Document VG1M5GEjrxO4KBb4X8M8ynJYq

Pall offers users of process fluids in all parts of the world the broadest range of filter media available for solving fluid clarification problems. Pictured here are Pall sterilizing filters providing bacteria-free water for pharmaceuticals manufactured by Dista Products Ltd., Liverpool, England. Cover Story: The cover design symbolizes our leadership in fine filtration. In most cases Pall filters are required to remove particles ranging in size from fractions of a micron to 40 microns. A 40 micron particle is about the smallest size which can be seen with the unaided eye. We are now active in four major markets: Process and Electric Power; Aerospace; Fluid Power and Biomedical. Modern pro duction processses and equipment utilizing closer tolerances and using new extremes of temperatures, pres sures and corrosive conditions, and an increasing awareness of the need to protect people and products from bacteria and other extremely fine contaminants create a demand for sophisticated filters of the kind we produce. C ontents page Fiscal Highlights 1 Letter to Stockholders 2-4 A Retrospective Note 5-6 A Prospective Note 7 Markets 8-15 Ten Year Financial Summary 16 Charts: Sales by Market and Product; Sales and Earnings; Book Value; Earnings Per Share 16-17 Consolidated Statements of Earnings 18 Consolidated Statements of Capital in Excess of Par Value 18 Consolidated Statements of Retained Earnings 19 Consolidated Statements of Changes in Financial Position 19 Consolidated Balance Sheets 20 Notes to Consolidated Financial Statements 20 Auditor's Opinion 24 Directors and Officers Inside Back Cover Fiscal H ighlights for the years ended July 31 Consolidated Net S a le s ............................................ Earnings before Taxes on In co m e......................... Taxes on In c o m e ...................................................... Earnings ..................................................................... Earnings per Share--P rim ary................................. Earnings per Share--Fully D ilu te d ......................... Depreciation and Amortization Deducted from Earnings..................................... Cash Provided from Operations............................. Total Assets at End of Y e a r ...................................... Gross Investment in Plant and Equipment............ Working C a p ita l........................................................ Stockholders' E q u ity ................................................ Average Shares Outstanding................................... Equity per S h a re ........................................................ 1972 $26,270,979 $ 621,561 $ 266,600 $ 354,961 $ 0.32 $ 0.32 $ 1,054,182 $ 1,409,143 $28,888,053 $15,462,634 $10,881,041 $12,504,432 1,104,388 $ 11.32 Hear Stockholder We are pleased to report that Fiscal 1973 operations resulted in record sales, profits, and earnings per share. Fiscal highlights are given on the pre ceding page. For those of you not familiar with our history, a retrospective note else where in this report will recount perti nent facts. Suffice it to say here that we have turned around after a difficult period. We have accomplished this by re directing our highly technological com pany from excessive aerospace orientation and dependence on custom engineering of porous metal filters for limited markets to serving new areas with a higher probability of long-term growth. We chose as our main direction the development of proprietary lines of dis posable filters suitably packaged in 2 standard form for sale in large markets. Using the sophisticated fluid clarifica tion technology available within Pall, we have now successfully developed lines that represent a significant im provement over filters previously of fered to each of the four markets to which our sales are directed. As a result, growth of our disposable filter lines has been very good. To gether with appurtenant hardware, dis posable product line sales amounted to $16,000,000 or about 50% of sales in 1973 compared to $11,100,000 or 42% of sales in 1972. Although the dis posable filter is immune neither to the vicissitudes of government whims and business cycles nor to technological obsolescence, it should be noted that once a disposable filter use is estab lished the long-term probability of spares or replacements being used is excellent. Accordingly, this change in our product mix has been a noteworthy achievement and a strong impetus to ward future growth. We are now active in four major mar kets: Process and Electric Power; Aerospace; Fluid Power; and Biomedi cal. It is significant that in 1973 dispos able filters constituted our largest product line in each of these. Our place in these markets is dis cussed in other sections of this report. We will just note here that another im portant accomplishment of the recent past has been the development of strong marketing organizations. The most recent is in the hospital market, in which we just began to set up broad distribution early in fiscal 1973. The strides made in our disposable lines were accompanied in 1973 by " eacn o- :>u: m arkets the principal p iO d u c t s vve se ii a re sophisticated, '. n r d isposable filters. Once a diso o s a b i c niter use is established the long-term p ro b a b ilit y of spares or m p ia c e rn c n is be in g used is excellent. 4/e expe, : o u r p ro fit a b ilit y to increase <d i s p o s a D i e s g r o w a n d as o u r ovestnen; m their m anufacturin g and m a rk e tin g pays of: Dall is also a leader in porous metal cleariable filters, which are used throughout the world in applications ranging from catalyst recovery in chemical processing to protection of the environment from radioactive par ticles escaping from nuclear power plants. growth in our other two major lines: porous metal filters and fluid clarifica tion equipment. Particularly in the process and power markets--as a re sult of construction commitments on power plants, petroleum refineries and chemical plants--prospects are good for continued progress in the next few years, despite recession or adverse business cycle conditions. Our efficiency also improved in 1973. Sales averaged $28,000 per employee in 1973 compared to $25,000 per em ployee in 1972. We also provided against the threat of tight money by entering into a term loan with Franklin National Bank and First National City Bank, establishing adequate credit lines to finance our prospective growth over the next few years. Prospects for next year are good for a ten percent growth in sales, as you will see in the table on page 4. Assum ing this sales increase, and good ex pectations for continued efficiency and favorable product mix, such a ten per cent increase is likely to result in a higher percentage increase in profit. An exam ination of these figures shows that, in view of a good opening backlog, only a modest increase over last year's total bookings would result in the achieving of our 1974 sales fore cast. There are certain hazards ahead--as appears inevitable when one considers the turmoil of continuing inflation, high interest rates, material shortages, in ternational trade restrictions, and un successful governmental manipulation