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Pall (NYSE:PLL)

Q3 2011 Earnings Call

June 09, 2011 8:30 am ET

Executives

Eric Krasnoff - Chief Executive Officer, President, Director and Chairman of Executive Committee

Lisa McDermott - Chief Financial Officer and Treasurer

Analysts

Hamzah Mazari - Crédit Suisse AG

Richard Eastman - Robert W. Baird & Co. Incorporated

Jonathan Groberg - Macquarie Research

S. Brandon Couillard - Jefferies & Company, Inc.

David Rose - Wedbush Securities Inc.

Brian Drab - William Blair & Company L.L.C.

Operator

Welcome to the Pall Corporation’s Conference Call and Webcast for Third Quarter Fiscal 2011. Today's call is being recorded and simultaneously webcast. [Operator Instructions] We'd like to remind you that the company's third quarter press release is available at www.pall.com. Management's remarks for this morning call will include forward-looking statements. Please refer to Slide 2 or request a copy for the specific wording of this qualification of the company's remarks. Management also uses certain non-GAAP measures to assess the company's performance. Reconciliations of these measures to their GAAP counterparts are included in the slide at the end of the presentation.

At this time, I will turn the call over to Mr. Eric Krasnoff, Pall Corporation's CEO and President. Please go ahead, sir.

Eric Krasnoff

Thank you, and good morning, everyone. We appreciate your joining us on our third quarter conference call. I am here on this very sultry morning with Lisa McDermott, our Chief Financial Officer; and Frank Moschella, the Corporate Controller. Now our first 3 quarters have been strong and place us around the higher end of our earnings guidance for fiscal 2011. The company also continues to make progress towards its long-term performance goals to create further value for shareholders.

Today, we will update you on our business and then look forward to your questions.

There are a number of factors driving growth. Pall has an accomplished and capable management team with solid depth throughout the organization. Top and bottom line growth strategies had differentiated Pall from its competitors. We provide total fluid management and are now a well-respected systems engineering company, a business developed organically. We have positioned the company to capitalize on improving economic conditions and emerging market trends. We're continuing to execute these strategies to expand opportunities and improve performance.

A confluence of trends are supporting the business and setting the stage for future growth. Among them, improving economies, arising middle-class and developing regions, game-changing technologies in areas such as electronics and biotechnology and of course the economics of environmentalism and increasing regulation. All of these drive Pall's enabling technologies. It's clear that it's a good time to be a leader, and I want to quote from an annual report of Pall's from 1959: "The existence and growth of Pall Corporation goes hand in hand with the requirements of modern technology." Now that statement is as true today as it was prophetic more than half a century ago. Our business makes up real difference to industries, customers and society. Pall management employees look forward to continuing to build on the company's success.

With that, let's now get into the details for the quarter. Fiscal '11 sales have increased by double digits throughout the year. Third quarter sales grew 11% in local currency to about $710 million. Life Sciences was up 12%, and Industrial grew close to 10%. BioPharmaceuticals continues to deliver strong results, reflecting Pall's broadening presence throughout the biotech production process. Microelectronics still grew after last year's meteoric 78% sales increase. New Pall products to service the proliferation of semiconductor and consumer electronic products are driving forces.

Machinery & Equipment's healthy performance also continued. That group posted its fifth straight quarter of double-digit growth. Mining in particular remained strong.

Food and Beverage, Life Sciences, OEM, Commercial Aerospace and Energy sales all grew at or above 10%. You'll hear more about them as we go along. Now on a geographic basis, both Industrial and Life Sciences grew in all regions. The Western Hemisphere was strongest with sales increasing 14%. Europe again grew over 10% with Military Aerospace the only weak spot. Sales in Asia were up about 7% overall, but if we take Japan out, Asia sales grew about 11%.

China and India in particular did very well. Sales in Japan, which is our largest Asian market, were down about $700,000 or about 1%. Life Sciences grew despite the disaster as Pharmaceutical customers increased purchases and accelerated production schedules in anticipation of possible supply-chain disruptions and power outages. Pall's industrial markets in Japan were down 6% overall, largely driven by the semiconductor industry there. Our Microelectronics sales decreased 11% in Japan, though some of this was offset as other producers in different geographies revved up production.

