Edgar Filing: PALL CORP

PLL-4/30/2015-Q3FY2015

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended April 30, 2015



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

For the transition period from to

Commission File Number: 001- 04311

PALL CORPORATION

(Exact name of registrant as specified in its charter)



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

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

(516) 484-5400

(Registrant’s telephone number, including area code)

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

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

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



	Large accelerated filer þ	Accelerated filer o

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

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

The number of shares of the registrant’s common stock outstanding as of May 18, 2015 was 106,829,801.

Table of Contents



		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited).
	Condensed Consolidated Balance Sheets as of April 30, 2015 and July 31, 2014.	3
	Condensed Consolidated Statements of Earnings for the three and nine months ended April 30, 2015 and April 30, 2014.	4
	Condensed Consolidated Statements of Comprehensive Income/(Loss) for the three and nine months ended April 30, 2015 and April 30, 2014.	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2015 and April 30, 2014.	6
	Notes to Condensed Consolidated Financial Statements.	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	36
Item 4.	Controls and Procedures.	37
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings.	38
Item 1A.	Risk Factors.	38
Item 6.	Exhibits.	38
SIGNATURES

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

PALL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)



	Apr 30, 2015			Jul 31, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	1,094,504		$	964,110
Accounts receivable	547,295			615,713
Inventory	385,994			404,878
Other current assets	154,937			152,522
Total current assets	2,182,730			2,137,223
Property, plant and equipment	725,260			805,327
Goodwill	476,718			491,462
Intangible assets	222,641			242,423
Other non-current assets	133,024			174,045
Total assets	$	3,740,373		$	3,850,480
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable	$	724,802		$	424,943
Accounts payable	156,810			165,373
Accrued liabilities	281,135			328,397
Income taxes payable	21,308			60,775
Current portion of long-term debt	75,950			87,955
Dividends payable	32,544			30,203
Total current liabilities	1,292,549			1,097,646
Long-term debt, net of current portion	373,472			373,793
Income taxes payable – non-current	111,993			150,484
Deferred taxes	95,703			67,303
Other non-current liabilities	232,099			265,897
Total liabilities	2,105,816			1,955,123
Stockholders’ equity:
Common stock, par value $.10 per share	12,796			12,796
Capital in excess of par value	362,539			327,301
Retained earnings	2,681,965			2,512,961
Treasury stock, at cost	(1,225,623		)	(942,780		)
Accumulated other comprehensive income/(loss)	(197,120		)	(14,921		)
Total stockholders’ equity	1,634,557			1,895,357
Total liabilities and stockholders’ equity	$	3,740,373		$	3,850,480

See accompanying notes to condensed consolidated financial statements.

PALL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)



	Three Months Ended				Nine Months Ended
	Apr 30, 2015		Apr 30, 2014		Apr 30, 2015		Apr 30, 2014
Net sales	$	681,145	$	682,445	$	2,051,431	$	1,989,193
Cost of sales	325,747		334,371		993,607		971,146
Gross profit	355,398		348,074		1,057,824		1,018,047
Selling, general and administrative expenses	197,683		201,045		592,173		592,228
Research and development	24,025		26,644		73,260		74,890
Restructuring and other charges, net	14,131		11,542		34,905		29,910
Interest expense, net	1,270		4,747		14,210		15,919
Earnings before income taxes	118,289		104,096		343,276		305,100
Provision for income taxes	22,112		15,405		74,427		61,230
Net earnings	$	96,177	$	88,691	$	268,849	$	243,870
Earnings per share:
Basic	$	0.90	$	0.80	$	2.50	$	2.20
Diluted	$	0.89	$	0.80	$	2.47	$	2.17
Dividends declared per share	$	0.305	$	0.550	$	0.915	$	0.825
Average shares outstanding:
Basic	107,162		110,183		107,502		110,946
Diluted	108,557		111,466		108,812		112,215

See accompanying notes to condensed consolidated financial statements.

PALL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(In thousands)

(Unaudited)



	Three Months Ended					Nine Months Ended
	Apr 30, 2015		Apr 30, 2014			Apr 30, 2015			Apr 30, 2014
Net earnings	$	96,177	$	88,691		$	268,849		$	243,870
Other comprehensive income/(loss), net of income taxes:
Foreign currency translation	2,836		25,041			(198,376		)	46,330
Pension liability adjustment	908		619			14,471			(46		)
Unrealized investment gains/(losses)	156		(224		)	(415		)	(598		)
Unrealized gains/(losses) on derivatives	1,384		(172		)	2,121			5,409
Total other comprehensive income/(loss), net of income taxes	5,284		25,264			(182,199		)	51,095
Comprehensive income/(loss)	$	101,461	$	113,955		$	86,650		$	294,965

See accompanying notes to condensed consolidated financial statements.