of the economy of almost every major country. The greatest short-term un- 3 David B. Pall, Chairman Abraham Krasnoff, President Sales for Fiscal Years ended July 31 (000's omitted) Continuing Lines 1969 ACTUAL SALES 1970 1971 1972 1973 Fore casted Sales 1974 Backlog at Beginning 1974 Aerospace Process & Electric Power* Biomedical Fluid Power Total Continuing Lines Discontinued Lines TOTAL $11,100 $9,000 $7,900 $9,300 $11,000 $11,200 $6,150 10,600 100 1,000 11,900 600 2,300 12,800 400 2,000 13,350 1,000 2,500 15,400 1,500 3,850 16,800 2,000 4,900 5,350 400 1,500 22,800 23,800 23,100 26,150 31,750 34,900 13,400 3,400 2,900 1,400 100 $26,200 $26,700 $24,500 $26,250 $31,750 $34,900 $13,400 'Marine market sales have been included with the major product line from which they were sold. They were previously included with Process & Electric Power. certainty regarding our earnings at the time of the writing of this report is the effect of economic controls in the United States and in the United King dom. However, our marketing is strong, our products are known for excellence, and we are established in a great and growing number of diverse applica tions, a substantial number of wbjch use our p ro p rietary disposable products. On the whole, over the term of the next few years, we see good prospects for continuing progress in sales and earnings based on leadership in fine filtration. Very truly yours, For comparison: Aerospace Process & Electric Power Biomedical Fluid Power Backlog at Beginning of 1973 $ 6,250 3,950 400 1,300 $11,900 Orders Booked in 1973 $10,900 16,800 1,500 4,050 $33,250 David B. Pall, Chairman Abraham Krasnoff, President 4 There are really two different filter in dustries. The one in which we are not engaged deals with what is called "bulk solids collection"--where large amounts of solids are collected from slurries. The one in which we are en gaged is known as "fluid clarification" --where we remove relatively small amounts of fine particles from rela tively large amounts of fluids (liquids or gases). The fine particles we remove may be products such as penicillin crystals which are being collected in ourfilters; they may be expensive or noxious cata lysts which our filters keep from going up the flue; they may be abrasive parti cles which our products remove from aircraft and industrial equipment sys tems to protect function and reduce wear; or they may be bacteria which are removed by our filters to assure sterility in pharmaceuticals, or damag ing microemboli to be removed by our blood filters during open-heart surgery or when transfusions are given. Most of our filters remove particles in the microscopic range. As a guide, the smallest pencil dot you can see with the naked eye is about 40 microns in diameter. Our filters generally range from this pore size which, for example, removes damaging microemboli from blood, down to a pore size of 0.2 mi crons (or one two-hundredth the size of a visible particle) the size needed to remove the smallest bacteria from pharmaceuticals. From the time of our inception in 1946, through 1964, Pall Corporation had an extended period of steady growth based mainly on the custom de sign of fine porous metal filters. These 5 were designed for aerospace and to a smaller extent for special chemical processing applications, in the micro scopic particle removal range. Following a drastic decline in the Aerospace business, we spent a num ber of years working on diversification and on new directions. Diversification attempts in a number of directions out side the field of fluid clarification proved not to be fruitful. As a result, a number of lines were disposed of. Dur ing this period, although earnings were low, we suffered no operating losses. We kept our balance sheet healthy and --what is of most importance--we did succeed in defining a new direction and in developing a new basis for growth. We defined our task as turning from the custom design of metal filters for limited markets to the development of proprietary disposable filter media and the design of these media into standard packages for distribution in large mar kets. Concomitant with this was the need to develop marketing strength to accompany our technical strength. All of this has now been substantially accomplished. The period of transition began in 1969 when, for the first time since 1957, the year we became a pub lic company, sales to the Aerospace industry were less than 50% of our total. Also in 1969, disposable filters and their appurtenances became a sig nificant part of our business--reaching 25% of sales. We now have what we believe to be the broadest range of fine disposable filters in industry, accompanied by an outstanding line of housings and ac cessory devices. 6 Growth of Disposable Filters (Including Appurtenant Hardware) 1969 1970 1971 1972 1973 NET SALES $6,500,000 7,100,000 8,500,000 11,100,000 16,000,000 In addition, we have maintained our historic position as a leader in porous metal filtration and in industrial air dry ing equipment. We are now actively engaged in four broad markets--each of which is de scribed in more detail in a following section of this report. Our traditional markets are in Aero space and in Process & Electrical Power. A major reorientation of our marketing and distribution to these in dustries was accomplished during the period in which our new emphasis on standard packaging and on proprietary disposable filters became established. In 1968 we organized separate mar keting for the industrial and mobile equipment filter market in a new In dustrial Hydraulics Division. We have made excellent progress since then as the chart below shows. When we first found opportunities in the Biomedical field we were preoc cupied with marketing problems in three other markets. Accordingly -we entered this new field by marketing through others for a two year period. In 1971 we started limited hospital marketing of our own, under our new Biomedical Products Division. Sales were $400,000 in 1971, $1,000,000 in 1972 and $1,500,000 in 1973. The in crea s e in 1973 cam e p rin c ip a lly through our own distributor network, which we began to organize only after the fiscal year began and which will be substantially completed in fiscal 1974. We have found that working too closely with major hospital supply companies soon becomes counter pro ductive. Product introduction becomes bogged down in the many tiers and departments of the giants; essential technical training of their sales organi zation on an outsider's product is ex tremely difficult; discounts required by such companies are far higher than any other cost of distribution; and there is always the tendency of such com panies to want to manufacture prod ucts themselves as soon as they believe they have learned enough to do so. % Accordingly it is our plan to curtail or eliminate exclusive arrangements where possible and to introduce our forthcoming new products through our own distribution, as we have already succeeded in doing with our Ultipor blood transfusion filter. A good deal has been accomplished in the past few years. We have created a disposable filter business in four mar kets. We are well established in North America and Western Europe. We have good and constantly improving distri bution in Japan, and marketing activity in early stages in Eastern Europe. We can expect our profitability to in crease as disposables grow and as our investment in manufacturing and mar keting pays off. Our research and development con tinues to be active and productive, and we see significant filter developments ahead. As the letter from our Chairman and President noted, we see good long term prospects for growth in sales and earnings. 