We could continue to see business disruptions in Japan in the short-term. Longer-term opportunities with the third's largest economy in the world as they rebuild will improve our prospects. Total orders kept pace with sales, increasing 10%. Every major market but Energy & Water was solidly positive. We logged double-digit orders growth in Asia. Orders grew by double digits for the first time this year, and orders in the Western Hemisphere increased 6% compared to over 30% a year ago. Orders for consumables grew 6% compared to 21% last year when companies began restocking inventories as the economy began to recover. Our backlog of consumables and systems is up over 25%. Now bear in mind that this includes orders for both consumables and systems that will ship over time.

With that, let's look at the sales details, starting first with Industrial. Pall’s Industrial sales overall increased about 10%, and that's up 14% for the 9 months. Aeropower grew close to 11% in the third quarter. Energy & Water was up 10% with growth in all markets. Microelectronics grew almost 7% instead of the flattish result projected in response to the industry forecasts. Within Aeropower, Machinery & Equipment posted double-digit growth for the fifth quarter in a row. Q3 sales increased about 24%. And sales in the Western Hemisphere were up 65%, 15% up in Europe and slightly up in Asia. Global mining, as I mentioned before, remains in high gear both at the producer and at the OEM level. Investment in new mining equipment continues to signal ongoing confidence and future requirements for mining materials. Q3 orders were up 10% for the sixth quarter of double-digit growth in Machinery & Equipment. Aerospace sales were down 3% overall, while orders were up 45%. Commercial Aerospace grew about 13%, and this once again reflects restocking of inventories for airline support and modest demand as OEM production rates pick up for new airframes.

Military was down 16%, and this was primarily driven by Europe. Overall Military orders increased 66% there and have grown by double digits for the previous 3 quarters. Most of this order growth is coming from the U.S. Although the procurement process is taking longer, orders are coming through. As you may have seen, Pall recently received a large order we had been waiting for from the U.S. government. We booked a $14 million order for Centrisep systems for 59 of the army's CH-47 helicopters to protect these valuable assets in sandy environments. Shipments are slated to begin in December 2011 and to be completed by November 2012. Energy & Water sales increased 10% on solid performance from all submarkets. Within the Energy market, Fuels and Chemicals grew almost 10%, and Power Generation grew about 15%. The oil and gas market have been particularly strong with alternative energy, polymer and chemical contributing. There's some weakness in the refinery market, which has to cope with the decreased demand brought on by higher oil prices.

The Power Generation story has been the same all year: strong growth in the Western Hemisphere and Asia for largely the same reasons. Water treatment systems for U.S. power generation stations and continued expansion of wind turbine markets particularly in China. Europe remained weak due to ongoing challenges in the turbomachinery market and from reduced demand for power tied to industrial production. Orders in Energy were down almost 5% in the quarter. The comparable quarter last year contained a very large order for a $5 billion gas processing plant in Abu Dhabi. That was the price of the plant, not the order. Municipal Water sales increased 7% in the quarter, and sales growth was in the Western Hemisphere and Europe. Europe seems to be stabilizing, although public spending is still under pressure. Overall, the backlog in Municipal Water remains over $100 million totally.

Now Microelectronics. That group was up 18% for the year and almost 7% in the quarter. As I mentioned before, the industry has stayed stronger than predicted. Q3 orders increased over 8%, marking 6 consecutive quarters of orders growth. The growth continues to reflect high-capacity utilization rates at chip producers and demand for products like smartphones, tablet computers, solar cells and other advanced electronics, including LEDs. The LED market is an exciting emerging opportunity for Pall. These are semiconductor light sources with the manufacturing process similar to that used to make IC devices. And in fact, they're actually known as LED semiconductor chips. We're leveraging our expertise in filtration for the semiconductor market in applying it to production of LEDs. As you probably know, many countries, including the U.S., have passed measures to phase out incandescent light bulbs for general lighting. U.S. legislation specifies that general-purpose lighting must be at least 25% more efficient than incandescent bulbs. And that's good for the new technology that our technology is supporting.