PALL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine Months Ended
	Apr 30, 2015			Apr 30, 2014
OPERATING ACTIVITIES
Net cash provided by operating activities	$	360,397		$	342,164
INVESTING ACTIVITIES
Capital expenditures	(39,330		)	(50,301		)
Acquisition of businesses, net of cash acquired	(9,382		)	(195,262		)
Purchases of retirement benefit assets	(51,305		)	(29,518		)
Proceeds from retirement benefit assets	54,935			36,020
Proceeds from sale of assets	2,213			5,618
Other	(13,420		)	(9,167		)
Net cash used by investing activities	(56,289		)	(242,610		)
FINANCING ACTIVITIES
Notes payable	299,859			134,992
Dividends paid	(95,321		)	(88,596		)
Repayments of short-term debt	—			(3,927		)
Repayments of long-term debt	(397		)	(545		)
Net proceeds from stock plans	12,850			13,814
Additions to deferred financing costs	(1,535		)	—
Purchase of treasury stock	(304,105		)	(250,000		)
Excess tax benefits from stock-based compensation arrangements	3,664			11,327
Other	(4,516		)	—
Net cash used by financing activities	(89,501		)	(182,935		)
Effect of exchange rate changes on cash and cash equivalents	(84,213		)	17,369
Net increase in cash and cash equivalents	130,394			(66,012		)
Cash and cash equivalents at beginning of year	964,110			936,886
Cash and cash equivalents at end of period	$	1,094,504		$	870,874
Supplemental Disclosures
Interest paid	$	14,782		$	13,068
Income taxes paid (net of refunds)	77,009			44,782

See accompanying notes to condensed consolidated financial statements.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

The condensed consolidated financial information of Pall Corporation and its subsidiaries (hereinafter collectively called the “Company”) included herein is unaudited. Such information reflects all adjustments of a normal recurring nature, which are, in the opinion of Company management, necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows as of the dates and for the periods presented herein. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2014 (“2014 Form 10-K”).

NOTE 2 – BALANCE SHEET DETAILS

The following tables provide details of selected balance sheet items:



	Apr 30, 2015			Jul 31, 2014
Accounts receivable:
Billed	$	486,155		$	556,928
Unbilled	74,873			72,681
Total	561,028			629,609
Less: Allowances for doubtful accounts	(13,733		)	(13,896		)
	$	547,295		$	615,713

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



	Apr 30, 2015		Jul 31, 2014
Inventory:
Raw materials and components	$	132,759	$	117,581
Work-in-process	95,630		112,824
Finished goods	157,605		174,473
	$	385,994	$	404,878



	Apr 30, 2015			Jul 31, 2014
Property, plant and equipment:
Property, plant and equipment	$	1,702,347		$	1,776,983
Less: Accumulated depreciation and amortization	(977,087		)	(971,656		)
	$	725,260		$	805,327

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

NOTE 3 – GOODWILL AND INTANGIBLE ASSETS

The Company completed its annual goodwill impairment test for all reporting units in the third quarter of fiscal year 2015 and determined that no impairment existed. In addition, the Company had no impairment of goodwill in the prior year. In connection with the annual goodwill impairment test, the Company estimates the fair value of its reporting units using a market approach employing Level 3 inputs as defined in the fair value hierarchy described in Note 11, Fair Value Measurements.

The following table presents changes in the carrying value of goodwill, allocated by reportable segment:



	Life Sciences			Industrial			Total
Balance at July 31, 2014	$	269,758		$	221,704		$	491,462
Acquisitions	9,112			2,617			11,729
Foreign currency translation / other	(20,154		)	(6,319		)	(26,473		)
Balance at April 30, 2015	$	258,716		$	218,002		$	476,718

Goodwill was primarily impacted by changes in the foreign exchange rates used to translate goodwill of foreign subsidiaries. Acquisitions for the Life Sciences segment are primarily related to the immaterial acquisition of Tarpon BioSystems (“Tarpon”) and to purchase price allocation adjustments for the acquisition of ATMI LifeSciences. Acquisitions for the Industrial segment are primarily related to a working capital adjustment for the acquisition of Filter Specialists, Inc.

Intangible assets consist of the following:



April 30, 2015	Gross		Accumulated Amortization		Net
Patents and unpatented technology	$	158,142	$	67,563	$	90,579
Customer-related intangibles	164,171		41,638		122,533
Trademarks	16,524		7,901		8,623
Other	3,509		2,603		906
	$	342,346	$	119,705	$	222,641

July 31, 2014	Gross		Accumulated Amortization		Net
Patents and unpatented technology	$	165,727	$	66,126	$	99,601
Customer-related intangibles	165,759		33,845		131,914
Trademarks	16,971		7,130		9,841
Other	3,647		2,580		1,067
	$	352,104	$	109,681	$	242,423

Intangible assets were primarily impacted by changes in the foreign exchange rates used to translate intangible assets of foreign subsidiaries. Intangibles were additionally impacted by the immaterial acquisition of Tarpon and the purchase of other customer-related intangibles.

