to 31.4% in fiscal year 2011. The selling and G&A expense components of SG&A as a percentage of sales were as follows:
selling expenses were 17.3% compared to 18.0% in fiscal year 2011, and
G&A expenses were 14.2% compared to 13.4% in fiscal year 2011.
For a discussion of SG&A by business, refer to the section “Review of Operating Segments Results From Continuing Operations” below.
Research and development (“R&D”) expenses were $82,932 in fiscal year 2012 compared to $80,506 in fiscal year 2011, an increase of $2,426, or 3.0% (approximately $3,000, or 4% in local currency). The increase in R&D expenses in local currency reflects increased spending in the Life Sciences segment partly offset by a decline in the Industrial segment. As a percentage of sales, R&D expenses were 3.1% compared to 3.2% in fiscal year 2011. For a discussion of R&D expenses by business, refer to the section “Review of Operating Segments Results From Continuing Operations” below.
In fiscal year 2012, the Company recorded restructuring and other charges (“ROTC”) of $66,858 primarily comprised of severance, professional fees and other costs related to the Company’s structural cost improvement initiatives, as well as charges related to certain employment contract obligations. Such costs were partly offset by the gain on sale of assets. The Company is targeting to achieve $100 million in structural cost improvements over the next three fiscal years, and expects to accomplish approximately 50% of this in fiscal year 2013. The cash outflow related to the costs to implement the structural cost improvements are estimated to be approximately $30-$40 million in fiscal year 2013.
In fiscal year 2011, the Company recorded ROTC of $26,505 primarily comprised of severance, professional fees and other costs related to the Company’s cost reduction initiatives. Furthermore, ROTC includes costs related to certain employment contract obligations and an increase to previously established environmental reserves. These costs were partly offset by the receipt of insurance claim payments. The severance costs recorded in fiscal year 2011 relate to the closure of a manufacturing facility.

22





The details of ROTC for the years ended July 31, 2012 and July 31, 2011 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.
Earnings before interest and income taxes (“EBIT”) were $387,087 in fiscal year 2012, essentially flat compared to $387,622 in fiscal year 2011. The year over year comparison of EBIT was negatively impacted by the increase in ROTC as discussed above. The impact of foreign currency translation had an immaterial impact on EBIT in fiscal year 2012. As a percentage of sales, EBIT were 14.5% compared to 15.4% in fiscal year 2011.
Net interest expense in fiscal year 2012 was $20,177 compared to $18,903 in fiscal year 2011. Net interest expense in fiscal year 2012 reflects the reversal of $4,435 of accrued interest primarily related to the resolution of U.S. tax audits. Net interest expense in fiscal year 2011 reflects the net reversal of $6,184 of accrued interest primarily related to the resolution of U.S. tax audits, partially offset by an interest accrual related to foreign tax matters. Excluding these items, net interest expense decreased $475 compared to fiscal year 2011.
The Company’s effective tax rate for fiscal years 2012 and 2011 was 23.4% and 24.3%, respectively. The effective tax rate for fiscal year 2011 reflects a tax benefit from the resolution of a U.S. tax audit partly offset by tax costs associated with the repatriation of foreign earnings and the establishment of the Company’s Asian headquarters in Singapore. Excluding these impacts, as well as the impacts of ROTC and interest discussed above, the effective tax rate for fiscal years 2012 and 2011 would have been 23.2% and 26.5%, respectively. This decrease reflects tax benefits associated with the Company’s Asian headquarters in Singapore and the expansion of the Company’s European headquarters in Switzerland.
Net earnings from continuing operations in fiscal year 2012 were $280,947, or $2.39 per share, compared with net earnings from continuing operations of $279,197, or $2.36 per share in fiscal year 2011. Company management estimates that foreign currency translation had an immaterial impact on earnings per share in fiscal year 2012.
Review of Operating Segments Results From Continuing Operations
The following table presents sales and segment profit by business segment, reconciled to earnings before income taxes, for the fiscal years ended July 31, 2012 and July 31, 2011.
 
2012

 
%
Margin
 
2011

 
%
Margin
 
%
Change
SALES:
 
 
 
 
 
 
 
 
 
Life Sciences
$
1,253,594

 
 
 
$
1,184,142

 
 
 
5.9
Industrial
1,418,062

 
 
 
1,333,053

 
 
 
6.4
Total
$
2,671,656

 
 
 
$
2,517,195

 
 
 
6.1
SEGMENT PROFIT:
 
 
 
 
 
 
 
 
 
Life Sciences
$
319,312

 
25.5
 
$
292,503

 
24.7
 
9.2
Industrial
198,747

 
14.0
 
182,749

 
13.7
 
8.8
Total segment profit
518,059

 
19.4
 
475,252

 
18.9
 
9.0
Corporate Services Group
64,114

 
 
 
61,125

 
 
 
4.9
Operating Profit
453,945

 
17.0
 
414,127

 
16.5
 
9.6
ROTC, net
66,858

 
 
 
26,505

 
 
 
 
Interest expense, net
20,177

 
 
 
18,903

 
 
 
 
Earnings before income taxes
$
366,910

 
 
 
$
368,719

 
 
 
 


23





Life Sciences:
Presented below are Summary Statements of Segment Profit for the Life Sciences segment for the fiscal years ended July 31, 2012 and July 31, 2011:
 
2012

 
% of
Sales
 
2011

 
% of
Sales
 
%
Change
Sales
$
1,253,594

 
 
 
$
1,184,142

 
 
 
5.9
Cost of sales
523,902

 
41.8
 
509,950

 
43.1
 
2.7
Gross margin
729,692

 
58.2
 
674,192

 
56.9
 
8.2
SG&A
357,722

 
28.5
 
332,635

 
28.1
 
7.5
R&D
52,658

 
4.2
 
49,054

 
4.1
 
7.3
Segment profit
$
319,312

 
25.5
 
$
292,503

 
24.7
 
9.2
The tables below present sales by market and region within the Life Sciences segment for the fiscal years ended July 31, 2012 and July 31, 2011, including the effect of exchange rates for comparative purposes.
 
2012

 
2011

 
%
Change

 
Exchange
Rate
  Impact

 
% Change in
Local
Currency

By Market
 
 
 
 
 
 
 
 
 
BioPharmaceuticals
$
816,920

 
$
738,010

 
10.7

 
$
(9,656
)
 
12.0

Food & Beverage
241,514

 
245,585

 
(1.7
)
 
(4,800
)
 
0.3

Medical
195,160

 
200,547

 
(2.7
)
 
(2,806
)
 
(1.3
)
Total Life Sciences
$
1,253,594

 
$
1,184,142

 
5.9

 
$
(17,262
)
 
7.3

By Region
 
 
 
 
 
 
 
 
 
Americas
$
384,757

 
$
345,273

 
11.4

 
$
(2,439
)
 
12.1

Europe
606,397

 
605,539

 
0.1

 
(18,725
)
 
3.2

Asia
262,440

 
233,330

 
12.5

 
3,902

 
10.8

Total Life Sciences
$
1,253,594

 
$
1,184,142

 
5.9

 
$
(17,262
)
 