Now let's go on to the Life Sciences. Overall, sales in Life Sciences increased about 12% in both the quarter and for the 9 months. In the third quarter, Medical grew 5%; Food and Beverage, 12% and BioPharm, 16%. Medical grew in Europe and the Western Hemisphere, which led with 10% growth. The Western Hemisphere growth was driven by balance strength in every submarket from the largest, blood, to the smallest, cell therapy. Western Hemisphere blood filter sales grew up to over 4% against the backdrop of declining blood collections. Hospital Critical Care grew 26% on increased Aquasafe water sales. And our Medical OEM business was up 19% in the Western Hemisphere and 12% globally. This is largely due to the addition of IV filters to drug infusion pumps to prevent air from being pumped into patients. A recent FDA draft guidance document recommends that manufacturers take measures to mitigate risks associated with the widely used pump equipment.

Sales in Food and Beverage were up 12%, marking 4 quarters of growth. Consumables sales increased 8% with all regions contributing but particularly in the Western Hemisphere. System sales increased 30%, with both results reflecting continuing recovery in the Food and Beverage market. Further proof is that Food and Beverage orders were up 13% in the quarter. As a side note, Pall scientists are currently assisting leading national authorities in Europe in their race to find the source of the deadly E. coli outbreak. On Tuesday, Senator Gillibrand in the U.S. introduced new meat safety regulations that calls for testing for a wider range of pathogens than currently required. One she specifically named as a leading cause of food-borne illness and death in the U.S. is non-O157 E. coli. Pall has a validated test to detect for this bacteria in meat.

And finally, last but not least, BioPharmaceuticals. BioPharm, which accounted for about 28% of total Pall sales in the quarter, is firing on all cylinders. Revenues increased 16% in the quarter and are up 18% for the year. Consumables sales increased almost 15%, and systems sales were up about 35%. Every region was strong, with Asia and Europe leading at 22% and 18% growth, respectively. Pharmaceuticals grew by 17%, and Lab had another good quarter with 11% growth. These results are the direct outcome of continuing execution of key growth strategies. These include total fluid management, providing customers with enabling technology to meet them -- meet their performance goals and adding the infrastructure for Pall to serve these customers around the world. Our efforts are paying off particularly as the biotech industry accounts for a much higher proportion of the overall market. Every one of the 6 top-selling drugs by 2014 is projected to be a biotech drug. Now that compares with just 2 biotech drugs in the top 6 only 3 years ago. Orders in BioPharmaceuticals increased 22%. Consumables orders were up 22%. And orders for systems increased 34%. So it's pretty clear we're closing in on a very strong year in BioPharm and for Pall overall. Overall, this is enormously gratifying for all of us. And now with that, let's hear from Lisa.

Lisa McDermott

Thank you, Eric, and good morning, everyone. Before getting to the financial details, I'd like to start off with some more good news. As you may recall, in 2007, the company announced that it would restate its financial statements for the fiscal years 1999 through 2006 for the under payment of income taxes, primarily in the United States. We reported last evening that late last month, the IRS concluded its audits of fiscal year 1999 through 2005. While we are still in the process of finalizing the impact of this to our financial position, I would like to highlight 3 key items. First, no penalties were assessed. Secondly, our current estimate is a reduction of net liabilities in the range of $20 million to $30 million, such benefits to be recognized in this year's fourth quarter. And this has no impact to the company. And thirdly, of the $127 million of additional unrecorded potential penalties that we've disclosed previously, we have now concluded that the likelihood of assessment of about $106 million of these penalties is remote. The balance primarily relates to some foreign matters.