Amortization expense for intangible assets for the three and nine months ended April 30, 2015 was $5,555 and $17,801, respectively. Amortization expense for intangible assets for the three and nine months ended April 30, 2014 was $5,399 and $14,778, respectively. Amortization expense is estimated to be approximately $5,624 for the remainder of fiscal year 2015, $22,370 in fiscal year 2016, $22,080 in fiscal year 2017, $21,946 in fiscal year 2018, $19,783 in fiscal year 2019, and $18,457 in fiscal year 2020.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

NOTE 4 – TREASURY STOCK

The following table highlights the share repurchase authorizations in effect during fiscal year 2015:



	Date of Authorization
	Jan 17, 2013			Jul 17, 2014			Oct 9, 2014		Total
Amount available for repurchases as of July 31, 2014	$	81,873		$	600,000		$	—	$	681,873
New authorizations	—			—			200,000		200,000
Utilized	(81,873		)	(222,232		)	—		(304,105		)
Amount available for repurchases as of April 30, 2015	$	—		$	377,768		$	200,000	$	577,768

In August 2014, the Company entered into an Accelerated Share Repurchase (“ASR”) agreement with a third-party financial institution to repurchase $300,000 of the Company’s common stock. This transaction was completed in the second quarter of fiscal year 2015. Under the agreement, the Company paid $300,000 to the financial institution. Upon completion of the transaction, the Company received a total of 3,461 shares with an average price per share of $86.67. In addition, during the three months ended January 31, 2015, the Company purchased 44 shares on the open market for a total cost of $4,105 and an average price per share of $94.26.

During the nine months ended April 30, 2015, 395 shares were issued under the Company’s stock-based compensation plans. At April 30, 2015, the Company held 21,222 treasury shares.

NOTE 5 – CONTINGENCIES AND COMMITMENTS

With respect to the matters described in Note 14, Contingencies and Commitments, to the Company’s consolidated financial statements included in the Company’s 2014 Form 10-K and below, the Company has assessed the ultimate resolution of these matters and has reflected appropriate contingent liabilities in the condensed consolidated financial statements as of April 30, 2015 and July 31, 2014.

The Company and its subsidiaries are subject to certain other legal actions that arise in the normal course of business. Other than those legal proceedings and claims discussed in the 2014 Form 10-K and this Note, the Company is not facing any other legal proceedings and claims that would individually or in the aggregate have a reasonably possible material adverse effect on its financial condition or operating results. As such, any reasonably possible loss or range of loss, other than those legal proceedings discussed in the 2014 Form 10-K and this Note, is immaterial. However, the results of legal proceedings cannot be predicted with certainty. If the Company failed to prevail in several of these legal matters in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.

Environmental Matters

The Company’s condensed consolidated balance sheet at April 30, 2015 includes liabilities for environmental matters of $17,434 which relate primarily to the environmental proceedings discussed in the 2014 Form 10-K and as updated in this Note. In the opinion of management, the Company is in substantial compliance with applicable environmental laws and its current accruals for environmental remediation are adequate. However, as regulatory standards under environmental laws are becoming increasingly stringent, there can be no assurance that future developments, additional information and experience gained will not cause the Company to incur material environmental liabilities or costs beyond those accrued in its condensed consolidated financial statements.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

NOTE 6 – RESTRUCTURING AND OTHER CHARGES, NET

The following tables summarize the restructuring and other charges (“ROTC”) recorded in the three and nine months ended April 30, 2015 and April 30, 2014:



	Three Months Ended Apr 30, 2015								Nine Months Ended Apr 30, 2015
	Restructuring (1)			Other Charges/(Gains) (2)		Total			Restructuring (1)			Other Charges/(Gains) (2)		Total
Severance benefits and other employment contract obligations	$	4,690		$	—	$	4,690		$	19,711		$	—	$	19,711
Professional fees and other costs, net of receipt of insurance claim payments	1,375			152		1,527			2,365			397		2,762
Impairment of assets	8,499			—		8,499			12,833			1,620		14,453
Reversal of excess restructuring reserves	(585		)	—		(585		)	(2,021		)	—		(2,021		)
	$	13,979		$	152	$	14,131		$	32,888		$	2,017	$	34,905
Cash	$	5,480		$	152	$	5,632		$	20,055		$	397	$	20,452
Non-cash	8,499			—		8,499			12,833			1,620		14,453
	$	13,979		$	152	$	14,131		$	32,888		$	2,017	$	34,905