7.3

Life Sciences segment sales increased 7.3% in fiscal year 2012 compared to fiscal year 2011. The increase in sales reflects growth in consumables and systems sales of 7.0% and 10.5%, respectively. Sales in emerging markets grew approximately 17% while sales in mature markets grew about 5%.
Increased pricing (in the BioPharmaceuticals and Food & Beverage markets) contributed $9,655, or 0.9%, to consumables sales growth thus, the volume increase related to consumables sales was 6.1%.
Systems sales represented 9.7% of total Life Sciences sales compared to 9.4% in fiscal year 2011. Life Sciences sales represented approximately 47% of total Company sales, on par with fiscal year 2011.
Sales in the BioPharmaceuticals market, which is comprised of two submarket groupings (Pharmaceuticals and Laboratory), and represented about 65% of total Life Sciences sales, increased 12.0%. The sales results by submarket are discussed below:
Sales in the Pharmaceuticals submarket, which represented about 55% of total Life Sciences sales, increased 13.7% driven by strong growth in all three regions. Consumables sales increased 14.0%, while systems sales grew 10.9%. Continued strength in the biotech sector was a key growth driver in the year. The acquisition of ForteBio contributed approximately $13 million (primarily in the Americas), or 2.2% to total Pharmaceuticals consumables sales growth in the year.
Sales in the Laboratory submarket, which represented approximately 10% of total Life Sciences sales, increased 2.1%. The year over year comparison reflects strong growth in Asia, driven by emerging markets, particularly China and India. Sales in the Americas were up slightly. These increases were partly offset by a decline in Europe.
Sales in the Food & Beverage market, which represented about 20% of total Life Sciences sales, increased 0.3% compared to fiscal year 2011. Excluding the impact of the divestiture of a non-core asset group in Italy in the first quarter of fiscal year 2012, total Food & Beverage sales grew about 6%, while consumables increased about 4%. All regions contributed to the consumables growth in the year. Systems sales grew 10.0%. The growth in consumables and systems sales was driven by new markets applications and products augmented by growth in emerging markets.

24





Sales in the Medical market, which is comprised of patient protection products sold to hospitals, original equipment manufacturers (“OEM”) and cell therapy developers, represented about 15% of total Life Sciences sales. Sales decreased 1.3% compared to fiscal year 2011.
OEM sales, which represented less than 10% of total Life Sciences sales, increased 2.0%. The underlying marketplace is strong, however, specific customer inventory reductions have hampered growth in this market.
Sales to Hospitals, which represented less than 10% of total Life Sciences sales, were down 2.2%. The decrease in sales reflects the impact of weak economic conditions in Europe and fewer infection outbreaks, resulting in reduced spending by hospitals, as well as pricing competition, particularly in Latin America.
Life Sciences gross margin in fiscal year 2012 increased 130 basis points to 58.2% from 56.9% in fiscal year 2011. The improvement in gross margin reflects the following:
favorable pricing and the benefit of sales channel changes from distributor to direct sales which increased gross margins by approximately 70-90 basis points, and
favorable mix driven by growth in Pharmaceuticals consumables sales which increased gross margins by approximately 40-60 basis points.
SG&A expenses in fiscal year 2012, increased by $25,087, or 7.5% (an increase of approximately $31,000, or 9% in local currency) compared to fiscal year 2011. Selling expenses increased approximately 3%, while G&A expenses increased approximately 15%. In addition to inflation in payroll and related costs that impacted both selling and G&A expenses, the increase in SG&A (in local currency) principally reflects increased spending related to regional expansion in emerging markets (impacting selling and G&A expenses), including the acquisition of a distributor in Brazil, incremental costs related to the acquisition of ForteBio (selling and G&A) and information technology related costs as discussed in the Review of Consolidated Results from Continuing Operations above. These increases were partly mitigated by savings generated from the Company’s cost reduction programs. SG&A as a percentage of sales increased to 28.5% from 28.1% in fiscal year 2011. The selling and G&A expense components of SG&A as a percentage of sales were as follows:
selling expenses were 17.5% compared to 17.9% in fiscal year 2011, and
G&A expenses were 11.0% compared to 10.1% in fiscal year 2011.
R&D expenses in fiscal year 2012 were $52,658, an increase of $3,604, or 7.3% (approximately $4,300, or 9% in local currency). As a percentage of sales, R&D expenses were 4.2% compared to 4.1% in fiscal year 2011.
Segment profit was $319,312, an increase of $26,809, or 9.2% (approximately $28,000, or 10% in local currency) compared to fiscal year 2011. Segment profit margin was 25.5% compared to 24.7% in fiscal year 2011.
Industrial:
Presented below are summary Statements of Segment Profit for the Industrial segment for the fiscal years ended July 31, 2012 and July 31, 2011:
 
2012

 
% of
Sales
 
2011

 
% of
Sales
 
%
Change

Sales
$
1,418,062

 
 
 
$
1,333,053

 
 
 
6.4

Cost of sales
767,656

 
54.1
 
722,333

 
54.2
 
6.3

Gross margin
650,406

 
45.9
 
610,720

 
45.8
 
6.5

SG&A
421,385

 
29.7
 
396,519

 
29.7
 
6.3

R&D
30,274

 
2.1
 
31,452

 
2.4
 
(3.7
)
Segment profit
$
198,747

 
14.0
 
$
182,749

 
13.7
 
8.8


25





The tables below present sales by market and region within the Industrial segment for the fiscal years ended July 31, 2012 and July 31, 2011, including the effect of exchange rates for comparative purposes.
 
2012

 
2011

 
%
Change

 
Exchange
Rate
Impact

 
% Change in
Local
Currency

By Market
 
 
 
 
 
 
 
 
 
Process Technologies
$
875,249

 
$
804,594

 
8.8

 
$
(11,676
)
 
10.2

Aerospace
230,967

 
207,685

 
11.2

 
(2,085
)
 
12.2

Microelectronics
311,846

 
320,774

 
(2.8
)
 
4,305

 
(4.1
)
Total Industrial
$
1,418,062

 
$
1,333,053

 
6.4

 
$
(9,456
)
 
7.1

By Region
 
 
 
 
 
 
 
 
 
Americas
$
455,227

 
$
434,490

 
4.8

 
$
(2,998
)
 
5.5

Europe
416,555

 
389,982

 
6.8

 
(17,221
)
 
11.2

Asia
546,280

 
508,581

 
7.4

 
10,763

 
5.3

Total Industrial
$
1,418,062

 
$
1,333,053

 
6.4

 
$
(9,456
)
 
7.1

Industrial segment sales increased 7.1% reflecting growth in the Process Technologies and Aerospace markets, partly offset by a decline in the Microelectronics market. The increase in sales reflects growth in consumables (including appurtenant hardware) and systems sales of 5.5% and 14.8%, respectively. Sales in emerging markets increased about 19%, while sales in mature markets grew about 4%.
Increased pricing contributed $8,078, or 0.7% to consumables sales growth thus the volume increase related to consumables sales was 4.8%.
Systems sales represented 18.2% of total Industrial sales compared to 17.3% in fiscal year 2011. Industrial sales represented approximately 53% of total Company sales, on par with fiscal year 2011.
Sales in the Process Technologies market, which is comprised of four submarkets, Fuels & Chemicals, Municipal Water, Power Generation and Machinery & Equipment, (representing about 60% of total Industrial sales), increased 10.2%. The sales results by submarket are discussed below:
Sales in the Fuels & Chemicals submarket, which represented approximately 25% of total Industrial sales, increased 18.7%, reflecting strong growth in all regions. Consumables sales increased 5.6%. Systems sales grew 59.2% as customers continued to invest to increase output. Robust growth in the oil & gas, refining and alternative energy sectors were key growth drivers in the year. The bulk of the investment in oil and gas reflected expansion plans in Brazil, Eastern Europe and the Middle East.
Sales in the Machinery & Equipment submarket, which represented approximately 20% of total Industrial sales, increased 8.5%, driven by growth in all three regions. The increase in Machinery & Equipment sales reflects growth in the mining, automotive in-plant and mobile OEM sectors. Growth in Asia was achieved despite a slowdown in the steel market in China and the ripple effect it had in the region. Growth in emerging markets was also a key contributor to the sales increase in all regions.
Sales in the Power Generation submarket, which represented close to 10% of total Industrial sales, increased 4.9% as double digit growth in Europe and low single-digit growth in Asia (the Company’s largest Power Generation region) was partly offset by a decline in the Americas. The growth in Europe reflected increased activity in the nuclear energy sector and recovery in the turbine OEM sector. The sales result in Asia was hampered by a decrease in demand from wind turbine OEMs in China and a reduction in Nuclear spend in Japan and China.The decline in the Americas reflects lumpiness in systems sales, as last year had particularly strong sales to OEM’s which did not repeat this year.
Municipal Water submarket sales, which represented less than 10% of total Industrial sales, decreased 1.8%. Sales in the Americas (the Company’s largest Municipal Water region) were down 13.8% reflecting the timing of large projects, although there have been signs of softening in this market in the U.S. Sales in Europe decreased 17.2% reflecting a reduction in capital spending due to economic conditions in the region. In Asia, sales more than doubled, the majority of which was driven by wastewater projects in Australia spurred by environmental discharge regulations.