So with that update, let's get to the financial review of the quarter and 9 months. Net earnings in the quarter were $71.1 million or $0.60 per share. This compares to $69.7 million or $0.58 per share last year. Pro forma earnings per share as defined in the appendix slide were $0.72 compared to $0.58 per share, an increase of 24%. Net earnings in the 9 months were $218.1 million or $1.84 per share, and this compares to $186.3 million or $1.56 per share last year. Pro forma earnings per share were $2.01 compared to $1.40 per share, an increase of 44%. The foreign currency translation increased earnings per share by about $0.04 in the quarter and $0.05 in the 9 months.

The sales increased 15% in the quarter and 14% in the 9 months compared to the same periods in fiscal 2010. Foreign currency translation increased the top line by about $28 million or 4% in the quarter and by about $17 million or about 1% in 9 months. Local currency sales were up almost 11% in the quarter. Consumables sales increased about 9%, and systems sales were up over 29%, bringing system sales to just over 12% of total sales compared to 10.5% in the third quarter of 2010.

In the 9 months, local currency sales grew 13%, reflecting about a 12% increase in consumables and a 25% increase in system sales. Overall, pricing gains contributed approximately $3 million to the top line in the quarter and $10 million in the 9 months. Gross margins for the 9 months stand at 50.8%, up 40 basis points year-over-year, as an improvement in Industrial was partly offset by a decline in Life Sciences. Now this is down 50 basis points from the 6 months ended January as we saw gross margins dip in the third quarter. I'll provide the key drivers of these results by business in a moment.

SG&A was 29.5% of sales in the third quarter, down from 30.4% last year. And in the 9 months, SG&A came in at 30% compared to 32% last year. These improvements reflect top line leverage and tight cost controls on G&A spend while spending in other key areas is ramping up. Excluding the estimated impact of foreign currency translation, SG&A expense increased about 8% in the quarter year-over-year and 7% in 9 months. Looking at the quarter, most of the increase reflects a ramp-up in spend on sales and marketing in 3 key areas: investments in emerging regions, variable flash performance related costs and marketing. In addition, we continue to see expense increases from our investments in our IT infrastructure, and corporate costs also reflect performance related cost, as well as certain governance-related items. Excluding the estimated impact of foreign exchange, R&D spending rose about 10% in the quarter and almost 14% in the 9 months. We expect it will be just under 3.5% of sales for the year, and this reflects a planned ramp-up in investment for new products.

Turning to income taxes. The effective tax rate or as reported rate for the quarter was 35.1% and for the 9 months, 29.8%. This includes tax costs recorded in the quarter associated with the establishment of the company's Asian headquarters. This compares to an effective tax rate of 31.6% in the third quarter and 25.2% for the first 9 months of last year, which included the favorable resolution of a foreign tax audit. So excluding these items, the effective tax rate in the first 9 months reflects a sustainable reduction of 4 percentage points year-over-year. The reduction in the rate has contributed about $13 million or about $0.11 for the bottom line year-to-date. Including the cost of the establishment of the Asian headquarters as well as the benefit at the conclusion of the IRS audits I mentioned earlier, we expect the effective rate to be about 24% for fiscal year 2011.

The full year forecasted underlying rate of about 27% does not reflect these items, which we consider to be discrete. It does reflect the tax benefits associated with the establishment of our European headquarters and puts us solidly on track to achieve our 2013 goal of 24% to 26%. The change in net interest expense in the third quarter and 9 months reflects that in fiscal year 2010, certain benefits were recorded related to the resolution of the foreign tax audits and expiring statutes of limitation. Including these items, net interest expense has been running about $250,000 higher per quarter this year, driven by slightly higher interest rates and debt levels. The 3 key items that I will comment on regarding sequential performance are revenues, gross margins and orders. Sales in the third quarter increased by $65 million or 10% sequentially. Almost 8% in local currency, 6% in base and 19% in systems. Life Sciences grew 10%, approximately 7.5% local currency. This was driven by 7% sequential growth in BioPharmaceuticals, 18% growth in Food and Beverage and 4% growth in Medical. Industrial also grew by almost 10% sequentially, about 7.5% in local currency. This was driven by growth of approximately 13% in Aeropower, 5.5% in Microelectronics and 4% in Energy & Water. Compared to the second quarter, gross margins trended down. This reflects declines in both businesses relating to 3 key factors: manufacturing overhead absorption, unfavorable mix and some special charges for certain inventory and contract related items. Orders were up 7.5% sequentially, approximately 5% in local currency, bringing our backlog up 11% compared to the end of the second quarter, 9% up in base and 15% up in systems.