	Three Months Ended Apr 30, 2014									Nine Months Ended Apr 30, 2014
	Restructuring (1)			Other Charges/(Gains) (2)			Total			Restructuring (1)			Other Charges/(Gains) (2)			Total
Severance benefits and other employment contract obligations	$	8,289		$	—		$	8,289		$	18,751		$	(402	)	$	18,349
Professional fees and other costs, net of receipt of insurance claim payments	567			1,498			2,065			2,704			3,693			6,397
Impairment of assets and gain on sale of assets, net	3,986			(1,640		)	2,346			3,986			(1,480		)	2,506
Environmental matters	—			—			—			—			4,440			4,440
Reversal of excess restructuring reserves	(1,158		)	—			(1,158		)	(1,782		)	—			(1,782		)
	$	11,684		$	(142	)	$	11,542		$	23,659		$	6,251		$	29,910
Cash	$	7,698		$	(142	)	$	7,556		$	19,673		$	6,091		$	25,764
Non-cash	3,986			—			3,986			3,986			160			4,146
	$	11,684		$	(142	)	$	11,542		$	23,659		$	6,251		$	29,910

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

(1) Restructuring:

In fiscal year 2012, the Company announced a multi-year strategic cost reduction initiative (“structural cost improvement initiative”). This initiative impacts both segments as well as the Corporate Services Group. The goal of this initiative is to properly position the Company’s cost structure globally to perform in the current economic environment without adversely impacting its growth or innovation potential.

Key components of the structural cost improvement initiative include:


▪	the strategic alignment of manufacturing, sales and R&D facilities to cost-effectively deliver high-quality products and superior service to the Company’s customers worldwide,


▪	creation of regional and global shared financial services centers for the handling of accounting transaction processing and other accounting functions,


▪	reorganization of sales functions, to more cost-efficiently deliver superior service to the Company’s customers globally, and


▪	reductions in headcount across all functional areas, enabled by efficiencies gained through the Company’s ERP systems, as well as in order to align to economic conditions.

Restructuring charges recorded in the three and nine months ended April 30, 2015 and April 30, 2014 primarily reflect the expenses incurred in connection with the Company’s structural cost improvement initiative as discussed above. In addition, restructuring charges recorded in the three and nine months ended April 30, 2015 include the impairment of assets related to a building held for sale. Restructuring charges recorded in the nine months ended April 30, 2015 include the impairment of assets related to the exit of an immaterial product line. Restructuring charges in the three and nine months ended April 30, 2014 include the impairment of assets related to the discontinuance of a specific manufacturing line due to excess capacity as a result of acquisitions.

(2) Other Charges/(Gains):

Severance benefits and other employment contract obligations: In the nine months ended April 30, 2014, the Company recorded adjustments related to certain employment contract obligations.

Professional fees and other: In the three months ended April 30, 2014, the Company recorded costs related to the settlement of a legal matter. In the three and nine months ended April 30, 2014, the Company recorded acquisition related legal and other professional fees.

Impairment of assets and gain on sales of assets, net: In the nine months ended April 30, 2015, the Company recorded an impairment related to a redundant software project. In the three months ended April 30, 2014, the Company recorded a gain on the sale of a building in Europe.

Environmental matters: In the nine months ended April 30, 2014, the Company increased its previously established environmental reserve related to a matter in Pinellas Park, Florida.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

The following table summarizes the activity related to restructuring liabilities recorded for the Company’s structural cost improvement initiative which began in fiscal year 2012:



	Severance			Other			Total
Original charge	$	61,852		$	3,448		$	65,300
Utilized	(27,365		)	(2,798		)	(30,163		)
Translation	(123		)	(47		)	(170		)
Balance at July 31, 2012	$	34,364		$	603		$	34,967
Additions	21,637			2,840			24,477
Utilized	(29,574		)	(1,936		)	(31,510		)
Reversal of excess reserves	(500		)	(57		)	(557		)
Translation	313			23			336
Balance at July 31, 2013	$	26,240		$	1,473		$	27,713
Additions	27,803			4,419			32,222
Utilized	(26,178		)	(4,596		)	(30,774		)
Reversal of excess reserves	(1,923		)	(107		)	(2,030		)
Translation	230			39			269
Balance at July 31, 2014	$	26,172		$	1,228		$	27,400
Additions	19,711			2,365			22,076
Utilized	(24,914		)	(2,084		)	(26,998		)
Reversal of excess reserves	(2,000		)	(21		)	(2,021		)
Translation	(2,194		)	(73		)	(2,267		)
Balance at April 30, 2015	$	16,775		$	1,415		$	18,190

NOTE 7 – INCOME TAXES

The Company’s effective tax rates for the nine months ended April 30, 2015 and April 30, 2014 were 21.7% and 20.1%, respectively. For the nine months ended April 30, 2015, the effective tax rate varied from the U.S. federal statutory rate primarily due to the benefits of foreign operations and a net tax benefit of $2,880 from the resolution of a U.S. tax audit, partly offset by the establishment of deferred tax liabilities for the repatriation of foreign earnings. For the nine months ended April 30, 2014, the effective tax rate varied from the U.S. federal statutory rate primarily due to the benefits of foreign operations and a net tax benefit of $10,054 from the resolution of tax audits.