26





The Aerospace market is comprised of sales of air, water, lubrication, fuel and hydraulic protection products to end-user customers in Military and Commercial Aerospace. Sales in the Aerospace market, which represented about 15% of total Industrial sales, increased 12.2%. The sales results by submarket are discussed below:
Sales to the Military Aerospace submarket, which represented close to 10% of total Industrial sales, increased 19.8%, reflecting double-digit growth in each of the three regions.
Sales to the Commercial Aerospace submarket, which represented less than 10% of total Industrial sales, increased 4.1%. The growth in Commercial Aerospace sales was primarily driven by the Americas, reflecting increases in OEM production rates and aftermarket sales related to an increase in passenger miles flown.
Microelectronics sales, which represented about 20% of total Industrial sales, decreased 4.1%, reflecting a decline in semiconductor chip production. Furthermore, the display sector continued to be weak due to overcapacity and the data storage sector struggled due to weak PC sales. Sales in all three regions were down. The biggest impact came from Asia, the Company’s largest Microelectronics region, where sales were down 5.6%.
Industrial gross margin increased to 45.9% from 45.8% in fiscal year 2011. The gross margin increase of 10 basis points year over year was primarily driven by improved pricing. Manufacturing cost savings were offset by inflation and unfavorable overhead absorption.
SG&A expenses increased by $24,866, or 6.3% (an increase of approximately $28,000, or 7% in local currency) compared to fiscal year 2011. Selling expenses increased about 1%, while G&A expenses were up 14%. In addition to inflation in payroll and related costs, the increase in SG&A (in local currency) principally reflects increased spending related to regional expansion in emerging markets (impacting selling and G&A expenses), including the acquisition in Brazil, and information technology related costs as discussed in the “Review of Consolidated Results from Continuing Operations” above, as well as costs related to bringing Industrial into the European and Asian hubs. These increases were partly mitigated by savings generated from the Company’s cost reduction programs.
SG&A expenses as a percentage of sales were 29.7% in fiscal year 2012, on par with fiscal year 2011. The selling and G&A expense components of SG&A as a percentage of sales were as follows:
selling expenses were 17.0% compared to 17.9% in fiscal year 2011, and
G&A expenses were 12.7% compared to 11.9% in fiscal year 2011.
R&D expenses were $30,274, a decrease of $1,178, or 3.7% (approximately $1,200, or 4% in local currency). As a percentage of sales, R&D expenses were 2.1% compared to 2.4% in fiscal year 2011.
Segment profit dollars were $198,747, an increase of $15,998, or 8.8% (approximately $14,600, or 8% in local currency). Segment profit margin increased to 14.0% from 13.7% last year.
Corporate Services Group:
Corporate Services Group expenses were $64,114 compared to $61,125 in fiscal year 2011, an increase of $2,989 or 4.9% ($3,071 or 5.0% in local currency). The increase in Corporate Services Group expenses primarily reflects an increase in payroll and related costs and costs associated with the executive management transition.
Review of Results from Discontinued Operations
Sales from discontinued operations in fiscal year 2012 were $230,826, an increase of 3.2% from $223,721 in fiscal year 2011. The impact of fluctuations in exchange rates used to translate foreign subsidiary results into U.S. Dollars decreased reported sales by $1,655 in fiscal year 2012. In local currency, sales increased 3.9%.
Net earnings from discontinued operations were $38,362, or 32 cents per share, compared with net earnings from discontinued operations of $36,299, or 31 cents per share in fiscal year 2011. Company management estimates that foreign currency translation had an immaterial impact to earnings per share from discontinued operations in fiscal year 2012.

27





Results of Operations 2011 Compared with 2010
Review of Consolidated Results from Continuing Operations
Sales in fiscal year 2011 increased 15.2% to $2.5 billion from $2.2 billion in fiscal year 2010. Exchange rates used to translate foreign subsidiary results into U.S. Dollars increased reported sales by $73,309, primarily due to the weakening of the U.S. Dollar against various Asian currencies (the JPY, Australian Dollar, Chinese Renminbi and Singapore Dollar) and European currencies (the Swiss Franc, Euro and British Pound). In local currency, sales increased 11.8%.
Life Sciences segment sales increased 12.9% (in local currency), while Industrial segment sales increased 10.9% (in local currency). For a detailed discussion of sales, refer to the section “Review of Operating Segments Results From Continuing Operations” below.
Consumable filtration products sales (including appurtenant hardware) increased 10.4% (in local currency) reflecting growth of 11.7% in Life Sciences and over 9% in Industrial. Increased pricing contributed $15,975, or about 80 basis points, to consumables sales growth in the year, primarily attributable to an improvement in the Life Sciences segment.
Systems sales increased 21.7% (in local currency) reflecting double-digit growth in both Life Sciences and Industrial. Systems sales represented 13.6% of total sales in fiscal year 2011 compared to 12.4% in fiscal year 2010.
Gross margin in fiscal year 2011 decreased to 51.0% from 51.3% in fiscal year 2010. This reflects a decrease in gross margin in the Life Sciences and Industrial segments of 30 basis points and 40 basis points, respectively. For a detailed discussion of the factors impacting gross margin by segment, refer to the section “Review of Operating Segments” below.
SG&A expenses in fiscal year 2011 increased by $73,625, or 10.3% (an increase of approximately $54,400, or 8%, in local currency). This increase is reflected in both segments and the Corporate Services Group. Selling expenses increased approximately 14%, while G&A expenses increased 6%. In addition to inflationary increases in payroll and related costs affecting both selling and G&A expenses, the overall increase in SG&A primarily reflects:
increased spending on sales and marketing in three key areas:
geographic expansion in Latin America, Middle East and Asia, principally impacting Industrial and to a lesser extent, Life Sciences, and costs incurred for changes in sales channels from distribution to direct sales, primarily impacting Life Sciences,
variable compensation costs reflecting increases in commissionable systems sales and the strength of each segment’s performance, and
marketing and advertising costs, impacting both segments.
investments in information technology, impacting both segments,
costs related to the establishment of the European headquarters in Switzerland, impacting both Life Sciences and Industrial, and the Asian headquarters in Singapore, primarily impacting Industrial, 
incremental costs related to a biotechnology company that was acquired late in the second quarter of fiscal year 2010, and
performance related compensation costs as well as certain governance related costs, impacting the Corporate Services Group.
As a percentage of sales, SG&A expenses were 31.4% compared to 32.8% in fiscal year 2010. The selling and G&A expense components of SG&A as a percentage of sales were as follows:
selling expenses were 18.0% compared to 18.3% in fiscal year 2010, and
G&A expenses were 13.4% compared to 14.5% in fiscal year 2010.
For a detailed discussion of SG&A by business, refer to the section “Review of Operating Segments Results From Continuing Operations” below.