7 MARKETS Companies processing fluids and gen erating power encompass a broad spectrum of industries, in all of which our products have at least some poten tial application. Almost half our busi ness was in this category in fiscal 1973. We expect to continue to increase our volume as our product line broadens, and as an increasing concern with product and atmospheric purity grows in many fields. Chemical manufacturers, petroleum extractors, drug producers, plastics makers, food and beverage proces sors, steel mills and electronic com ponent manufacturers all use our filters and fluid purifiers. Applications range from providing bacteriologically sterile air and water for pharmaceutical use to removing ultrafine particles from molten plastics in the manufacture of high quality film. American, Canadian and British-made nuclear power gener ating plants--which will increase in use substantially during the next decadeall use Pall filters to prevent radioac tive contaminants from escaping in the liquids and gases which emanate from the plants. Our new family of AB (absolute bac teria) disposable filters will help our growth. More than two years ago we recognized that the pharmaceutical industry and others would have serious need for a series of large flow capacity disposable cartridges, free of asbestos, capable of in-place steam sterilization, compatible with a wide range of fluids and capable of absolute retention rat ings down to 0.2 microns. The 0.2 micron retention size is re quired by the pharmaceutical industry to remove the smallest of bacteria from 8 liquids in order to sterilize fluids with out heat. Until now they were only able to do this by using asbestos which is now suspect as a carcinogen, or by using expensive and delicate mem branes or ceramics. Our Ultipor 0.2 micron filters for liquid sterilization just recently reached the market. Applica tions are growing rapidly, as is the list of important users. Apart from filters, our next most im portant process industry line, consti tuting almost one-third of our process industry business, consists of the world's leading line of desiccant air dryers. In the United States and Europe this line appears ready to enter a new period of growth as a result of the con tinuing construction of new power plants, petroleum refineries and chem ical plants. This air dryer line is also doing well in Europe--and more re cently in Japan, as a result of the changes in monetary values. Changes have been proposed in U.S. federal regulations which will require nuclear power plants to further restrict radioactive gas waste release to the environment. Four different types of treatment systems for removing radio active xenon and krypton are now available, each of which requires a desiccant dryer. To the best of our knowledge we are the only dryer man ufacturer with nuclear code vessel manufacturing approval, which places us in an excellent position to realize this potentially large use of dryers (about $50,000 to $150,000 per plant). These applications are in addition to the filters used to prevent radioactive particles from escaping the plants. As a result of the energy crisis there will be more expenditures for breeder reactors, synthetic natural gas and coal gasification plants, and refineries (in addition to more nuclear power plants). In each of these, all of our process fluid purification products--disposable filters, dryers and metal filters--find applications. Our distribution is well developed in our "home" markets in North America and Western Europe. And, as you may know, we have more recently been penetrating the Eastern European Mar ket, particularly with disposable cart ridges. This trading area adds appreciably to our potential. Acceptance of our proprietary dis posable filter line in Japan is very good. Also, as indicated earlier, the devaluation of the dollar and revalua tion of the yen have made our dryer line highly competitive with Japanese equipment. Our process equipment exports to Japan increased from about $500,000 in 1972 to about $1,000,000 in 1973. We are leaders in the process mar ket in the purification, by both filtration and drying, of compressed air and other gases. We are also a leader in liquid purification in the fine filtration range of from 10 microns down to ster ilizing filter grades. Our new sub micron liquid sterilizing Ultipor AB filter line has advanced us in this new field. We see the opportunity for a sub stantially increased marketfor our ster ilizing filters over the next few years. Overall, we look for an extended period of growth in our process mar kets--particularly with disposable fil ters, which now constitute about 50% of this business. 9 ''i 10 MARKETS Aerospace We have long been the leading supplier of fine hydraulic oil filters for aircraft, first with metal filters and more re cently with disposable filters. In the past year and a half, dispos able filters have been in use in com mercial and military aircraft around the world. This has led to a recovery in our Aerospace business. In addition, over the past several years we have had extensive test programs on the use of disposable lube oil filters to replace historically used metal strainers on jet engines. This business has now started to take hold. As a result, we believe we have about doubled the market poten tial for disposable filters in the aircraft industry. The substantial increase in Aero space sales in 1973 is attributable to several factors: 1. Retrofits and new business in dis posable filters have increased. About 75% of our aircraft business is now in filters and 60% of the filters are now in our disposable line. 2. Conversion of the engine metal filter business to disposables has acceler ated, along with the use of our CentrisepTMair cleaner in some sys tems. 3. The aircraft business worldwide has generally made a modest improve ment. 4.4ast, but not least, we have been getting a substantial share of avail able new business. When engineering competence and reliability predominate over cheap in itial prices, we generally outstrip the field. This has been true in a number of recent programs. However, there is an equal tendency in the industry to compromise specifications to encour age price competition, even at the ex pense of future operating costs. This creates difficult competitive conditions in parts of the market. Our major Aerospace filter manufac turing facility was completely relocated from New York to Florida about a year ago. It is now fully operational and con tributing to earnings. Further improve ments in efficiency are continuing to be realized. As a result, our ability to serve the industry has been enhanced, as has our competitive stance and our profitability. We have changed the nature of our aircraft