Now I'll provide some color on segment performance. Pall Industrial sales growth was about 10% in local currency, reflecting a 6% increase in consumables with all markets growing. System sales grew by 28%, Municipal Water and Machinery & Equipment sales were particularly strong. Systems represented about 16.7% of sales compared with about 14.5% last year. Pall Industrial's gross margin in the quarter decreased 120 basis points to 46.1%. And this principally reflects unfavorable mix. At the 9-month mark, gross margins improved 140 basis points to 46.9%, primarily driven by volume, cost savings, partly offset by unfavorable mix. Industrial SG&A grew by 9% in local currency, reflecting increased spend of about 13% in sales and marketing costs and, in particular, spend for our European and Asian headquarters. Operating margins were 14.8% in the quarter compared to about 15.7% a year ago. This reflects the decline in gross margin I mentioned earlier. At the 9-month mark, operating margins were 15.2%, a 370 basis point improvement over last year. So overall, we're pleased with the progress we're making in Pall Industrial.

Switching now to Life Sciences. Local currency sales grew almost 12% in the quarter. Consumables sales increased over 10%, with all markets contributing. Consumables growth in Pharmaceuticals and Laboratory was particularly strong. Systems grew about 32% with Pharmaceutical sales system sales up about 35% and Food and Beverage system sales up 30%. System sales represented 8% of sales compared to 6.7% of sales last year. Now despite continued manufacturing efficiencies and pricing improvements, Life Sciences gross margins decreased 100 basis points to 53.3%. This was impacted by certain inventory-related charges. We also had lower overhead absorption from reduced manufacturing output. Together, these items reduced gross margins by about 300 basis points. Cost savings and the benefit of pricing partly offset. Life Sciences SG&A increased 4.5% in local currency in the quarter, again driven by increases in sales and marketing cost. G&A cost reductions were offset by Life Sciences share of the increased spend on IT. At the 9-month mark, SG&A as a percentage of sales in Life Sciences was 26.1%, a 200 basis point improvement over last year. Now operating margins came in at 24.2%, a 100 basis point improvement. And at the 9-month mark, operating margin improved 130 basis points to 24.2%.

Turning now to cash flow. Operating cash flow in the 9 months was $281 million, an increase of about $24 million or 9% compared to the 9 months of fiscal year 2010. This does reflect continued improvement in working capital management, particularly days in inventory improving by 9 days. However, the improvement in working capital in 2010 was higher as the improvement in the cash conversion cycle versus 2009 was more pronounced. Significant uses of cash during the 9 months included $122 million return to shareholders with dividends of $57 million and stock repurchases of $65 million buying close to 1.3 million shares. This leaves approximately $288 million of our current authorization, $103 million in capital spending and $154 million in repayments of debt net of new borrowings.

We expect full year operating cash flow in the range of $435 million to $450 million. The capital spending is expected to be in the range of $150 million to $160 million for the full year. Wrapping up the discussion of our liquidity, our cash position stood at $491 million at April 30, and our net debt to net debt plus equity was 9%, down from 19.4% at July 31, 2010, reflecting the strong generation of cash in the U.S. this year.

Our results through April put us at the high end of our 2011 expectation. We expect local currency sales for the year to be up high-single to low-double-digits with similar rates of growth in both Life Sciences and Industrial likely on the higher end of this range. We also expect operating margins for the year to be at the higher end of the range at 17.5% to 18.5% with gross margins for the year at the high end of our range of 50% to 51%. This reflects continued benefit from pricing and manufacturing efficiencies. We do expect gross margins in the fourth quarter to improve compared to the third quarter due to the unusual items in the third quarter. We expect -- we continue to expect SG&A as a percentage of sales to be less than 30%.