28





R&D expenses were $80,506 in fiscal year 2011 compared to $68,796 in fiscal year 2010, an increase of $11,710, or 17.0% (approximately $11,200, or 16% in local currency). The increase in R&D expenses reflects increased spending in both segments. As a percentage of sales, R&D expenses were 3.2% compared to 3.1% in fiscal year 2010. For a detailed discussion of R&D by business, refer to the section “Review of Operating Segments Results From Continuing Operations” below.
In fiscal year 2011, the Company recorded ROTC of $26,505 primarily comprised of severance, professional fees and other costs related to the Company’s cost reduction initiatives. Furthermore, ROTC includes costs related to certain employment contract obligations and an increase to previously established environmental reserves. These costs were partly offset by the receipt of insurance claim payments. The severance costs recorded in fiscal year 2011 relate to the closure of a manufacturing facility.
In fiscal year 2010, the Company recorded ROTC of $17,664. This was primarily comprised of severance, professional fees and other costs related to the Company’s on-going cost reduction initiatives and an increase to previously established environmental reserves. These costs were also partly offset by the receipt of insurance claim payments.
The details of ROTC for the years ended July 31, 2011 and July 31, 2010 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.
EBIT were $387,622 in fiscal year 2011, an increase of 21.7% compared to $318,432 in fiscal year 2010. The impact of foreign currency translation increased EBIT by approximately $22,000, or 7% in fiscal year 2011. As a percentage of sales, EBIT were 15.4% compared to 14.6% in fiscal year 2010.
Net interest expense in fiscal year 2011 was $18,903 compared to $14,324 in fiscal year 2010. Net interest expense in fiscal year 2011 reflects the net reversal of $6,184 of accrued interest primarily related to the resolution of U.S. tax audits, partially offset by an interest accrual related to foreign tax matters. Net interest expense in fiscal year 2010 reflects the reversal of $11,780 of accrued interest primarily related to the resolution of foreign tax audits and expiring statutes of limitation for assessment related to uncertain tax positions. Excluding these items, net interest expense decreased $1,017 compared to fiscal year 2010.
The Company’s effective tax rate for fiscal years 2011 and 2010 was 24.3% and 25.7%, respectively. The effective tax rate for fiscal year 2011 reflects a tax benefit from the resolution of a U.S. tax audit partly offset by tax costs associated with the repatriation of foreign earnings and the establishment of the Company’s Asian headquarters in Singapore. The effective tax rate for fiscal year 2010 reflects tax benefits from the resolution of foreign tax audits and expiring foreign statutes of limitation for assessment related to uncertain tax positions partly offset by a tax charge primarily related to tax costs associated with the establishment of the Company’s European headquarters. Excluding these items, the impacts of ROTC discussed above and debt extinguishment costs in fiscal year 2010, the effective tax rate for fiscal year 2011 and 2010 would have been 26.5% and 31.3%, respectively. This decrease reflects tax benefits associated with the establishment of the Company’s European headquarters.
In May 2011, the Internal Revenue Service (“IRS”) concluded its audits of fiscal years 1999 through 2005, including the matter previously disclosed for those years in Note 2, Audit Committee Inquiry and Restatement, to the consolidated financial statements included in the 2007 Form 10-K. In closing the audit, the IRS did not assess any penalties. As a result, the Company reversed $22,829 of previously recorded liabilities related to tax and penalties that were accrued but not assessed. Additionally, the Company will not make any further cash payments to the IRS or receive any refunds with respect to these matters.
Net earnings from continuing operations in fiscal year 2011 were $279,197, or $2.36 per share, compared with net earnings from continuing operations of $202,453, or $1.70 per share in fiscal year 2010. Company management estimates that foreign currency translation increased earnings per share by 13 cents in fiscal year 2011.


29





Review of Operating Segments Results From Continuing Operations
The following table presents sales and segment profit by business segment, reconciled to earnings before income taxes, for the fiscal years ended July 31, 2011 and July 31, 2010.
 
2011

 
%
Margin
 
2010

 
%
Margin
 
%
Change
SALES:
 
 
 
 
 
 
 
 
 
Life Sciences
$
1,184,142

 
 
 
$
1,021,582

 
 
 
15.9
Industrial
1,333,053

 
 
 
1,164,097

 
 
 
14.5
Total
$
2,517,195

 
 
 
$
2,185,679

 
 
 
15.2
SEGMENT PROFIT:
 
 
 
 
 
 
 
 
 
Life Sciences
$
292,503

 
24.7
 
$
234,130

 
22.9
 
24.9
Industrial
182,749

 
13.7
 
155,377

 
13.3
 
17.6
Total segment profit
475,252

 
18.9
 
389,507

 
17.8
 
22.0
Corporate Services Group
61,125

 
 
 
53,411

 
 
 
14.4
Operating Profit
414,127

 
16.5
 
336,096

 
15.4
 
23.2
ROTC, net
26,505

 
 
 
17,664

 
 
 
 
Interest expense, net
18,903

 
 
 
14,324

 
 
 
 
Loss on extinguishment of debt

 
 
 
31,513

 
 
 
 
Earnings before income taxes
$
368,719

 
 
 
$
272,595

 
 
 
 
Life Sciences:
Presented below are Summary Statements of Segment Profit for the Life Sciences segment for the fiscal years ended July 31, 2011 and July 31, 2010:
 
2011

 
% of
Sales
 
2010

 
% of
Sales
 
%
Change
Sales
$
1,184,142

 
 
 
$
1,021,582

 
 
 
15.9
Cost of sales
509,950

 
43.1
 
437,287

 
42.8
 
16.6
Gross margin
674,192

 
56.9
 
584,295

 
57.2
 
15.4
SG&A
332,635

 
28.1
 
308,292

 
30.2
 
7.9
R&D
49,054

 
4.1
 
41,873

 
4.1
 
17.1
Segment profit
$
292,503

 
24.7
 
$
234,130

 
22.9
 
24.9
The tables below present sales by market and region within the Life Sciences segment for the fiscal years ended July 31, 2011 and July 31, 2010, including the effect of exchange rates for comparative purposes.
 
2011

 
2010

 
%
Change
 
Exchange
Rate
  Impact

 
% Change in
Local
Currency
By Market
 
 
 
 
 
 
 
 
 
BioPharmaceuticals
$
738,010

 
$
620,279

 
19.0
 
$
20,688

 
15.6
Food & Beverage
245,585

 
218,049

 
12.6
 
6,556

 
9.6
Medical
200,547

 
183,254

 
9.4
 
3,910

 
7.3
Total Life Sciences
$
1,184,142

 
$
1,021,582

 
15.9
 
$
31,154

 
12.9
By Region
 
 
 
 
 
 
 
 
 