business, as we have the nature of the whole Company's business, to substantial orientation toward dispos able filters. We expect continued mod est growth in this business over the next few years, with less dependence on the U.S. military--as our foreign and commercial business grows. We are also looking for new direc tions in which to apply our excellent technology in Aerospace fluid clari fication. This includes new applica tions of our Centrisep air cleaners, which are used throughout the world to protect helicopter engines from in gested dirt. One such new--albeit lo n g -te rm direction is in the use of Centrisep and certain of our filters on gas turbine engines used to power trucks and buses, and other ground and marine equipment. We are actively at work with Ford, General Motors and British Leyland, among others,.on such pro grams; but it is too early to predict the probable degree of success that either they or we will have. MARKETS Our principal products in the industrial fluid power market are a line of filters designed around our Ultipor ,9P 3 mi cron absolute filter medium. This line also now includes an outstanding array of filter housings and accessory de vices which are rapidly assuming lead ership in the industry. The principle of Ultipor .9P filtration is simple: particles in the ultrafine 1 to 5 micron range (about one-fiftieth to one-tenth the size of visible particles) have been proven most harmful in caus ing wear and generating new contami nants as they work their way into mov ing clearances and act as a lapping compound that grinds away at sur faces. Each newly released particle then circulates through the system and in turn generates still more contam inants, a perpetually self-escalating, ABRASIVE WEAR 12 snowballing process which has been called the chain reaction of wear. This phenomenon is true of virtually all modern hydraulic systems, whether on machine tools, earth moving equip ment or farm tractors. Machinery wear, short life of critical components, and costly equipment downtime were taken for granted until we introduced the Ultipor filter answer. Cincinnati Milacron, the world's leading machine tool manufacturer, and Massey Ferguson, one of the world's leading tractor man ufacturers, were quick to adopt Ultipor filter protection on their latest equip ment. Many other prominent com panies have followed. However, no matter how self-evident the argument, many users are only convinced after extensive periods of testing. During the past few years, dozens of these test programs have come to suc cessful conclusions. Of major signifi cance among these have been programs in plants of every U.S. and a number of European automobile manu facturers. Because these m anufac turers have adopted Ultipor filtration to save maintenance costs and downtime in a variety of their systems, many of their equipment suppliers have also begun to buy our products for installa tion on original equipment. In addition to such applications on machine tools, injection molding ma chines, welding machines and other production equipment, a wide variety of mobile equipment uses have also been developed. These range from in stallations on fork lift trucks to garbage trucks, and from giant road building equipment to relatively small and high ly sensitive seismographic equipment. We have often said that this market is big (larger than our present total business), amorphous, and difficult to penetrate. Now the hard work of the past is coming to fruition. Our name is well established, our penetration has begun and we look forward to a long period of progress. Along with it we foresee increasing profitability, asjhe investment in missionary marketing work and product development we have made over the past few years starts to pay off. It should be noted here that we have added a line of pneumatic filters to our fluid power line which also has good promise for growth over a period of years. These excellent products re move oil droplets and dirt from the compressed air lines which power many assembly tools and other de vices, and thus prolong life and reduce downtime. A distributor organization for this line is expected to be completed, at least in the United States, in 1974. j * * * w 13 14 MARKETS SSiomedicai As indicated earlier in this report we decided to establish our own Biomedi cal distribution organization at the be ginning of the fiscal year. By the year's end, we had done a substantial job of organizing it in the U.S., Canada and Europe. Our concept in entering the Biomedica# market was to satisfy what we saw as a considerable need for "patient protection filters." By this we mean fil ters used directly in connection with the patient, to protect him from bac teria or other particles in fluids being administered to him. Such fluids in clude blood, anesthetics, a variety of intravenously fed fluids, and gases used in inhalation therapy. The use of most of these products is strongly influenced by the anesthesi ologist, who works along with his col leagues in other specialties. Following our own successful introduction of blood filters for protection from micro emboli (small particles) of patients un dergoing open-heart surgery and for those receiving transfusions, we were able to find qualified regional distribu tors whose lines were generally of in terest to anesthesiologists. As a result our organization fell into place quite rapidly. Although we are relatively new in the Biomedical field, we have a long history of supplying filters for critical applications, with strict quality control. This has contributed to our present po sition of leadership in the fine filtration of blood--in the face of competition from three strong hospital supply com panies, the last of which has only re cently entered the market. Our concept of blood filtration is substantially differ- ent from the other three, which are all similar to each other. And to our knowl edge, ours is the only one backed by published clinical evidence of both safety and efficacy. In anesthesia ad ministration, we do not know of another filter which has been successfully applied. In the Biomedical field, as in our other areas of interest, we have a sub stantial research and development pro gram under way. This effort includes further investigation of blood filtration, and a number of new product develop ments. The most important of these is a device for removing air bubbles, bac teria and other contaminants from in travenous fluids just before the fluids enter the patient's arm; and an autotransfusor for salvaging a patient's own blood during an operation, cleaning it, and returning it to him to avoid or minimize transfusions. If successful, either one of these products could con ceivably develop a volume of sales as large as a complete product line in an other of our markets. Unlike our entry into other newfields, we have entered the hospital market profitably. In a short time we have suc ceeded in establishing a record and a reputation for excellence of products and service. We have also built a good marketing organization, and have a series of promising new products scheduled for introduction over the next two years. We consider our ability to serve doc tors and their patients to be excellent, and our prospects for success in this market to be just as good. 15 Sales and Income (000 omitted) Net S ales............................................................. Earnings Before Taxes and Extraordinary Charges-Credits............................................... Earnings Before Extraordinary Charges-Credits* Financial Position (000 omitted) Depreciation and Amortization.......................... Cash Provided from Operations.......................... Working Capital................................................... Total Assets......................................................... Gross Investment in Plant and Equipment......... Long-Term Debt ................................................. Stockholders' Equity........................................... Per Share Data Average Shares Outstanding (000 omitted)........ Earnings Before Extraordinary Charges-Credits Per Share......................................................... Dividends Per Class A Share.............................. Stockholders' Equity Per Share.......................... Gross Assets Per Share...................................... ' Before extraordinary charges-credits: 1971, charge of $342,544; 1970, charge of $112,478; 1968, credit of $45,617; 1966, credit of $75,122; 1965, charge of $362,262; 1964, credit of $734,592. for the fiscal years ended July 31 1972 $26,271 622 355 1971 $24,549 559 294 1970 $26,716 454 229 1969 $26,229 876 406 1968 $25,221 532 234 1,054 1,409 10,881 28,888 15,463 6,623 12,504 999 1,293 11,360 27,762 13,941 6,674 12,070 951 1,180 11,216 28,520 13,785 6,954 12,071 926 1,332 11,292 26,021 12,841 6,806 12,115 909 1,143 11,803 24,461 1 ,398 8,412 10,553 1,104 $ 0.32 -- 11.32 26.16 1,101 $ 0.27 -- 10.96 25.22 1,098 $ 0.21 0.24 10.99 25.96 1,062 $ 0.38 0.32 11.41 24.51 1,014 $ 0.23 0.32 10.40 24.11 Biomedical 5% By Market 1973 S ales Fluid Power 12% By Product Other Products, Commissions, Royalties 11 % 16 1967 $25,378 2,182 1,077 1966 $20,096 551 175 1965 $17,991 491 203 1964 $16,040 1,984 1,004 846 1,923 8,874 24,779 10,838 5,673 10,183 768 943 7,587 21,717 9,901 5,860 9,175 737 940 6,329 20,215 9,547 4,302 9,337 717 1,721 6,174 18,544 7,655 4,092 9,668 937 $ 1.15 0.32 10.86 26.43 936 $ 0.19 0.32 9.81 23.21 934 $ 0.22 0.32 10.00 21.65 933 $ 1.08 0.307 10.36 19.87 Sales and Earnings (in millions) $32__________________________ Sales ff Earnings After Taxes 17 C o n s o lid a t e d S t a t e m e n t s o f E a r n in g s for the years ended July 31 Net sales ............................................................................. Cost of s ale s ......................................................................... Gross profit on s a le s ...................................................... Selling, general and administrative expenses............... Earnings from operations.............................................. Miscellaneous in c o m e ...................................................... Earnings before provision for income ta x e s ............... Provision for income ta x e s ................................................ E a r n in g s ........................................................................... Earnings per share: Prim ary............................................................................. Fully d ilu te d ..................................................................... 1972 $26,270,979 17,026,262 9,244,717 8,646,015 598,702 22,859 621,561 266,600 $ 354,961 $ 0-32 0-32 Depreciation and amortization charges included in Cost of sales and Selling, general and administrative expenses amounted to $1,128,140 and $1,054,182 for the years ended July 31, 1973 and 1972, respectively. C o n so lid ated S ta te m e n ts o f C a p ita l in E xcess o f P a r V a lu e for the years ended July 31 Balance, beginning of fiscal y e a r ................................... Add: Issuance of 150 shares of Common Stock pursuant to stock options............................................................... Conversion of $78,000 of 61A % Convertible Subordi nated Debentures into 3,900 shares of Common Stock Capital in excess of par value at end of fiscal year. . . . 1972 $5,498,847 1,500 74,100 $5,574,447 The comments contained in the accompanying Notes to Consolidated Financial Statements are an integral part of these statements and should be read in conjunction herewith. 18 m i w / m ata 1<1 Pall Corporation and subsidiaries C on solidated S ta te m e n ts o f R eta in e d E arnin gs for the years ended July 31 Balance, beginning of fiscal year...................................... Add: Earnings for the year ended July 3 1 ....................... Retained earnings at end of fiscal year........................... 1972 $5,467,696 ..... 354,961 $5,822,657 These highly engineered, extremely small Pall filters are installed In hydraulic line fittings to assure "last chance" protection of components. C o n so lid ated S ta te m e n ts o f C hanges in F in a n c ia l P o sitio n for the years ended July 31 Sources of Working Capital: 1972 Operations: E a r n in g s ....................................................................... $ 354,961 Depreciation and amortization................................. 1,054,182 Deferred income ta x e s .............................................. 57,656 Working capital provided from operations........ 1,466,799 Increase in long-term d e b t............................................ Disposals of fixed assets................................................ Proceeds of capitalized leases . . ............................... Reduction (increase) in other assets, etc..................... Issuance of stock pursuant to stock options............... Issuance of stock upon conversion of debentures. . . Working capital provided...................................... 717,500 616,455 6,515 (52,509) 1,650 78,000 2,834,410 Uses of Working Capital: | Acquisitions of fixed assets.......................................... ! Reduction of long-term debt.......................................... Reduction of debt upon conversion of debentures. . . Working capital u s e d ............................................ iincrease (Decrease) in Working Capital....................... 2,545,802 689,763 78,000 3,313,565 $ (479,155) |Changes in Working Capital by Element: ! Increase (decrease) in: | Cash ................................................................. I Cash available under bank loan agreement | Accounts receivable...................................... Other receivables and advances................. | Prepaid expenses........................................... | Merchandise inventory................................... I Decrease (increase) in: i Notes p a ya b le ............................................................. t Accounts p a ya b le ...................................................... ! Accrued expenses, taxes and sundry liabilities... I Income taxes payable................................................ j Current portion of long-term debt........................... IIncrease (Decrease) in Working Capital......................... $ (18,527) 916,017 (63,984) 61,242 (728,945) (398,246) (312,667) 319,883 (213,116) (40,812) $ (479,155)  '^SupissJJWiS5?S C o n s o lid a t e d B a la n c e S h e e t s as of July 31 Assets Current Assets: Cash ...................................................................................... Cash available under bank loan agreem ent................... Accounts receivable (net of estimated uncollectibles of $126,968 and $109,836, respectively)......................... Other receivables and advances...................................... Prepaid expenses............................................................... Merchandise inventory...................................................... Total Current Assets........................................................... Fixed Assets--at Cost: Land ...................................................................................... Buildings, machinery, equipment, etc. (less accumu lated depreciation of $5,910,743 and $6,073,574, respectively) ................................................................... Total Fixed Assets............................................................... Other Assets: Investments and receivables--long-term ....................... Deferred charges, deposits, etc........................................ Intangibles (less accumulated amortization of $276,242 and $266,678, respectively)......................... Total Other A s s e ts ............................................................. Total ...................................................................................... 1972 $ 718,251 -- 6,664,106 245,673 230,414 10,939,731 18,798,175 296,157 9,092,903 9,389,060 138,368 222,769 339,681 700,818 $28,888,053 N o t e s t o C o n s o lid a t e d F in a n c ia l S t a t e m e n t s Juiy3i, 1973 The financial statements as at and for the year ended July 31,1972 are included for comparative purposes only. Reference should be made to the Company's previ ously issued annual report for the Audi to r's Opinion and notes pertaining to those financial statements. Note 1--Accounting Policies Basis of Consolidation: The statements of Pall Corporation are presented in consolidation with its sub sidiaries, all wholly-owned. Intercompany transactions and unrealized profits in inventories have been eliminated. Translation of Foreign Currencies: The Consolidated Balance Sheet at July 31, 1973 includes the following United States dollar amounts in respect of the consolidated foreign subsidiaries: Current assets ............................................ $6,207,640 Net fixed a s s e ts ......................................... 2,889,581 Intangibles and other assets ................. 102,296 Current liabilities....................................... 2,796,473 Long-term debt........................................... 321,310 Capitalized lease obligations................. 1,409,098 Unrealized gain on foreign exchange. . . 69,796 The accounts of subsidiaries located out side the United States have been trans lated into U.S. dollars using rates of exchange as follows: current assets, cur rent liabilities and long-term debt at current rates; non-current assets at his torical rates; and income and expense accounts at the average rates prevailing during the year, except for depreciation expense which has been translated at the exchange rates prevailing when the re lated assets were acquired. The resulting gain from translation of $69,796 has been deferred in the accompanying balance sheet. Inventory Pricing: Inventory was generally priced at the lower of cost (on the first-in first-out basis) or market. Raw materials, includ ing materials entering into work in proc ess and finished goods, were priced on the basis of average cost. Charges for labor and overhead included in finished goods are based mainly on cost. Depreciation Methods: The amounts at which fixed assets are stated in the Consolidated Balance Sheet represent cost, after accumulated depre ciation. Provisions for depreciation of Pall Corporation and subsidiaries Liabilities and Stockholders' Equity Current Liabilities: Notes p a ya b le ..................................................................... Accounts p a ya b le ............................................................... Accrued expenses, taxes and sundry liabilities............ Income taxes p a y a b le ...................................................... Current portion of long-term debt.................................. Total Current Liabilities.................................................... Long-Term D e b t ................................................................. 1972 $ 3,494,645 2,117,508 1,235,722 432,995 636,264 7,917,134 6,623,491 Other: Capitalized lease obligations............................................ Deferred income ta x e s ...................................................... Unrealized gain on foreign exchange............................. 1,364,907 396,000 82,089 Stockholders' Equity: Common Stock, par value $1.00 per share, 1,700,000 shares authorized, 1,107,328 shares issued and outstanding ..................................................................... Capital in excess of parv a lu e ........................................... Retained earnings............................................................... Total Stockholders' Equity................................................ Total ...................................................................................... 1,107,328 5,574,447 5,822,657 12,504,432 $28,888,053 The comments contained in the accompanying Notes to Consolidated Financial Statements are an integral part of these statements and should be read in conjunction herewith. Pall pneumatic filters remove destructive oil and dirt from the com pressed air lines which power many assembly tools. property have been calculated approxi mately as follows: buildings--40 to 50 years, chiefly straight-line; machinery, equipment and furniture--8 to 10 years, chiefly straight-line; and transportation equipment--3 to 5 years, chiefly declining balance. Amortization of Intangibles: Intangible assets include unamortized cost of investment in Die-Draulic, Inc. of $284,692 at July 31,1973. This represents the difference between the purchase price and the Company's equity in the underlying net tangible assets at the date of acquisition, and is not being amortized, since in the opinion of management there has been no diminution in its value. Patents are amortized by the straight-line method over their useful lives. Deferred income taxes result principally from the use, for tax purposes only, of an accelerated depreciation method. Investment tax credits are accounted for on the "flow through" method and are treated as a reduction of income tax ex pense in the year utilized. Such credits amounted to $110,000 in 1973 and $32,000 in 1972. Pall Corporation has established a do mestic international sales corporation (DISC), the earnings of which are par tially deferred for tax purposes. Manage ment considers such tax deferral to be permanent since it is intended to use these earnings to finance export opera tions. The accumulated earnings of the DISC on which income taxes have not been provided are $252,000 at July 31, 1973. Federal Income Taxes: United States income taxes have not been provided on the earnings of foreign sub sidiaries, since management considers such earnings to be permanently invested abroad. The amount of such accumulated earnings at July 31, 1973 was $516,000. Earnings Per Share: Primary earnings per share has been computed based on the average number of shares outstanding during each year. Stock options were excluded from the computations since they were not dilutive during either 1973 or 1972. Fully diluted earnings per share was com puted for 1973 assuming the conversion of the 6 1/4% Convertible Subordinated Debentures and the 5Va% Subordinated Convertible Note, and the elimination of the related interest expense, net of tax effect. There was no material dilution in 1972. Note 2--Inventory Closing and opening inventories used in the computation of cost of sales for the year ended July 31, 1973 are as follows: July 31 1973 July 31 1972 Raw materials and components ............... $ 6,153,587 $ 5,699,704 Work in process................................... 2,7312,4,64106,852 Finished g o o d s ............. 2,726,845 2,623,175 TOTAL ......................... $11,611,872 $10,939,731 Note 3--Fixed Assets Accumulated Cost Depreciation Net Machinery, equipment and improvments ........ $ 8,244,086 $4,057,323 $4,186,763 Office furni ture and fixtures . . . . 857,465 448,069 409,396 Transportation equipm ent.. 290,544 101,579 188,965 Buildings (1) . . 6,207,545 1,303,772 4,903,773 Land ............... 296,157 -- 296,157 TOTAL . . . . $15,895,797 $5,910,743 $9,985,054 (1) Includes real estate with a book value of ap proximately $1,273,000 at July 31,1973 utilized pur suant to capitalized lease obligations (see note 5). Note 4--Long-Term Debt Due Within After One Year One Year 63/s % Promissory Note due as follows: $66,500 on May 1, 1974 and $428,500 on May 1,1975.The note agree ment requires the Company to m aintain consolidated working capital (as defined) at not less than $12,500,000 through July 31, 1974 ($13, 500,000 after July 31, 1974), and places certain restric tions on the creation of ad ditional indebtedness and on various other corporate actions, including the pay ment of dividends. At July 31,1973, the amount of con solidated retained earnings subject to restriction was $6,253,643 and consoli dated working capital (as defined) was $13,755,196. $ 66,500 $ 428,500 5% % Promissory Note due in annual installments of $100,000 to November 1, 1977. The note agreement requires the Company to maintain consolidated work ing capital (as defined) at not less than $12,500,000 through July 31, 1974 ($13,500,000 thereafter but prior to August 1, 1975, and $14,500,000 after July 31, 1975), and places certain restrictions on corporate actions Identical with those imposed under the 6% % note ....................................... 100,000 400,000 Promissory Notes (interest at 1% over prime rate) pay able to two banks in maxi mum principal amount of $3,900,000. The banks are committed to lend the Com pany up to the maximum principal amount through July 26, 1974, and any un drawn portion of the com mitment bears interest at Va of 1% per year. The notes will be repaid by quarterly payments of $62,500 each from October 31, 1973 to July 31,1976; $150,000 each from October 31, 1976 to July 31,1977; $225,000 each from October 31, 1977 to July 31, 1979; and $187,500 from October 31, 1979 to July 31, 1980. The note agreem ent requires the Company to maintain con solidated working capital (as defined) at $12,500,000 prior to August 1, 1974, $13,500,000 thereafter but prior to August 1, 1975, and $14,500,000 after July 31, 1975. The note agreement also places certain restric tions on the creation of ad ditional indebtedness and on various other corporate actions, including the pay ment of dividends. At July 31,1973, the amount of con solidated working capital (as defined) was $13,827,591. The undrawn portion of the loans was $1,400,000 at July 31, 1973 and is reflected as a current a s s e t................... 250,000 3,650,000 6V4 % Convertible Subordi nated Debentures due June 1, 1983. The indenture is sued during 1968 requires the Company to redeem an nually on June 1 in each of the years 1976 to 1982 in clusive, one-ninth of the Debentures outstanding on March 31, 1976, and places certain restrictions on the creation of additional in debtedness and on various other corporate actions, in cluding the payment of divi dends. At July 31, 1973 the amount of consolidated re tained earnings subject to restriction pursuant to the indenture was $5,125,808. The Debentures are con vertible into Common Stock at a p rice of $ 20 .00 per share. Accordingly, 121,200 shares of Common Stock were reserved for this pur pose at July 31, 1973........... -- 2,424,000 Pall sterilizing filters are free of asbestos, capable of in-place steam sterilization, compatible with a wide range of fluids and have absolute retention ratings down to 0.2 microns. 5 1 /8 % Subordinated Con vertible Note dated No vem ber 30, 1961 due in semi-annual installments of $50,000.The unpaid balance will be due on December 1, 1976. The note is subordi nated to the 6% % Prom issory Note and bears certain restrictions. The note agreement provides for the conversion of the note into Common Stock at a price of $37.55 per share, subject to adjustm ent in certain circumstances. Ac cordingly, 9,321 shares of Common Stock were re served for this purpose at July 31, 1973 ........................ 100,000 250,000 Mortgages payable at inter est rates from 3% to 8 1/ 2% are liens on land, buildings and equipment having a net book value of $2,697,364 at July 31,1973 ........................ 168,574 1,388,595 Term loan (interest at 11/2 % over First N ational City Bank, London base rate) due $189,750 on December 31, 1973 and $189,750 on December 31,1974 ............. 189,750 T O T A L .............................. $874,824 189,750 $8,730,845 Note 5--Capitalized Lease Obligations During the year ended July 31, 1967 the Company sold its plant at Portsmouth, England. This property was then leased back from the purchaser for ninety-nine years. Under the provisions of the lease, the Company is to pay a basic annual rental of $47,000, and is to pay all ex penses relating to the property. The basic rent may be increased in the fourteenth year under certain conditions. At July 31, 1973 the Company had com pleted construction of an extension to the above mentioned plant. The costs in curred for this construction amounted to $840,434. Under the terms of an agree ment entered into for the purposes of financing this construction, the Company had received $840,434 in construction loans. The basic annual rental for the plant addition is approximately $83,000. For accounting purposes, the Company has treated these transactions as financ ing arrangements and has reflected the sales price net of the amortization portion of payments made as a liability. Depreci ation on the Company's leasehold interest in the property has been provided for based on its estimated useful life. Note 6--Common Stock On November 20, 1972 the stockholders approved a resolution to amend the Cer tificate of Incorporation and redesignate all Class A Stock as Common Stock. No dividends were declared or paid dur ing the year ended July 31, 1973. Note 