In closing, fiscal 2011 is shaping up to be another good year for Pall. Based on our results at the 9-month mark, our expectations for the fourth quarter and with foreign exchange at current rates a tailwind, we expect to come in around the high end of our pro forma EPS range of $2.80 to $2.90 for fiscal 2011. And thank you for attention this morning. With that, I will this hand this back to Eric.

Eric Krasnoff

Thanks, Lisa. That's very exciting. Now we have carefully positioned the company to benefit from and outpace the economic recovery. Our sustained results attest to the demand for Pall technologies and solid execution for our growth plans. We believe that the global economy will continue to improve, albeit, not always steadily. Our strategic plan is crafted to yield sustained revenue and profit growth and drive further value creation for shareholders. Now we've covered a lot of ground this morning, and I appreciate your patience. Before getting to your questions I do want to update you on the search for my successor. The board is working diligently to identify the right candidate to lead the future growth of Pall Corporation. While the management team here remains focused on maintaining our strong performance and momentum, Pall has a deep bench of dedicated, experienced and talented leaders who are continuing to steer Pall on this path to sustainable profitable growth. So our company is in good hands. And with that, we will ask the conference operator to facilitate your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Hamzah Mazari with Crédit Suisse.

Hamzah Mazari - Crédit Suisse AG

I was just wondering if you could flush out just the negative mix during the quarter and how that plays out going forward, say, over the next 12 months.

Eric Krasnoff

Sure.

Lisa McDermott

Well, when you say flush out, Hamzah -- and the question was for everyone on the call, as all the people can’t hear it, Hamzah was asking about the negative mix in the quarter and how that plays out over the next 12 months. Principally, the negative mix in the quarter related to a surge in system sales. System sales were up significantly in the quarter both year-over-year as well as sequentially, coming in for the quarter at over 12% of our total sales. In addition, particularly in Pall Industrial, we saw some negative mix with the growth in Aerospace and Power Gen. For instance, we're at the beginning of the wind turbine market and given it's at the beginning and it's growing quite well but the margins right now are not so strong on that. So that's what we saw in the quarter. As we look at the balance of the year, we continue to expect some mix pressure, although as I said, we do expect the fourth quarter gross margins to bounce back from the third quarter because we don't expect to see the unusual charges that we took in the third quarter. I won't comment on fiscal year 2012, and I will wait to comment on that with our fourth quarter earnings call.

Operator

Your next question comes from the line of Jon Groberg with Macquarie.

Jonathan Groberg - Macquarie Research

I guess, can you maybe, Eric, just talk a little bit about, I guess, current state of the business? It sounds like orders were still pretty strong in the last quarter, the past and I know for -- particularly on the consumables side, you tend to ship those pretty quickly. But maybe just given a lot of the macro and leading indicators that suggest things are slowing. Maybe just kind of describe the current state of your business.

Eric Krasnoff

Yes, I think that we could just talk globally, on the Life Sciences side of biotech is growing. We're going to see be seeing biosimilars, which will increase the volume and the variety of production for biotech drugs. In Medical, it's increasingly a public health concern about acquired infections for pathogens such as E. coli, not just in the hospital setting and nursing homes but now of course in the food supply as well. Those are major drivers for our business. And we also, with our Blood business continue to grow. And a lot of that growth both in BioPharm and in Medical is in the emerging regions. Now that's the thing we also see on the Industrial side, very large growth in the areas that we've invested in infrastructure in Latin America, Eastern Europe, Middle East, North Africa and in Southeast Asia. The Industrial markets overall, we think, of course, that our mix is so varied that we have confidence that mining is strong. The production of energy, of alternative energy and the increased filtration, purification requirements of the environmentalist issues, those are monetary issues now to producers in economies. So I think overall, even if there is a modest decline, let's say, in GDP in some of the West, probably primarily the Western countries, that we'd still be able to post results that will lead us to our 2013 goals.