Americas
$
345,273

 
$
296,312

 
16.5
 
$
990

 
16.2
Europe
605,539

 
539,000

 
12.3
 
13,243

 
9.9
Asia
233,330

 
186,270

 
25.3
 
16,921

 
16.2
Total Life Sciences
$
1,184,142

 
$
1,021,582

 
15.9
 
$
31,154

 
12.9

30





Life Sciences segment sales increased 12.9% in fiscal year 2011 compared to fiscal year 2010. The increase in sales reflects growth in consumables and systems sales of 11.7% and 26.0%, respectively.
Increased pricing (primarily in the BioPharmaceuticals market) contributed $12,833, or about 1.4%, to consumables sales growth in the year and the volume-related consumables sales increase was about 10.3%. Systems sales represented 9.4% of total Life Sciences sales in fiscal year 2011 compared to 8.4% in fiscal year 2010. Life Sciences sales represented approximately 47% of total Company sales, on par with fiscal year 2010.
Sales in the BioPharmaceuticals market, which represented about 60% of total Life Sciences sales, increased 15.6%. The sales results by submarket are discussed below:
Sales in the Pharmaceuticals submarket, which represented about 55% of total Life Sciences sales, increased 16.3% compared to fiscal year 2010. Consumables sales increased 15.2%, while systems sales grew 27.4%. All three regions reported double-digit sales growth compared to fiscal year 2010. The sales results in all regions reflect overall growth in the marketplace as pharmaceuticals manufacturers introduce new drugs and increase production levels. The biologicals drug market was strong, particularly in the biotech, vaccine and plasma sectors. Increased demand for the Company’s single-use products also contributed to the growth in the year. In addition to the above factors, the Americas also benefited from a change in route to market from distributor sales to direct. The sales results in Asia also reflects growth in emerging markets (China and India) and strong sales growth in Korea, Singapore (as customer factories built in the last two years ramp up production) and Japan. Sales growth in Asia was also favorably impacted, as drug producers in China move towards adopting Federal Drug Administration manufacturing standards to facilitate exporting their products to the U.S. and Europe.
Sales in the Laboratory submarket, which represented about 10% of Life Sciences sales, grew 12.2%, with all regions contributing. The growth in this submarket was driven by increased end-user demand fueled by underlying growth in the pharmaceutical marketplace. Emerging markets in Asia, particularly China and India, also contributed to the growth year over year.
Sales in the Food & Beverage market, which represented about 20% of total Life Sciences sales, increased 9.6% reflecting growth in all three regions. Consumables sales increased 6.1%, while systems sales increased 24.3%. The overall sales increase in the year was primarily driven by improved market conditions, new market applications and products in food contact compliance and beer stabilization as well as growth in emerging markets in Asia (primarily China and India) as well as in various countries in Eastern Europe.
Sales in the Medical market, which represented about 15% of total Life Sciences sales, increased 7.3% compared to fiscal year 2010.
OEM sales, which represented less than 10% of total Life Sciences sales, grew 10.0% primarily driven by increased intravenous filter (“IV”) sales in the Americas and Europe. Regulatory requirements in the U.S. are driving an increase IV sales in the Americas, while growth in Europe primarily reflects increased sales in U.K., Germany and France fueled by increased end-user demand.
Sales to Hospitals, which represented less than 10% of total Life Sciences sales, increased 5.2%, with all regions contributing. The growth year over year primarily reflects an increase in Pall-Aquasafe water filter sales in the Americas and Europe. The growth in Europe principally reflects a large one-time sale to a hospital partly offset by the impact of competitive pricing pressure in the region.
Life Sciences gross margin in fiscal year 2011 decreased 30 basis points to 56.9% from 57.2% in fiscal year 2010. The decrease in gross margin in the year reflects the following factors:
unfavorable absorption of manufacturing overhead as inventory levels were adjusted and certain inventory-related charges, partly offset by cost savings and the benefit of exchange rates on foreign currency denominated sourced goods primarily in the Eurozone, that in the aggregate decreased gross margin by an estimated 50-70 basis points, and 
favorable pricing, which increased gross margin by an estimated 20-40 basis points.
SG&A expenses in fiscal year 2011, increased by $24,343, or 7.9% (approximately $16,300, or 5% in local currency) compared to fiscal year 2010. Selling expenses increased close to 13%, while G&A expenses were up slightly. In addition to inflation in payroll costs that impacted both selling and G&A expenses, the increase in SG&A principally reflects increased spending on sales and marketing, investments in information technology, costs related to the establishment of the European headquarters and incremental costs related to a biotechnology company acquired in fiscal year 2010, as discussed in the Review of Consolidated Results from Continuing Operations above. SG&A as a percentage of sales decreased to 28.1% from 30.2% in fiscal year 2010.

31





The selling and G&A expense components of SG&A as a percentage of sales were as follows:
selling expenses were 17.9% compared to 18.5% in fiscal year 2010, and
G&A expenses were 10.1% compared to 11.7% in fiscal year 2010.
R&D expenses in fiscal year 2011 were $49,054 compared to $41,873 in fiscal year 2010, an increase of $7,181, or 17.1% (approximately $6,800, or 16% in local currency). The increase in R&D expenses reflects increased headcount as well as expenses to support projects in the BioPharmaceuticals market. As a percentage of sales, R&D expenses were 4.1%, on par with fiscal year 2010.
Segment profit dollars were $292,503, an increase of $58,373, or 24.9% (approximately $45,700, or 20% in local currency) compared to fiscal year 2010. Segment margin improved to 24.7% from 22.9% in fiscal year 2010.
Industrial:
Presented below are summary Statements of Segment Profit for the Industrial segment for the fiscal years ended July 31, 2011 and July 31, 2010:
 
2011

 
% of
Sales
 
2010

 
% of
Sales
 
%
Change
Sales
$
1,333,053

 
 
 
$
1,164,097

 
 
 
14.5
Cost of sales
722,333

 
54.2
 
626,846

 
53.8
 
15.2
Gross margin
610,720

 
45.8
 
537,251

 
46.2
 
13.7
SG&A
396,519

 
29.7
 
354,951

 
30.5
 
11.7
R&D
31,452

 
2.4
 
26,923

 
2.3
 
16.8
Segment profit
$
182,749

 
13.7
 
$
155,377

 
13.3
 
17.6
The tables below present sales by market and region within the Industrial segment for the fiscal years ended July 31, 2011 and July 31, 2010, including the effect of exchange rates for comparative purposes.
 
2011

 
2010

 
%
Change
 
Exchange
Rate
Impact

 
% Change in
Local
Currency
By Market
 
 
 
 
 
 
 
 
 
Process Technologies
$
804,594

 
$
702,332

 
14.6
 
$
23,250

 
11.2
Aerospace
207,685

 
195,737

 
6.1
 
2,124

 
5.0
Microelectronics
320,774

 
266,028

 
20.6
 
16,781

 
14.3
Total Industrial
$
1,333,053

 
$
1,164,097

 
14.5
 
$
42,155

 
10.9
By Region
 
 
 
 
 
 
 
 
 
Americas
$
434,490

 
$
359,076

 
21.0
 
$
1,737

 
20.5
Europe
389,982

 
350,233

 
11.3
 
6,783

 
9.4
Asia
508,581

 
454,788

 
11.8
 
33,635

 
4.4
Total Industrial
$
1,333,053

 
$
1,164,097

 
14.5
 
$
42,155

 
10.9
Industrial segment sales increased 10.9%, with all markets contributing. The increase in sales in the year reflects growth in consumables and systems sales of 9.2% and 19.7%, respectively.
Increased pricing contributed $3,142, or less than 0.5%, to consumables sales growth in the year. Systems sales represented 17.3% of total Industrial sales in fiscal year 2011 compared to 16.0% in fiscal year 2010. Industrial sales represented approximately 53% of total Company sales in fiscal year 2011, on par with fiscal year 2010.