7--Contingencies and Commitments Pall Corporation and its subsidiaries may be subject to renegotiation of govern ment contracts and subcontracts per formed since August 1,1956. With respect to all periods up to July 31, 1972, the Renegotiation Board has stated its inten tion not to take any action in the absence of unusual circumstances or subsequent indications of excess profits. In view thereof, no provisions have been made for this contingency for any past years, nor for the current year, since no prece dent is available. In the opinion of man agement, operating results reported upon would not be materially affected. The Company and its subsidiaries lease certain facilities (other than facilities cov ered under capitalized leases; see note 5) under long-term leases expiring up to 13 years after July 31, 1973 and annual ren tals under such leases amount to approxi mately $77,000. Total rental commitments under these leases aggregate approxi mately $322,000. Pall Corporation is contingently liable on a series of notes with a total face value of $166,856, which have been discounted. The notes, received upon the sale of its Mexican subsidiary, are payable quarterly to February 1, 1976. During the year ended July 31, 1972, the Company entered into employment agree ments with its chairman, president and six vice-presidents. The aggregate com mitment for future salaries at July 31,1973 was $603,000. On January 9, 1973, the United States Government instituted an action against Pall Corporation for $659,739 alleged to be the damages resulting from defective pumps sold by a former Pall subsidiary (the Government being assignee of the customer). A motion has been filed to dis miss the complaint as being barred by the statute of limitations. Motion papers and memoranda of law have been pre sented, argument has been had and the motion is now under consideration by the judge. It is the opinion of counsel, based on their extensive conversations with officers and other employees of Pall Corporation and their review of the ap plicable law, that there is no merit to the Government's case. Note 8--Stock Option Plans The Pall Corporation 1966 Qualified Stock Option Plan: The Pall Corporation 1966 Qualified Stock Option Plan was approved by 23 stockholders at the annual meeting held in November 1966 and provides for the issuance of a maximum of 45,000 shares of the Company's Common Stock to cer tain officers and employees of the Com pany and its subsidiaries. The balance of unexercised optioned stock as at July 31, 1973 was as follows: Date Granted Aug. 30, 1968Jan. 24, 1973 No. of Option Price Shares Per Share Total 16,200 $9.69-$17.50 $227,274 All options expire five years from the date of grant and are exercisable in equal annual increments over that period. Op tions exercisable at July 31,1973 were for 5,660 shares. There were no options exer cised during the year ended July 31,1973. The Pall Corporation 1973 Qualified Stock Option Plan: The Pall Corporation 1973 Qualified Stock Option Plan was adopted by the Board of Directors on July 2, 1973, sub ject to stockholders' approval at the No vember 1973 stockholders' meeting. The Plan provides for the issuance of a maxi mum of 55,000 shares of the Company's Common Stock to certain officers and employees of the Company and its sub sidiaries. Options granted under this Plan may not be exercised until the Plan has been approved by shareholders. The terms and conditions of options granted under the 1973 Plan are substantially the same as the terms and conditions of op tions granted under the 1966 Plan, except that the 1973 Plan permits payment of the exercise price in installments meeting the requirements of Regulation G of the Fed eral Reserve Board, and except that op tions granted under the 1973 Plan are exercisable in full from the outset. Unexercised optioned stock as at July 31, 1973 was as follows: Date Granted July 2, 1973 July 18, 1973 No. of Shares 46,500 8,500 Option Price Per Share Total $10.75 12.875 $499,875 109,438 The Company makes no charge against income with respect to options. Note 9--Pension and Profit Sharing Plans The total cost of Pension and Profit Shar ing Plans in effect for the year ended July 31,1973 was $384,171 .Aggregate amounts in pension and retirement funds exceeded the actuarially computed value of vested benefits at July 31, 1973. The aggregate liability for unfunded past service costs under the Pension Plan, to which major amendments were made effective August 1, 1971 and are first reflected this year, is estimated to be $467,000 at July 31, 1973. Past service costs are being funded over a 30 year period. Note 10--Interest Expense Interest expense amounted to $847,179 and $790,384 for the fiscal years ended July 31, 1973 and 1972, respectively. A u d ito r's O pinion Board of Directors, PALL CORPORATION 30 Sea Cliff Avenue Glen Cove, N.Y. 11542 ROBBINS, GREENE & CO. CERTIFIED PUBLIC ACCOUNTANTS 522 Fifth Avenue, New York, N.Y. 10036 We have examined the consolidated balance sheet of Pall Corporation and its subsidiaries as at July 31,1973 and the related consolidated statements of earnings, retained earnings, capital in excess of par value, and changes in financial position, for the year then ended. Our examina tion was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we con sidered necessary in the circumstances. In our opinion, the above-mentioned financial statements present fairly the financial position of Pall Corporation and its subsidiaries as at July 31, 1973 and the results of operations and changes in financial position for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. New York, New York September 28,1973 Robbins, Greene & Co. fBm m ^T5?iir ^ ^ .,%^^-|.^^^-*i43^^g^ess3*!^,^ 9 l ^ ^ O fficers Dr. David B. Pall Chairman of the Board Abraham Krasnoff President Chesterfield F. Seibert Senior Vice President Maurice G. Hardy Vice President P rin cip al P lan ts Glen Cove and Cortland, New York St. Petersburg, Florida South El Monte, California Grand Rapids, Michigan Putnam, Connecticut Montreal, Canada Portsmouth, England Frankfurt, Germany Sidney Krakauer Vice President Nicholas Nickolaus Vice President Henry Petronis Vice President Stanley Wernick G eneral Counsel Carter, Ledyard & Milburn New York, N.Y. McKenna & Co. London, England Vice President & Treasurer Peter Schwartzman Secretary Donald M. Harris P atent Counsel Janes & Chapman New York, N.Y. Assistant Secretary G overnm ent D irecto rs C on tract Counsel Dr. David B. Pall Chairman Gilinsky & Mishkin New York, N.Y. Abraham Appel 4 Albert H. Haas A u d ito rs Maurice G. Hardy Robbins, Greene & Co. Donald M. Harris New York, N.Y. v Abraham Krasnoff Chesterfield F. Seibert Jerome S. Shulman R eg istrar and Alan B. Slifka Tran sfer A gent Frankin National Bank C orporate H eadqu arters Corporate Trust Department 2 Broadway, New York, N.Y. Glen Cove, New York 11542 Tel. 516-671-4000 TWX 510-223-0606 Telex 01-26329 Pall Corporation is an Equal Opportunity Employer. i Design: Graphics Institute, Inc., NYC Annual Stockholders' Meeting Tuesday, November 20,1973,2:30 P.M. Harrison House of Glen Cove Glen Cove, L.I., N.Y. Printed in USA P a ll C o rp o ra tio n Glen Cove, Long Island, New York 11542