During the three months ended April 30, 2015, the Company reached a final agreement with the Internal Revenue Service (“IRS”) resolving the outstanding tax positions for fiscal years ended 2009 through 2011. As a result, the Company reversed $4,402 of previously recorded liabilities related to tax and penalties, and $4,170 related to interest ($2,648 net of income tax cost) that were accrued but not assessed as part of the IRS agreement.

At April 30, 2015 and July 31, 2014, the Company had gross unrecognized income tax benefits of $125,781 and $202,564, respectively. During the nine months ended April 30, 2015, the amount of gross unrecognized tax benefits decreased by $76,783, primarily due to the settlement of the IRS income tax examinations for fiscal years ended 2009 through 2011 and the impact of foreign currency translation, partially offset by tax positions taken during the current period. As of April 30, 2015, the amount of net unrecognized income tax benefits that, if recognized, would impact the effective tax rate was $104,594.

At April 30, 2015 and July 31, 2014, the Company had liabilities of $8,717 and $14,556, respectively, for potential payment of interest and penalties.

Due to the potential resolution of tax examinations and the expiration of various statutes of limitation, the Company believes that it is reasonably possible that the gross amount of unrecognized tax benefits may decrease within the next twelve months by a range of zero to $50,412.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

NOTE 8 – COMPONENTS OF NET PERIODIC PENSION COST

Net periodic pension benefit cost for the Company’s defined benefit pension plans includes the following components:



	Three Months Ended
	U.S. Plans						Foreign Plans						Total
	Apr 30, 2015			Apr 30, 2014			Apr 30, 2015			Apr 30, 2014			Apr 30, 2015			Apr 30, 2014
Service cost	$	2,589		$	2,169		$	849		$	1,005		$	3,438		$	3,174
Interest cost	2,895			3,028			3,615			4,398			6,510			7,426
Expected return on plan assets	(2,483		)	(2,325		)	(3,525		)	(3,611		)	(6,008		)	(5,936		)
Amortization of prior service cost/(credit)	365			395			—			(10		)	365			385
Amortization of actuarial loss	1,018			1,344			1,233			1,450			2,251			2,794
Net periodic benefit cost	$	4,384		$	4,611		$	2,172		$	3,232		$	6,556		$	7,843

	Nine Months Ended
	U.S. Plans						Foreign Plans						Total
	Apr 30, 2015			Apr 30, 2014			Apr 30, 2015			Apr 30, 2014			Apr 30, 2015			Apr 30, 2014
Service cost	$	7,767		$	6,509		$	2,687		$	2,998		$	10,454		$	9,507
Interest cost	8,687			9,083			11,374			12,923			20,061			22,006
Expected return on plan assets	(7,450		)	(6,974		)	(11,009		)	(10,591		)	(18,459		)	(17,565		)
Amortization of prior service cost/(credit)	1,094			1,185			2			(31		)	1,096			1,154
Amortization of actuarial loss	3,056			4,033			3,906			4,261			6,962			8,294
Net periodic benefit cost	$	13,154		$	13,836		$	6,960		$	9,560		$	20,114		$	23,396

NOTE 9 – STOCK-BASED PAYMENT

The Company currently has three stock-based employee and director compensation plans — the Pall Corporation 2012 Stock Compensation Plan, under which the Company may grant stock options, restricted shares, restricted units, performance shares, and performance units; the Management Stock Purchase Plan (“MSPP”); and the Employee Stock Purchase Plan (“ESPP”). These three plans are more fully described in Note 15, Common Stock, to the consolidated financial statements included in the 2014 Form 10-K.