Jonathan Groberg - Macquarie Research

Okay. Can I just get one clarification? What percentage of your sales -- and I think last quarter you said what percent of your total sales were Asia-Pac. But maybe what percent are Asia-Pac x Japan or emerging markets, however you want to define it?

Eric Krasnoff

Well, we take that for that emerging market is about 22% now, so it's a big number. Asia, outside of Japan, is as I remember that's like 18% of Pall sales.

Jonathan Groberg - Macquarie Research

Okay.

Operator

Your next question comes from the line of with Brian Drab with William Blair.

Brian Drab - William Blair & Company L.L.C.

First question, just to clarify, on Slide 17, when you talk about the sequential comparison in the gross profit section, you talk about unfavorable absorption of manufacturing overhead. Given the sequential, a significant volume improving, can you describe what's going on there in a little more detail?

Lisa McDermott

Sure. As we mentioned in the second quarter, our plan in the back half of the year was to very much focus on bringing our inventory levels down. We did build our inventory levels up to a point that we felt comfortable that we could take the so-called pedal up the metal. So principally, in our media plants and our medical plants, on the Life Sciences side, we did see a lower level of production, and therefore, although sales are up, that's being underwritten to some extent by the inventory level at the end of the second quarter. We did bring inventory levels down in Life Sciences, so we saw that there. And although inventory levels are slightly up compared to the second quarter, in the context of the overall volume level, as you're pointing out, our days in inventory have reduced pretty significantly against the second quarter. So that was done purposefully.

Brian Drab - William Blair & Company L.L.C.

Okay. That's very helpful. And the next question is just around the system sales. It sounds like systems sales as a percentage of sales is going to be a little bit lower in the fourth quarter. Is that right? Or is that -- what's the main driver of the expected increase in margins in the fourth quarter from the third quarter if not that?

Lisa McDermott

System sales will be a higher percentage of sales in the fourth quarter. What's driving our expectation that gross margins will be better than the third quarter, number one, is there is some pretty significant charges taken by Life Sciences that we would consider to be non-repeating. So we will not see that headwind in Life Sciences in the fourth quarter. And we don't expect to see some of the other negative mix items that we had in the third quarter repeat in the fourth quarter.

Brian Drab - William Blair & Company L.L.C.

Okay. And what should we expect if you can give us any feel for this in terms of restructuring charges in the next couple of quarters? It was a little higher than we expected in this quarter.

Lisa McDermott

Given the nature of restructuring charges, they are difficult to forecast. I know right now, I can tell you what I know right now that there will probably be at least $3 million of restructuring one-time items in the fourth quarter, which is not, by the way, included in the Reg G table in the back of our deck today.

Eric Krasnoff

But there are no other major ones that we see on our radar right now. And we only have 2 months to go.

Brian Drab - William Blair & Company L.L.C.

Got it. All right.

Operator

Your next question comes from the line of Robert Eastman with Robert W. Baird.

Richard Eastman - Robert W. Baird & Co. Incorporated

Just 2 quick questions. One is, Lisa, in the gross margin slide, you mention this inventory contract related charges. What's that related to? What's the magnitude to that?

Lisa McDermott

Well, the magnitude of it was about $6 million in the quarter. And it's related to a number of different things. As we're progressing with the Life Sciences, European regional headquarters, we are rationalizing some of the inventory and writing off some of the inventory. There was a contract that we had to provide some reserve for. So it was just a number of different things that happened to occur in the third quarter.

Richard Eastman - Robert W. Baird & Co. Incorporated

It wasn't a clunker system or anything like that?

Lisa McDermott

No.

Richard Eastman - Robert W. Baird & Co. Incorporated

Okay. And then that was all in Life Sciences?

Lisa McDermott

Yes.

Richard Eastman - Robert W. Baird & Co. Incorporated

Okay. And then also just -- when you talk about in the Industrial side of the business, Eric, you had mentioned this as well, the gross margin was unfavorable due to mix. Is that primarily higher system sales or was the mix on the consumables side noticeably lower margin as well?