32





Sales in the Process Technologies market, which represented about 60% of total Industrial sales, increased 11.2%.The sales results by submarket are discussed below:
Sales in the Fuels & Chemicals submarket, which represented approximately 20% of total Industrial sales, increased 8.3% reflecting increases in the Americas and Europe, partly offset by a decline in Asia. Consumables sales increased 7.9%, while systems sales grew 9.8%. The growth in the Americas and Europe was driven by robust activity in the oil and gas sector and continued recovery in the chemical sector. Europe also benefited from growth in emerging markets in the Middle East. The decline in Asia primarily reflects a low level of investment activity in fiscal year 2010 that affected systems sales growth in the current year as well as weakness in the electronics-grade chemical marketplace.
Sales in the Machinery & Equipment submarket, which represented approximately 20% of total Industrial sales, increased 16.9%, with all regions contributing to the growth. The increase in Machinery & Equipment sales was driven by growth in the mining and primary metals sectors as well as an increase in OEM in-plant activities related to an increase in demand for manufacturing capacity. Furthermore, the Americas and Europe benefited from an increase in sales to mobile OEM customers (construction and mining) as they increased build rates to meet demand.
Sales in the Power Generation submarket, which represented approximately 10% of total Industrial sales, increased 9.8%. The growth was driven by Asia (mainly China), reflecting strong demand in the wind-turbine market and the Americas, primarily driven by sales of water treatment and condensate systems to power stations in the U.S. A decrease in sales in Europe, related to overall weakness in the marketplace, particularly in the turbine OEM and fossil sectors, partly offset the above.
Municipal Water submarket sales, which represented approximately 10% of total Industrial sales, increased 8.3%. By region, sales in the Americas (the Company’s largest Municipal Water region) grew 22.5%, driven by municipalities in the U.S. upgrading to membrane filtration to comply with environmental regulations. Sales in Europe increased 2.4%. Growth in Europe was hampered by a reduction in publicly funded projects (primarily in the leachate sector) due to the fiscal challenges of local governments. In Asia, the Company’s smallest Municipal Water region, sales were down about 40% related to timing of large systems projects.
Sales in the Aerospace market, which represented about 15% of total Industrial sales, increased 5.0%. The sales results by submarket are discussed below:
Sales to the Military Aerospace submarket, which represented less than 10% of total Industrial sales, decreased 2.6% primarily reflecting the impact of spending cutbacks by European governments. This was partly offset by an increase in the Americas reflecting increased shipments of spares to the U.S. government.
Sales to the Commercial Aerospace submarket, which represented less than 10% of total Industrial sales, increased 14.5%, with all regions contributing to the growth. The growth in Commercial Aerospace sales was primarily driven by a modest increase in OEM production rates, an increase in aftermarket sales related to an increase in air miles flown and modest improvement in the business jet market.
Microelectronics sales, which represented about 24% of total Industrial sales, increased 14.3% reflecting double-digit growth in all regions. Growth was particularly strong in the first half of fiscal year 2011, with modest growth seen in the second half of the year. Overall, the sales growth reflects strength in the semiconductor marketplace. OEM activity was also strong globally, although some slowing was seen in the latter part of the year. Growth in the display marketplace in Asia also positively impacted revenue growth year over year, particularly in the first-half with slowing seen later in the year. Increased demand for consumer electronics, including tablets and smart phones, continue to positively impact sales growth in this market.
Industrial gross margin decreased 40 basis points to 45.8% from 46.2% in fiscal year 2010. The decrease in gross margin reflects the impact of unfavorable mix which reduced gross margin by an estimated 170-190 basis points comprised of the following:
a negative impact from an increase in systems sales, as discussed above, which typically have lower gross margins than consumables, and
a negative impact from the consumables market mix, primarily in the Process Technology submarket comprised of lower margin capital goods, such as hardware and other appurtenant devices to the filtration consumable product.
This was partly offset by the impact of cost savings, including improved efficiency in manufacturing operations, which outpaced inflation, that in the aggregate increased gross margin by an estimated 130-150 basis points.

33





SG&A expenses increased by $41,568, or 11.7% (approximately $30,300, or 9% in local currency) compared to fiscal year 2010. Selling expenses increased close to 17%, while G&A expenses increased 5%. In addition to inflation in payroll costs, the increase in SG&A principally reflects increased spending on sales and marketing, investments in information technology and costs related to the establishment of the European and Asian headquarters as discussed in the “Review of Consolidated Results from Continuing Operations”. SG&A expenses as a percentage of sales decreased to 29.7% from 30.5% in fiscal year 2010. The selling and G&A expense components of SG&A as a percentage of sales were as follows:
selling expenses were 17.9% compared to 17.5% in fiscal year 2010, and
G&A expenses were 11.9% compared to 13.0% in fiscal year 2010.
 R&D expenses were $31,452 in fiscal year 2011 compared to $26,923 in fiscal year 2010, an increase of $4,529, or 16.8% (approximately $4,400, or 16% in local currency). As a percentage of sales, R&D expenses were 2.4% compared to 2.3% in fiscal year 2010.
Segment profit dollars in fiscal year 2011 were $182,749, an increase of $27,372, or 17.6% (approximately $18,000, or 12% in local currency) compared to fiscal year 2010. Segment margin increased to 13.7% from 13.3% in fiscal year 2010.
Corporate Services Group:
Corporate Service Group expenses in fiscal year 2011 were $61,125 compared to $53,411 in fiscal year 2010, an increase of $7,714 or 14.4% ($7,759, or 14.5% in local currency). The increase in Corporate Service Group expenses primarily reflects increases in performance related compensation costs, professional fees for certain governance related matters and payroll and related costs.
Review of Results from Discontinued Operations
Sales from discontinued operations in fiscal year 2011 were $223,721, an increase of 3.5% from $216,253 in fiscal year 2010. The impact of fluctuations in exchange rates used to translate foreign subsidiary results into U.S. Dollars increased reported sales by $3,019 in fiscal year 2011. In local currency, sales increased 2.1%.
Net earnings from discontinued operations were $36,299, or 31 cents per share, compared with net earnings from discontinued operations of $38,795, or 33 cents per share in fiscal year 2010. Company management estimates that foreign currency translation had an immaterial impact to earnings per share from discontinued operations in fiscal year 2011.
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 $610,900 at July 31, 2012 as compared with $676,500 at July 31, 2011. This includes working capital related to the Company’s discontinued operations, however, excludes assets aggregating approximately $94,500 classified as held for sale that otherwise would have been reported as non-current. Excluding the effect of foreign exchange (discussed below), non-cash working capital decreased approximately $19,600 compared to July 31, 2011.
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, 2012 to those at July 31, 2011, the Euro, British Pound and the JPY have weakened against the U.S. Dollar. The effect of foreign currency translation, inclusive of discontinued operations, decreased non-cash working capital by $45,988, including net inventory, net accounts receivable and other current assets by $29,127, $44,090 and $8,385, respectively, as compared to July 31, 2011. Additionally, foreign currency translation decreased accounts payable and other current liabilities by $33,890 and current income taxes payable by $1,724.
Net cash provided by operating activities, inclusive of discontinued operations in fiscal year 2012 was $474,848 as compared to $429,987 in fiscal year 2011, an increase of $44,861, or about 10%. The increase primarily reflects the net earnings growth exclusive of ROTC, as more than 50%, or about $35 million of the current year ROTC did not impact cash outflows yet. Furthermore, the increase in net cash provided by operating activities benefited from reduced inventory levels, and decreased defined benefit plan contributions. These factors were partly offset by an increase in accounts receivable. The net earnings from discontinued operations adjusted for non-cash reconciling items in fiscal year 2012 and fiscal year 2011 were approximately $45,900 and $51,500, respectively. This includes transaction related costs, net of tax, of $7,444 related to the divestiture of the Blood product lines in fiscal year 2012. The absence of cash flows from discontinued operations is not expected to significantly affect the Company’s future liquidity or capital resources.

34





The Company’s full cash conversion cycle, defined as days in inventory outstanding (“DIO”) plus days sales outstanding (“DSO”) less days payable outstanding (“DPO”), increased to 115 days in the quarter ended July 31, 2012 from 111 days in the quarter ended July 31, 2011. This primarily reflects a decrease in DPO and an increase in DSO, partly offset by a decrease in DIO.
Free cash flow, inclusive of discontinued operations, which is defined as net cash provided by operating activities less capital expenditures, was $315,939, or about 99% of net earnings in fiscal year 2012, as compared with $269,216, or about 85% of net earnings in fiscal year 2011. The increase in free cash flow primarily reflects the increase in net cash provided by operating activities as discussed above. Free cash flows includes capital expenditures of approximately $7,200 and $12,100 in fiscal years 2012 and 2011, respectively, related to the discontinued operations.
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, inclusive of discontinued operations to free cash flow
 
2012

 
2011

 
2010

Net cash provided by operating activities
$
474,848

 
$
429,987

 
$
377,860

Less capital expenditures
158,909

 
160,771

 
136,313

Free cash flow
$
315,939

 
$
269,216

 
$
241,547

Net Earnings
$
319,309

 
$
315,496

 
$
241,248

Free cash flow conversion
98.9
%
 
85.3
%
 
100.1
%
Overall, net debt (debt net of cash and cash equivalents) as a percentage of total capitalization (net debt plus equity) was 11.5% at July 31, 2012 as compared to 9.1% at July 31, 2011. Net debt increased by approximately $46,100 compared with July 31, 2011. The impact of foreign exchange rates (primarily on cash and cash equivalents) increased net debt by about $31,000. Excluding this impact, net debt increased by $15,100 reflecting a decrease in cash and cash equivalents of $25,200 partly offset by a decrease in gross debt of $10,100.
The Company’s 5-year senior revolving credit facility contains financial covenants which require 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 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, 2012, the Company was in compliance with all related financial and other restrictive covenants, including limitations on indebtedness.
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 currency 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. In addition to the balance sheet related mitigation activities, during the fourth quarter of fiscal year 2012, the Company began to use foreign exchange forward contracts for cash flow hedging of its forecasted transactional exposure to the Euro due to changes in the market rates to exchange Euros for British Pounds. 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, 2012 was $2,858,670. The notional amount of foreign currency forward contracts outstanding as of July 31, 2012 was $517,124 of which $77,557 are for cash flow hedges that cover monthly transactional exposures through July 2013. The Company’s foreign currency balance sheet exposures resulted in the recognition of a loss within SG&A of approximately $16,385 in the year ended July 31, 2012, 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 $3,839 in the year ended July 31, 2012.

35





As of July 31, 2012, the Company had $204,940 of outstanding commercial paper, all of which is recorded as current liabilities under notes payable in the Company’s consolidated balance sheet. Commercial paper outstanding at any one time during the year had balances ranging from $135,000 to $335,000, carried interest rates ranging between .37% and .53% and original maturities between 1 and 62 days. Commercial paper outstanding at July 31, 2012 carry interest rate at .48% and maturities between 29 and 32 days. As of July 31, 2012, the Company does not have any outstanding borrowings under its existing senior revolving credit facility.
The Company utilizes cash flow generated from operations and its senior revolving credit facility to meet its short-term liquidity needs. Company management considers its cash balances, lines of credit and access to the commercial paper and other credit markets, along with the cash typically generated from operations, to be sufficient to meet its anticipated liquidity needs.
As of July 31, 2012, the amount of cash and cash equivalents held by foreign subsidiaries was $487,777. The Company does not expect any restrictions or taxes on repatriation of cash held outside of the U.S. to have a material effect on the Company’s overall liquidity.
Capital expenditures, inclusive of discontinued operations, were $158,909 in fiscal year 2012. Depreciation expense, inclusive of discontinued operations, was $90,388 and amortization expense was $20,717 in fiscal year 2012.
On October 16, 2008, the board authorized an expenditure of $350,000 to repurchase shares of the Company’s common stock. At July 31, 2011, there was $203,037 remaining under this stock repurchase authorization. On September 26, 2011, the board authorized an expenditure of $250,000 to repurchase shares of the Company’s common stock. The Company repurchased stock of $121,164 in fiscal year 2012 leaving $331,873 remaining at July 31, 2012 under the current stock repurchase programs. Net proceeds from stock plans were $39,562 in fiscal year 2012.
In fiscal year 2012, the Company paid dividends of $88,955 compared to $77,641 in fiscal year 2011, an increase of about 15%. The Company increased its quarterly dividend by 20% from 17.5 cents to 21 cents per share, effective with the dividend declared on January 19, 2012.
The following is a summary of the Company’s contractual payment commitments as of July 31, 2012 (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, 2012):
 
Year Ended
 
 

 
 

 
2013

 
2014

 
2015

 
2016

 
2017

 
Thereafter

 
Total

Long-term debt
$
453

 
$
403

 
$
115,484

 
$
359

 
$
374

 
$
375,657

 
$
492,730

Interest on long-term debt
21,536

 
21,513

 
21,049

 
18,799

 
18,784

 
56,273

 
157,954

Operating leases
24,816

 
16,977

 
9,894

 
6,244

 
4,138

 
5,745

 
67,814

Purchase commitments
41,723

 
7,765

 
894

 
794

 
696

 
6,591

 
58,463

Other commitments
425

 
228

 
3,677

 
3,668

 
3,668

 
800

 
12,466

Total commitments
$
88,953

 
$
46,886

 
$
150,998

 
$
29,864

 
$
27,660

 
$
445,066

 
$
789,427

The Company had gross liabilities for unrecognized tax benefits of approximately $194,829 and related accrued interest of $17,879 as of July 31, 2012, which were excluded from the table above. See Note 11, Income Taxes, to the accompanying consolidated financial statements for further discussion of these amounts.

36





Adoption of New Accounting Pronouncements
In May 2011, the FASB issued amendments to fair value measurement and disclosure requirements. This guidance amends United States generally accepted accounting principles (“U.S. GAAP”) to conform with measurement and disclosure requirements in International Financial Reporting Standards (“IFRS”). The amendments change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. This includes clarification of the Board’s intent about the application of existing fair value measurement and disclosure requirements and those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. In addition, to improve consistency in application across jurisdictions, some changes in wording are necessary to ensure that U.S. GAAP and IFRS fair value measurement and disclosure requirements are described in the same way (for example, using the word “shall” rather than “should” to describe the requirements in U.S. GAAP). This amended guidance is to be applied prospectively and was effective for the Company beginning with its third quarter of fiscal year 2012. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance intended to simplify goodwill impairment testing. Entities will be allowed to perform a qualitative assessment on goodwill impairment to determine whether it is more likely than not (defined as having a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This guidance is effective for goodwill impairment tests performed in interim and annual periods for fiscal years beginning after December 15, 2011, which for the Company is the first quarter of fiscal 2013, with early adoption permitted. The Company does not expect this guidance will have a material impact on its results of operations or financial position.
In June 2011, the FASB issued new guidance on the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. In December 2011, the FASB issued an amendment to defer indefinitely a requirement in the June 2011 standard that called for reclassification adjustments from accumulated other comprehensive income to be measured and presented by income statement line item in net income and also in other comprehensive income. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. The adoption of this disclosure-only guidance will not have an impact on the Company’s consolidated financial results and is effective for the Company beginning with its first quarter of fiscal year 2013.

37





ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 had less than a 1 cent impact on earnings per share in fiscal year 2012.
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 Brazilian Real, the Canadian Dollar, the 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. In fiscal year 2012, the Euro, Pound, Brazilian Real and Canadian Dollar, weakened by approximately 4.6%, 1.1%, 10.5% and 2.1%, respectively, against the U.S. dollar and the Yen, Australian Dollar, Swiss Franc and Singapore Dollar strengthened by approximately 4.8%, 1.2%, 1.8% and 1.1%, respectively, against the U.S. dollar, compared with the average exchange rates in effect in fiscal year 2011. Additionally, the Euro weakened against the Pound by approximately 3.6%.
The Company is also exposed to transaction risk from adverse changes in exchange rates. One component of this exposure relates to short-term transaction exposures of 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. At July 31, 2012, the net balance sheet exposures amounted to approximately $330,552 and were offset by net forward contracts with a notional principal amount of $222,604. If a hypothetical 10% simultaneous adverse change had occurred in exchange rates as of July 31, 2012, net earnings would have decreased by approximately $9,907, or approximately 8 cents per share. In addition to these balance sheet related mitigation activities, during the fourth quarter of fiscal year 2012, the Company began to use forwards for cash flow hedging on its forecasted transactional exposure to the Euro due to changes in market rates to exchange Euros for Pounds. The hedges cover a British subsidiary (Pound functional currency) with Euro revenues and a Swiss subsidiary (with a Euro functional currency) with Pound expenses. The probability of the occurrence of these transactions is high and the Company’s assessment is based on observable facts, including the frequency and amounts of similar past transactions. The objective of the cash flow hedges is to “lock-in” the forecasted impact of the Pound equivalent amount of Euro sales for the British subsidiary and the Euro equivalent amount of Pound expenses for the Swiss subsidiary, at the agreed upon exchange rates in the forwards. The notional amount of forwards outstanding as of July 31, 2012 was $77,557 and cover monthly transactional exposures through July 2013.The Company does not enter into forwards for trading purposes.
Interest Rates
The Company currently has offsetting exposures with respect to changes in interest rates. This is primarily due to the Company’s variable rate positions on debt and accrued liabilities compared to the Company’s variable rate positions on cash and retirement benefit assets.
The Company’s debt portfolio is comprised of both fixed and variable rate borrowings. The Company’s debt portfolio was approximately 29% variable rate at July 31, 2012, compared to 30% variable rate at July 31, 2011. The Company’s cash position was 100% variable rate at July 31, 2012 and July 31, 2011.
For the year ended July 31, 2012, interest expense on variable rate debt and accrued liabilities was $8,731 and interest income on variable rate cash and retirement benefit assets was $8,527. A hypothetical 10% shift in market interest rates for fiscal year 2012 (e.g., if an assumed market interest rate of 5.0% increased to 5.5%) could have an adverse affect on interest, net of approximately $20.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this item are located immediately following the signature page of this Form 10-K. See Item 15.(a)(1) for a listing of financial statements provided.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
As discussed in various portions of this Form 10-K, including Note 19, Discontinued Operations, to the accompanying consolidated financial statements, the Company sold, effective August 1, 2012, certain assets of its blood collection, filtration and processing product line, which was a component of the Life Sciences segment (the product line sales were reported in the Medical market), and met both the component and held for sale criteria during the third quarter of fiscal year 2012. As such, it has been reported as a discontinued operation in the Company’s consolidated financial statements. The table below presents selected quarterly financial information on a continuing operations basis and a total operations basis.
(In thousands,
except per share data)
 
First
Quarter

 
Second
Quarter

 
Third
Quarter

 
Fourth
Quarter

 
Full
Year

2012:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
651,262

 
$
640,047

 
$
657,976

 
$
722,371

 
$
2,671,656

Gross profit
 
335,352

 
338,165

 
334,426

 
372,155

 
1,380,098

Restructuring and other
charges, net (a)
 
22,984

 
5,156

 
2,861

 
35,857

 
66,858

Net earnings from continuing operations
 
59,652

 
74,646

 
70,938

 
75,711

 
280,947

Net earnings
 
69,455

 
84,729

 
78,918

 
86,207

 
319,309

Earnings per share from continuing operations:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.52

 
$
0.64

 
$
0.61

 
$
0.65

 
$
2.42

Diluted
 
$
0.51

 
$
0.63

 
$
0.60

 
$
0.64

 
$
2.39

Earnings per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.60

 
$
0.73

 
$
0.68

 
$
0.74

 
$
2.75

Diluted
 
$
0.59

 
$
0.72

 
$
0.67

 
$
0.73

 
$
2.71

 
 
 
 
 
 
 
 
 
 
 
2011:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
553,791

 
$
590,896

 
$
653,792

 
$
718,716

 
$
2,517,195

Gross profit
 
288,006

 
311,120

 
332,266

 
353,520

 
1,284,912

Restructuring and other
charges, net (a)
 
1,409

 
4,789

 
7,723

 
12,584

 
26,505

Net earnings from continuing operations
 
61,839

 
65,453

 
61,758

 
90,147

 
279,197

Net earnings
 
71,409

 
75,664

 
71,069

 
97,354

 
315,496

Earnings per share from continuing operations:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.53

 
$
0.56

 
$
0.53

 
$
0.77

 
$
2.40

Diluted
 
$
0.52

 
$
0.55

 
$
0.52

 
$
0.76

 
$
2.36

Earnings per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.61

 
$
0.65

 
$
0.61

 
$
0.84

 
$
2.71

Diluted
 
$
0.61

 
$
0.64

 
$
0.60

 
$
0.82

 
$
2.67

(a)
Refer to Note 2, Restructuring and Other Charges, Net, to the accompanying consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
Not applicable.
 

39





ITEM 9A. CONTROLS AND PROCEDURES.
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, 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 defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective.
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, as amended. 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, 2012.
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).
(b)
Attestation report of the independent 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, 2012, 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.

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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, 2012, 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, 2012 and 2011, 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, 2012 and our report dated October 1, 2012 expressed an unqualified opinion on those consolidated financial statements.
 
/s/ 
KPMG LLP
 
KPMG LLP
Melville, New York
October 1, 2012
(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 transition to the Company’s financial shared services capabilities and standardization of its financial systems. When taken together, these changes, which have occurred 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 to 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 fiscal years 2010 though 2012, certain significant operations migrated to the Company’s global Enterprise Resource Planning (“ERP”) software system. In the third quarter of fiscal year 2012, the last significant phase of the migration of operations, namely the Americas, was completed. 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 control over financial reporting.
In connection with these migrations, and continuing process changes associated with these migrations and transition of financial activities to its shared service centers that occurred during the Company’s fourth quarter of fiscal year 2012, the Company has instituted material changes in its internal control over financial reporting during the fourth quarter of fiscal year 2012.

41





ITEM 9B. OTHER INFORMATION.
On and effective September 26, 2012, the Company's Board of Directors (the “Board”), upon the recommendation of the Nominating/Governance Committee of the Board, approved amendments to the Company's By-laws (the “By-laws”). The material amendments included revisions to the following sections:
Section 2.06 - Amended to require the Board to appoint the inspector of election and to provide for the appointment of one or more inspectors.
Section 2.07(b) - Amended to include requirement that shareholders must provide the same information and undertakings with respect to nominating an individual to the Board at a special meeting of shareholders as a shareholder nominating an individual at an annual meeting of shareholders.
Section 3.06 - Amended to eliminate reference to a classified Board structure.
Section 3.09 - Amended to (i) delete the expressed duties and responsibilities of the Board's standing committees and, (ii) provide that standing committees shall have the duties and authorities as determined by the Board.
Section 3.10 - Amended to establish procedures in the event the Chairman of the Board is absent or unable to serve.
Section 4.01 - Amended to (i) remove the Chief Operating Officer position as an Elected Officer (as such term is defined in the By-laws) of the Company, (ii) delete description of an Operating Committee, and (iii) remove language regarding the officers appointed by the Chief Executive Officer.
Section 4.04 - Amended to delete reference addressing the unavailability of the Chief Executive Officer.
Sections 5.01 and 5.02 - Amended to reflect administrative changes relating to the removal of a director or an officer, respectively.
Section 6.01 - Amended to expressly provide that the Company may issue uncertificated shares of its stock.
Section 6.01 - Amended to expand the window for fixing the record date for shareholder meetings and for dividend declarations.
Section 7.01 - Amended to eliminate language regarding indemnification rights.
In addition to the summary of material amendments described above, the By-laws were also amended to make certain other non-substantive changes.
The foregoing description of the amendments to the By-laws is qualified in its entirety by reference to the full text of the By-laws. A clean copy of the By-laws and a copy marked to reflect changes to the prior By-laws are included as exhibits to this Annual Report on Form 10-K.

PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
 
Information required by this item is included in Part I above under the caption “Executive Officer of the Registrant” and in the Proxy Statement under the captions “Proposal 1 – Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Board and Committee Information” and is incorporated by reference in 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” and “Compensation of Non-Employee Directors” and is incorporated by reference in this report.
 

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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 “Governance of the Company – Securities Ownership” and “Executive Compensation – Equity-Based Compensation,” 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 “Governance of the Company – Director Independence,” “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.
 
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.

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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, 2012 and July 31, 2011
Consolidated Statements of Earnings – years ended Ju