The detailed components of stock-based compensation expense recorded in the condensed consolidated statements of earnings for the three and nine months ended April 30, 2015 and April 30, 2014 are reflected in the table below:



	Three Months Ended				Nine Months Ended
	Apr 30, 2015		Apr 30, 2014		Apr 30, 2015		Apr 30, 2014
Restricted stock units	$	5,969	$	5,064	$	19,292	$	15,511
Stock options	2,340		2,069		6,243		5,555
MSPP	795		961		3,314		2,125
ESPP	263		273		800		771
	$	9,367	$	8,367	$	29,649	$	23,962

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

NOTE 10 – EARNINGS PER SHARE

The condensed consolidated statements of earnings present basic and diluted earnings per share. Basic earnings per share is determined by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share considers the potential effect of dilution on basic earnings per share assuming potentially dilutive shares that meet certain criteria, such as those issuable upon exercise of stock options, were outstanding. The treasury stock method reduces the dilutive effect of potentially dilutive securities as it assumes that any cash proceeds (from the issuance of potentially dilutive securities) are used to buy back shares at the average share price during the period. Equity awards aggregating 445 and 496 were not included in the computation of diluted shares for the three months ended April 30, 2015 and April 30, 2014, respectively, because their effect would have been antidilutive. For the nine months ended April 30, 2015 and April 30, 2014, 345 and 524 antidilutive shares, respectively, were excluded. The following is a reconciliation between basic shares outstanding and diluted shares outstanding:



	Three Months Ended		Nine Months Ended
	Apr 30, 2015	Apr 30, 2014	Apr 30, 2015	Apr 30, 2014
Basic shares outstanding	107,162	110,183	107,502	110,946
Effect of stock plans	1,395	1,283	1,310	1,269
Diluted shares outstanding	108,557	111,466	108,812	112,215

NOTE 11 – FAIR VALUE MEASUREMENTS

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

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


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

▪

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


▪	Level 3: Use of inputs that are unobservable.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

The following table presents, for each of these hierarchy levels, the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of April 30, 2015:



	Fair Value Measurements
	As of Apr 30, 2015		Level 1		Level 2		Level 3
Financial Assets Carried at Fair Value
Money market funds	$	4,780	$	4,780	$	—	$	—
Available-for-sale securities:
Equity securities	188		188		—		—
Debt securities:
Corporate	28,200		—		28,200		—
U.S. Treasury	13,002		—		13,002		—
Federal agency	14,604		—		14,604		—
Mortgage-backed	5,977		—		5,977		—
Trading securities	1,528		1,528		—		—
Derivative financial instruments:
Foreign exchange forward contracts	11,175		—		11,175		—
Financial Liabilities Carried at Fair Value
Derivative financial instruments:
Foreign exchange forward contracts	1,979		—		1,979		—

The following table presents, for each of these hierarchy levels, the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of July 31, 2014:



	Fair Value Measurements
	As of Jul 31, 2014		Level 1		Level 2		Level 3
Financial Assets Carried at Fair Value
Money market funds	$	4,860	$	4,860	$	—	$	—
Available-for-sale securities:
Equity securities	4,748		4,748		—		—
Debt securities:
Corporate	30,243		—		30,243		—
U.S. Treasury	9,724		—		9,724		—
Federal agency	13,719		—		13,719		—
Mortgage-backed	11,405		—		11,405		—
Trading securities	819		819		—		—
Derivative financial instruments:
Foreign exchange forward contracts	5,931		—		5,931		—
Financial Liabilities Carried at Fair Value
Derivative financial instruments:
Foreign exchange forward contracts	1,726		—		1,726		—

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

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

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

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

NOTE 12 – INVESTMENT SECURITIES

The following is a summary of the Company’s available-for-sale investment securities by category which are classified within other non-current assets in the Company’s condensed consolidated balance sheets. Contractual maturity dates of debt securities held by the benefits protection trusts at April 30, 2015 range from 2015 to 2046.



April 30, 2015	Cost/Amortized Cost Basis		Fair Value		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Net Unrealized Holding Gains/(Losses)
Equity securities	$	185	$	188	$	3	$	—		$	3
Debt securities:
Corporate	26,932		28,200		1,268		—			1,268
U.S. Treasury	12,611		13,002		391		—			391
Federal agency	13,674		14,604		930		—			930
Mortgage-backed	5,888		5,977		89		—			89
	$	59,290	$	61,971	$	2,681	$	—		$	2,681

July 31, 2014	Cost/Amortized Cost Basis		Fair Value		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Net Unrealized Holding Gains/(Losses)
Equity securities	$	4,160	$	4,748	$	588	$	—		$	588
Debt securities:
Corporate	28,987		30,243		1,259		(3		)	1,256
U.S. Treasury	9,478		9,724		246		—			246
Federal agency	12,778		13,719		941		—			941
Mortgage-backed	11,219		11,405		190		(4		)	186
	$	66,622	$	69,839	$	3,224	$	(7	)	$	3,217

As of April 30, 2015, the Company had no gross unrealized losses related to its available-for-sale investments. The following table shows the gross unrealized losses and fair value of the Company’s available-for-sale investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of July 31, 2014:



July 31, 2014	Less Than 12 Months					12 Months or Greater				Total
	Fair Value		Gross Unrealized Holding Losses			Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses
Debt securities:
Corporate	$	3,384	$	(3	)	$	—	$	—	$	3,384	$	(3	)
Mortgage-backed	1,919		(4		)	—		—		1,919		(4		)
	$	5,303	$	(7	)	$	—	$	—	$	5,303	$	(7	)