Eric Krasnoff

It was both. On the consumables side, I think Lisa referred to the windmill -- not windmill, the wind turbines. And what happens there is the initial sale is generally to the OEM at a lower margin and then the consumables strain picks up, and it’s a much higher margin. We see that in mobile equipment, we see it in Aerospace as well.

Richard Eastman - Robert W. Baird & Co. Incorporated

Okay. And then just lastly, I just wanted to double check a number. You had mentioned price in the third quarter contributed $3 million?

Eric Krasnoff

Yes.

Richard Eastman - Robert W. Baird & Co. Incorporated

Okay, great.

Operator

[Operator Instructions] Your next question comes from the line of David Rose with Wedbush Securities.

David Rose - Wedbush Securities Inc.

A couple of quick questions. On pricing, do you plan to have any additional pricing actions in the fourth quarter? And if so, how much should it contribute in the quarter? And then secondly, are we still in line with the approximate $0.09 per share for -- x tailwind for the year given that we have $0.04, I guess we have $0.05 for the first 9 months that implies another $0.04 for the fourth quarter? And then lastly, can you talk a little bit about your Asahi agreement and when that expires and what you plan to do with that.

Eric Krasnoff

Sure. First, on pricing, we don't have a periodic pricing schedule. We are -- in different businesses, in different parts of the world, there's always pricing activity going on as contracts come up for renewal, as we're pricing new products, et cetera. So that's an ongoing effort, and particularly with our belief that inflation is going to become much more significant over the next few quarters, we've revved up those. I don't want to quantify the amount right now for the fourth quarter.

Lisa McDermott

Although we do expect to see continued pricing improvement.

Eric Krasnoff

Yes. On Asahi, the Asahi alliance has been going on for well over 20 years right now. It's very solid. We're partners. We continue to expand the commitment to each other in the marketplaces. And there's no tombstone event out there I would look out or any dates that I think we should -- need to focus on. It's been a great relationship for both parties.

Lisa McDermott

I'll take the FX question since it was a 3-part question. We do see, as I mentioned, FX as a stronger tailwind than -- at current rates than the $0.09. So I would put us in the range of $0.09 to $0.12 for the year.

Operator

And your final question comes from the line of Jon Wood with Jefferies.

S. Brandon Couillard - Jefferies & Company, Inc.

This is Brandon Couillard in for Jon. Lisa, if I take a step back and look at your fiscal '13 financial targets, I believe it included an assumption that the diluted share count kind of migrates toward the 113 million range. And so given where paltry interest income rates are, can you comment on your enthusiasm for share repurchases, would have anticipated perhaps more activity on that front?

Lisa McDermott

Well, my comment would be that we are highly enthusiastic about the company. And we continue to be highly enthusiastic about buying back shares. I will say that we are behind schedule with respect to the targeted share count for 2013. And there's a number of factors impacting that, not just the level of buyback but also the spot price, where it's been. But you should expect from Pall to continue to see the $100 million to $150 million buyback history this year that you've seen in prior years.

S. Brandon Couillard - Jefferies & Company, Inc.

Great. And then in the context of what we've seen from a few semiconductor-related companies in the last month or so, is there anything changed on the macro front in that market recently that gives you any pause or concern on the trajectory of that business?

Eric Krasnoff

Our orders were I think still up about 8% on a 7% sales increase in the third quarter. What's cushioning us now is the Consumer Electronics side of that business, which is not all semiconductor. But having said that, we expected the third quarter to be relatively flat, up a little bit, and we're expecting our fourth quarter to be flat, and maybe we'll be pleasantly surprised again.

Operator

There are no further questions at this time. I would like to now turn the call back over to Mr. Krasnoff.

Eric Krasnoff

Okay. Thank you. I want to thank all of you for participating this morning and for your interest in Pall. Please put September 14 and 15 on your calendars for our fourth quarter and full year results. We're going to release on the 14th after the market closes and follow up with our conference call the next morning at 8:30 a.m. Eastern Time. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.

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Source: Pall's CEO Discusses Q3 2011 Results - Earnings Call Transcript
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