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

The following table shows the proceeds and gross gains and losses from the sale of available-for-sale and trading investments primarily related to the Company's benefits protection trust for the three and nine months ended April 30, 2015 and April 30, 2014:



	Three Months Ended				Nine Months Ended
	Apr 30, 2015		Apr 30, 2014		Apr 30, 2015		Apr 30, 2014
Proceeds from sales	$	12,489	$	4,915	$	46,238	$	7,973
Realized gross gains on sales	166		93		739		177
Realized gross losses on sales	27		6		39		106

The following is a summary of the Company’s trading securities by category which are classified within other non-current assets in the Company’s condensed consolidated balance sheets.



	Apr 30, 2015		Jul 31, 2014
Equity securities	$	1,528	$	819
Total trading securities	$	1,528	$	819

The following table shows the net gains and losses recognized on trading securities for the three and nine months ended April 30, 2015 and April 30, 2014:



	Three Months Ended						Nine Months Ended
	Apr 30, 2015			Apr 30, 2014			Apr 30, 2015			Apr 30, 2014
Gains/(losses), net recognized for securities held	$	52		$	(1	)	$	20		$	22
Gains/(losses), net recognized for securities sold	(6		)	—			(5		)	—
Total gains/(losses), net recognized	$	46		$	(1	)	$	15		$	22

NOTE 13 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company manages certain financial exposures through a risk management program that includes the use of foreign exchange derivative financial instruments. Derivatives are executed with counterparties with a minimum credit rating of “A” by Standard & Poors and “A2” by Moody’s Investor Services, in accordance with the Company’s policies. The Company does not utilize derivative instruments for trading or speculative purposes. As of April 30, 2015, the Company had foreign currency forward contracts outstanding with notional amounts aggregating $409,098, whose fair values were a net asset of $9,196.

Foreign Exchange Related

a. Derivatives Not Designated as Hedging Instruments

The risk management objective of holding foreign exchange derivatives is to mitigate volatility to earnings and cash flows due to changes in foreign exchange rates. The Company and its subsidiaries conduct transactions in currencies other than their functional currencies. These transactions include non-functional intercompany and external sales as well as intercompany and external purchases. The Company uses foreign exchange forward contracts, matching the notional amounts and durations of the receivables and payables resulting from the aforementioned underlying foreign currency transactions, to mitigate the exposure to earnings and cash flows caused by the changes in fair value of these receivables and payables from fluctuating foreign exchange rates. The notional amount of foreign currency forward contracts not designated as hedging instruments entered into during the three and nine months ended April 30, 2015 was $558,312 and $1,945,416, respectively. The notional amount of foreign currency forward contracts outstanding that were not designated as hedging instruments as of April 30, 2015 was $322,173.

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

b. Cash Flow Hedges

The Company uses foreign exchange forward contracts for cash flow hedging on its future transactional exposure to the Euro due to changes in market rates to exchange Euros for British Pounds. The hedges cover a British subsidiary (British Pound functional) with Euro revenues and a Swiss subsidiary (Euro functional) with British 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 a portion of the British Pound equivalent amount of Euro sales for the British subsidiary and a portion of the Euro equivalent amount of British Pound expenses for the Swiss subsidiary at the agreed upon exchange rates in the foreign exchange forward contracts. The notional amount of foreign currency forward contracts designated as hedging instruments entered into during the three and nine months ended April 30, 2015 was $25,000 and $64,404, respectively. The notional amount of foreign currency forward contracts outstanding designated as hedging instruments as of April 30, 2015 was $86,925 and covers certain monthly transactional exposures through May 2016.

c. Net Investment Hedges

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

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



April 30, 2015	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign exchange forward contracts	Other current assets	$	6,584	Other current liabilities	$	12
Derivatives not designated as hedging instruments
Foreign exchange forward contracts	Other current assets	$	4,591	Other current liabilities	$	1,967
Total derivatives		$	11,175		$	1,979
Nonderivative instruments designated as hedging instruments
Net investment hedge				Current portion of Long-term debt	$	75,627



July 31, 2014	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign exchange forward contracts	Other current assets	$	4,755	Other current liabilities	$	3
Derivatives not designated as hedging instruments
Foreign exchange forward contracts	Other current assets	$	1,176	Other current liabilities	$	1,723
Total derivatives		$	5,931		$	1,726
Nonderivative instruments designated as hedging instruments
Net investment hedge				Current portion of Long-term debt	$	87,570

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

The amounts of the gains and losses related to the Company’s derivative financial instruments designated as hedging instruments for the three and nine months ended April 30, 2015 and April 30, 2014 are presented as follows:



Derivatives in cash flow hedging relationships	Amount of Gain/(Loss) Recognized in OCI on Derivatives (Effective Portion)				Location of Gain/(Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) ^(a)
	Three Months Ended					Three Months Ended
	Apr 30, 2015		Apr 30, 2014			Apr 30, 2015		Apr 30, 2014
Foreign exchange forward contracts	$	3,270	$	305	Net sales	$	951	$	440
					Cost of sales	814		171
Total derivatives	$	3,270	$	305		$	1,765	$	611

Derivatives in cash flow hedging relationships	Amount of Gain/(Loss) Recognized in OCI on Derivatives (Effective Portion)				Location of Gain/(Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) ^(a)
	Nine Months Ended					Nine Months Ended
	Apr 30, 2015		Apr 30, 2014			Apr 30, 2015		Apr 30, 2014
Foreign exchange forward contracts	$	7,667	$	5,615	Net sales	$	2,071	$	552
					Cost of sales	2,752		(695		)
Total derivatives	$	7,667	$	5,615		$	4,823	$	(143	)


(a)	There were no gains or losses recognized in earnings related to the ineffective portion of the hedging relationship or related to the amount excluded from the assessment of hedge effectiveness for the three and nine months ended April 30, 2015 and April 30, 2014.

The amounts of the gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments for the three and nine months ended April 30, 2015 and April 30, 2014 are presented as follows:



Derivatives not designated as hedging relationships	Location of Gain/(Loss) Recognized in Earnings on Derivatives	Amount of Gain/(Loss) Recognized in Earnings on Derivatives
		Three Months Ended						Nine Months Ended
		Apr 30, 2015			Apr 30, 2014			Apr 30, 2015			Apr 30, 2014
Foreign exchange forward contracts	Selling, general and administrative expenses	$	(346	)	$	(607	)	$	(10,766	)	$	(2,950	)

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

The amounts of the gains and losses related to the Company’s nonderivative financial instruments designated as hedging instruments for the three and nine months ended April 30, 2015 and April 30, 2014 are presented as follows:



Nonderivatives designated as hedging relationships	Amount of Gain/(Loss) Recognized in OCI on Derivatives (Effective Portion)					Location of Gain/(Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) ^(b)
	Three Months Ended						Three Months Ended
	Apr 30, 2015		Apr 30, 2014				Apr 30, 2015		Apr 30, 2014
Net investment hedge	$	459	$	63		N/A	$	—	$	—

Nonderivatives designated as hedging relationships	Amount of Gain/(Loss) Recognized in OCI on Derivatives (Effective Portion)					Location of Gain/(Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) ^(b)
	Nine Months Ended						Nine Months Ended
	Apr 30, 2015		Apr 30, 2014				Apr 30, 2015		Apr 30, 2014
Net investment hedge	$	11,943	$	(4,113	)	N/A	$	—	$	—


(b)	There were no gains or losses recognized in earnings related to the ineffective portion of the hedging relationship or related to the amount excluded from the assessment of hedge effectiveness for the three and nine months ended April 30, 2015 and April 30, 2014.

NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

Changes in accumulated other comprehensive income/(loss) by component are presented below:



	Foreign Currency Translation			Defined Benefit Pension Plan			Unrealized Investment Gains/(Losses)			Unrealized Gains/(Losses) on Derivatives			Accumulated Other Comprehensive Income/(Loss)
Balance at July 31, 2014	$	98,689		$	(121,280	)	$	2,880		$	4,790		$	(14,921	)
Other comprehensive income/(loss) before reclassifications	(198,376		)	—			(34		)	6,484			(191,926		)
Amounts reclassified from accumulated other comprehensive income/(loss)	—			5,653			(381		)	(4,363		)	909
Foreign exchange adjustments and other	—			8,818			—			—			8,818
Balance at April 30, 2015	$	(99,687	)	$	(106,809	)	$	2,465		$	6,911		$	(197,120	)

	Foreign Currency Translation			Defined Benefit Pension Plan			Unrealized Investment Gains/(Losses)			Unrealized Gains/(Losses) on Derivatives			Accumulated Other Comprehensive Income/(Loss)
Balance at July 31, 2013	$	84,598		$	(125,211	)	$	2,123		$	(2,302	)	$	(40,792	)
Other comprehensive income/(loss) before reclassifications	46,330			—			(813		)	5,154			50,671
Amounts reclassified from accumulated other comprehensive income/(loss)	—			6,551			215			255			7,021
Foreign exchange adjustments and other	—			(6,597		)	—			—			(6,597		)
Balance at April 30, 2014	$	130,928		$	(125,257	)	$	1,525		$	3,107		$	10,303

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(Unaudited)

Reclassifications out of accumulated other comprehensive income/(loss) are presented below: