Pall Corporation (NYSE: PLL)

Analysts Dalton Friedhoff dalton-friedhoff@uiowa.edu

Zhendong Jin zhendong.w.jin@gmail.com

Company Overview Pall Corporation manufactures and distributes high-tech filtration, separation, purification consumables and systems. Pall Corp has positioned itself as a global leader in the filtration industry, with operations in Europe, the Americas, and Asia. The company reports revenues under two segments: Life Sciences and Industrial. The Pall Life Sciences business segment serves end-users in the biopharmaceutical, food and beverage, and medical markets. The Pall Industrial segment serves end-users in the process technologies, aerospace, and microelectronics markets. Excluding the impact of foreign currency translation, Pall Corp experienced a 1% sales increase in 2013, due to a lack luster industrials segment performance, offset by tremendous growth in the biopharmaceutical end user market.i

Stock Performance Highlights 52 week High $91.83 52 week Low $62.72 Beta Value 1.30 Average Daily Volume 667,206

Share Highlights Market Capitalization $9.47 b Shares Outstanding 109.78 m Book Value per share $5.42 EPS (2013) $5.10 P/E Ratio 27.39 Dividend Yield 1.27% Dividend Payout Ratio 19.61%

Company Performance Highlights ROA 16.86 % ROE 34.58 % Sales $2.648 b

One Year Stock Performanceii

Current Price: $85.45

Target Price: $85.47 - $89.85

Separates from Competition

Favorable Regulatory Environment: As the global population keeps growing, water scarcity becomes an increasing concern for developing countries. Regulations in China currently limit the annual consumption of water, therefore increasing the need for water recycling facilities. We believe stricter regulations coupled with greater filtration awareness will provide a channel for long-term sustainable growth.

High Growth End Markets: Within the filtration industry, the life sciences end user segment offers the highest growth rates. Pall Life Sciences is currently responsible for just under 50% of sales, which we believe will increase ≈700 bps to 56% by 2019. The membrane filtration industry for biopharmaceutical companies is expected to grow at 16% CAGR.iii

Diversified Business Portfolio: Pall Corp. currently serves 14 different end user markets within three major geographic regions. Not a single customer of Pall represents more than 3% of annual sales. We believe Pall Corporation’s robust business portfolio will enable the company to capitalize on high growth prospects, while mitigating risk through diversification.

Strategic Acquisitions: Pall Corporation continues to expand its position in the filtration industry through strategic acquisitions. Identifying a growing need in the biopharmaceutical industry for single-use filtration systems, Pall acquired ATMI LifeSciences in 2014. We believe this strategic acquisition will provide many synergies for Pall’s already high growth pharmaceutical segment.

Operational Improvements: Due to the highly fragmented nature of the filtration industry, Pall Corp is continuously looking for operational improvements to stay ahead of the competition. In 2013, Pall’s restructuring yielded over $50 million in costs savings, with expected incremental savings of $25 million per year in fiscal 2014 and 2015. We believe these operational improvements will allow for at least a +200 bps improvement on the COGS and SG&A lines combined.

Krause Fund Research Spring 2014

Industrials

Recommendation: HOLD April 22, 2014

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Based on the current economic environment, our research conducted on the industrials sector, and company-specific analysis, we recommend Paul Corporation (NYSE: PLL) as a Hold. We believe Pall Corp and its sub-industry, filtration, are currently in the growth stage. Pall Corps relatively large market share in a highly fragmented industry coupled with leading technologies, distinguishes Pall from its other main competitors. Pall Corp has strategically positioned itself to generate over 60% of its revenue from the Process Technologies, and Life Sciences end user markets. Compared to other filtration markets, these business segments have the highest growth potential, along with the highest margins, and the replacement needs for end users is high. While we believe the filtration industry and Pall Corp have huge growth potential, we do not find the value of the company inexpensive, as it is currently trading at 30x earnings.

US Gross Domestic Product

US Gross Domestic Product (GDP) measures the dollar amount of goods and services produced in the United States within a specific time period. GDP growth fluctuates regularly during economic cycles. Within the past 10 years, US GDP growth reached as high as 3.8% in 2004 and fell as low as -2.8% in 2009 due to the financial crisisiv. For Q4 2013, the final estimate of real GDP growth was 2.6%v. After observing the trend of the GDP growth during the past two years, we believe the overall US economy is warming up and heading to the expansion side. During 2014-2018 we expect GDP will grow 3.0-3.5%, reaching a 3.2% growth rate thereafter.

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Historically, US GDP growth has a high correlation with the performance of the industrials sector. Improvement in GDP indicates a positive sign for industrials companies, like Pall Corporation. Gross domestic investments on machinery and equipment have been increasing in the past two years and grew at 10.9% in Q4 2013vii. We expect the demands for industrials products will maintain its growing momentum during the next 5-year period, and in turn will support the healthy revenue growth for the industrials sector.

Interest Rates

Interest rates are especially important to the industrials sector as most industrials companies are capital-intensive. Fluctuation in interest rates directly affects companies’ ability of financing, especially through issuing debts. Companies that have access to cheaper capital often can generate more economic profits from their business operations.

In the US, yield on the 10-year Treasury bonds is considered as one of the most important numbers in the world of interest rates and serves as the benchmark to calculate corporate costs of debt. The yield has kept climbing from its lowest level at 1.93% in May of 2013 since the Fed’s first announcement of tapering on the quantitative easing program. The 10-year Treasury currently has a yield of 2.721%viii, which is still considered low compared to historical records.

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We expect the 10-year Treasury yield will stay below 3.0% throughout 2014 since Fed has the intention to keep interest rates low until unemployment rate falls below 6.5%. As a result, Fed will not likely fully phase out its asset purchase plan by the end of this year, which will keep suppressing the yields on Treasury bonds. Low interest rates lead to low cost of debt, which in

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EXECUTIVE SUMMARY

ECONOMIC OUTLOOK

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turn will translate into more profits for industrials companies with large-scale capital expenditures.

Commodity Prices

A major group of customers for the industrials sector are commodity producers, such as oil and gas companies. Therefore, commodity prices, like crude oil, indirectly influence the performances of many industrials companies, including Pall Corporation. Decreases in commodity prices often signal lower demands for products and services from industrials companies.

According to the data from the US Department of Energy, world crude oil price, traded as high as $104.07/barrel in 2013, will continue to drop below $100/barrel until 2016 due to the decreasing demands from emerging markets, like China, Europe, and Indiax. However, we expect the crude oil price will pick up again in the long run, as oil is more expensive to extract because of the diminishing marginal returns in global production. As a result, we estimate the short-term decrease in oil price will drag the growth of industrials companies, but the situation will reverse in the long run.

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Currency Exchange Rates

Most industrials companies have extensive operations around the world, which means those companies’ revenues are susceptible to fluctuation in foreign currency exchange rates. Companies exporting goods and services oversea generate less revenues in a strong US dollar environment. While, companies spend less to import products from foreign suppliers when dollar appreciates against other currencies. On the contrary, a weaker dollar is unfavorable to companies that demand products from abroad.

Due to the large presence of US industrials companies in Europe, Euro – US dollar plays as one of the most critical currency exchange rates in the industrials sector. According to the below chart, Euro has kept appreciating against US dollar during the past year, which benefits industrials companies that supply goods to European countries.

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Considering the current low interest rate environment paired with the continuing quantitative easing program carried out by the Fed, we believe Euro will keep appreciating against US dollar throughout 2014 and the Euro – US dollar rate will fluctuate between 1.35 and 1.40. However, in the long run, we expect the Euro – US dollar rate to drop below 1.30 after 2015 when the US economy shows more improvement and strength.

Historically there is a positive correlation between the performance of the industrials sector and U.S. Equities. Most sectors in industrials are expected to grow faster than the U.S. economy according to IBISWorld.xiii The chart below shows the annual return for both the S&P 500 and Pall Corp.

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CAPITAL MARKETS

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Industry Overview

The Industrials sector serves a diversified group of end user markets and products, including construction equipment, farm machinery, heavy duty trucks, pumps, values, motors, compressors, hydraulics, industrial controls, and filtration. According to the CFA Institute, the Industrials sector comprises the following four major industry segments:

• Construction and Mining Equipment • Farm Machinery • Heavy Trucks • Industrial Machinery

In terms of competitive landscape, the top three industry segments listed above have 4-5 large manufacturers accounting for 55-60% of the total industry’s revenue. The industrial machinery segment is unique, because it has a far greater number of manufactures that serve a wide variety of end user markets, whose products consist of pumps, valves, motors, compressors, hydraulics, filtration, industrial controls, and automation systems.xv

Sub-Industry Outlook

The filtration industry is a large sub-segment of industrial machinery and is growing fast. From 2008-2014, filtration has gone from a $60 b to a $70 b industry. The market is highly fragmented, with many global and regional companies supplying a wide range of filtration products. The table below breaks down the main end user segments by their respective market sizes.

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Below is a list of common filter product applications:xvii

• Increasing production efficiency and reducing costs

• Developing and producing biologically derived drugs, plasma, and vaccines

• Removing pollutants from water and air

• Waste water treatment and industrial emissions

• Protection of engines and other industrial systems

Government

Government regulations and environmental initiatives are a crucial component of the filtration industry’s success. Water purity specifications for municipality and residential drinking resources, along with recycling of treatment water offer a huge channel for long-term growth. Additionally, the governments high specification and quality standards in the biopharmaceutical industry offers huge growth potential for companies specializing in advance membrane filtration technologies.

Markets and Competition

The competition is intense in all Pall Corp.’s markets, ranging from large corporations to smaller regional competitors. Through Pall’s advance technologies, robust product portfolio, and global outreach, the company is able to differentiate itself from market competition. Currently, Pall Corp is the largest pure play filtration, separation, and purification company in the market. The table below compares key operating and financial metrics for the filtration industry leaders.

Company Ticker

Mkt cap mm

Profit margin

P/E ttm

Div. yield

Beta

DCI 6,108 10.78% 24 1.3% .82

CLC 2,809 10.02% 24 1.2% .85

PNR 15,883 7.18% 31 1.3% 1.22

ECL 32,446 7.3% 34 1.0% .63

PLL 9,426 11.78% 31 1.3% 1.3

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Air Polution,

1.2Transportation,

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Life Sciences, 6

Water, 8.2

End User Segment ($ billions)

INDUSTRY ANALYSIS

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Porter’s Five Forces

Industry Competition: Due to the highly fragmented nature of the filtration industry, the level of competition is intense in all markets. Competitors consist of both global and small regional companies. At the regional level the market is highly fragmented and more consolidated at the global end.xix

Threat of New Entrants: The threat of new entrants in the filtration industry is low/high depending on the end user market. For Pall Corporation the threat of new entrants is low, due to the strict specification requirements, and regulation around its end user markets, that require advanced membrane technologies for finer filtration standards. Threat of Substitutes: The threat of substitute products is moderate/high, depending on the end market user specific needs. One of the most significant threats in the industry comes from alternative technologies. These alternative products generally consist of older filtration methods that don’t require the finer level of membrane technology that Pall Corp specializes in. Power of Buyers: Buying power in the filtration industry is low/moderate, depending heavily on the size and the type of end user market. The level of bargaining power also depends on whether the company sells to a manufacture or directly to the consumer has a significant impact on bargaining power as well. Power of Suppliers: The power of suppliers in the filtration industry is low. The materials required to produce filter media is readily available and low costing. Additionally, the number of suppliers that supply the necessary material to produce filters are abundant.xx

Pall Corporation (PLL) is a leading global supplier of filtration, separation, and purification technologies. The company has two business segments: Life Sciences and Industrial. The Life Sciences business focuses on developing, manufacturing and selling products to customers in the Biopharmaceutical, Food & Beverage and Medical markets. The Industrial business focuses on serving the customers in the Process Technologies,

Aerospace and Microelectronics markets. Pall Corp. operates globally in three geographic regions: The Americas; Europe (including the Middle East and Africa); and Asia. On August 1, 2012 the company sold its “Blood Product Line” to Haemonetics Corporation for $550 (MM).xxi

Corporate Strategy

Pall Corporation actively pursues organic growth through:

1. Accelerated expansion in high-growth geographies such as Asia, Eastern Europe, and the Middle East.

2. Focus on high-growth markets such as biotechnology, diagnostics, vaccine production, and energy.

3. Use strong cash generation and balance sheet capacity for strategic acquisitions.xxii

In the last few years Pall Corporation has used its strong cash position to make acquisitions that align with corporate strategy goals #1 and #2 mentioned above. Below is a table of Pall’s most recent deals:

FY Target Acquirer

Deal Value mm

2012 Pall Corp Blood Line

Haemonetics Corp 551

2014 ATMI LifeSciences Pall Corp 185

2012 ForteBio Inc Pall Corp 142 xxiii

In 2013, Pall strengthened its advanced solutions for biopharmaceutical customers by acquiring the ATMI LifeSciences business for $185 million. ATMI is a technology leader in the field of single-use systems for the biopharmaceutical industries. Due to the efficiency and cost savings these machines provide throughout the drug manufacturing industry, we believe this will enable the company to further grow its Life Sciences system sales in the future. Therefore, we expect an annual growth rate over the next five years between ≈ 8-9.5%, with a continuing value growth rate of 5.5%. In 2012, Pall acquired ForteBio and extended its capabilities in the more than $1 billion biopharmaceuticals process monitoring market and in the protein research market.

COMPANY ANALYSIS

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Also during fiscal year 2012, Pall Corp sold its blood filtration line to Haemonetic Corp for ≈ .551 billion USD. The reason for selling the blood line was due to inadequate performance and margins compared to other business segments. Additionally, in 2011 (not listed above), Pall enhanced its capabilities to support customers in the fast-growing Latin American market by acquiring its long-time Brazilian distributor partner, Engefiltro.xxiv

Life Cycle

Pall Corp. is in the growth stage of the corporate life cycle. Growth rates are still expected to remain high around 5-7% or 2x GDP.

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xxv In the past year, the company had 160 invention disclosures and 27 original patent applications (more than double avg. annual production over last decade).xxvi We believe this huge investment in R&D will allow Pall Corp. to benefit from high-growth end markets. Additionally, we believe that the company’s relatively large size will allow it to grow through strategic acquisitions, expanding into new markets, and cost-reducing initiatives.

Products and Markets

Pall Corporation’s products primarily consist of: Consumables and Systems. The consumable filtration products are principle filters made out of the company’s proprietary filter media using their advanced technology and engineering. The systems generally include the consumable filtration media along with an associated piece of hardware. During fiscal year 2013, consumables accounted for 87% of sales, while systems only represented 13%.xxviii The following pie chart breaks down Pall Corp’s revenues by end user markets.

The Pall Industrial segment is represented by the dark blue slices and the Pall Life Sciences segment in gray. Each side of the business was responsible for 50% of the

company’s 2013 revenues. As depicted in the chart, the BioPharmaceuticals and Process technologies account for over 60% of the entire sales figure. Coupled with diverse customer backgrounds, Pall Corp also serves a variety of end markets from all around the world. The pie chart below shows the geographic regions that Pall conducts business with as a percent of total sales.

New Products

Pall Corporation is continually developing new products to meet the specific demands of its customers. The company’s proprietary materials and technologies, combined with advanced engineering capabilities give it the ability to produce new innovative products and enter new markets.

Within BioPharmaceuticals industry, the Biotechnology segment represents the fastest growing part of this market. Due to strict government regulations, drug manufacturers are starting to recognize the cost-and-time-saving benefits of disposable sing-use systems, compared to traditional hard-piped steel factories.

Recent Earnings and Guidance

The table below summarizes Pall’s historical earnings with analyst expectations, stock price movements, and our group’s future EPS estimates:

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Process Technologies31%

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Europe39%

Americas32%

Asia29%

Geographic Regions (as % of sales)

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On average, over the last 5 years, analyst expectations and managerial guidance have been closely aligned to actual performance metrics. Due to Palls ability to meet and exceed expectations, its stock price has experienced healthy annual returns between 27-31%, excluding an 8% increase during fiscal year 2012.

On February 27, 2014, the company reported a pro forma earnings per share of $0.82 for Q2 of fiscal year 2014, exceeding the average analyst expectations of $0.80 per share. Compared to the previous year was an increase of $0.09 or 12%. This positive performance was due to a 4% sales increase excluding FX, a gross margin decline of 70 bps, and SG&A as a percent of sales down 210 bps. Pall Life Sciences continues to be the main driving force, reporting an 8% growth in sales for the quarter, while Pall Industrial sales remain flat.xxx

Production and Distribution

Pall Corporation has facilities in Europe, United States, and Asia to support its primary activities as research & development, manufacturing, warehousing, marketing, administration, and selling. The company sells products to the market mainly through its own direct sales force as well as distributors. For example, Pall’s laboratory products are sold to customers through its distribution partner, VWR International. Satair A/S, as a distribution partner, helps Pall to reach its commercial airline customers.xxxi

Significant Customers

Pall Corporation has a broad customer base and serves 14 different industries, such as Food and Beverage, Medical, Machinery and Equipment, Biopharmaceuticals, and Microelectronics.xxxii

The following chart displays the company’s top ten customers measured by the percentage contribution to Pall’s total revenue:

Competition

While the competition in the filtration industry is intense, Pall Corp is able to distinguish itself through advanced engineering and technologies. The company focuses on high end growth markets like biopharmaceutical that require the finest level of filtration due to strict regulations on drug manufacturing. Due to Pall being in the market place since 1949, they have substantial industry knowledge and expertise, to help drive new products and gain market share from other competing players.

Research and Development

Pall Corporation invest heavily in developing sustainable products to provide clear environmental benefits. Pall fluid management solutions enable customers to purify and conserve water, consume less energy, make alternative energy possible and practical, advance medicine, and minimize emissions and waste. Pall’s emphasis on R&D helps it to meet the goal of making our world safer, greener, and better. The company’s R&D expenses totaled $94,216,000 in fiscal year 2013, $82,932,000 in fiscal year 2012 and $80,506,000 in fiscal year 2011.xxxiv

Major Stock Holders

The table below gives a breakdown of major stockholders at Pall Corporation:

Insider and 5% Owners: 0%

Institutional & Mutual Fund Owners: 96%

Number of Institutions Holding Shares:

422

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The top 4 largest institutional holders are: ClearBridge Investment, LLC, Vanguard Group, Inc., Price (T.Rowe) Associates Inc., Waddell & Reed Financial Inc. Individually, these institutions own between 6-7% of all outstanding shares.xxxvi

Payout Policy

Pall Corporation is committed to making consistent dividend payments to its shareholders. The company never missed one single payout in the past 13 years. In fact, the payouts rose from $0.1 in 2004 to today’s $0.275, which indicates a healthy growth of the company. The following table shows the historical and

Company Percent of Sales Boeing Co/THE 2.40 % JGC Corp 2.03 % Rolls-Royce Hold 1.84 % Omnicare Inc. 1.51 % Toshiba Corp 0.99 % Maire Tecnimont 0.66 % BAE Systems PLC 0.23 % Nihon Yamamura 0.21 % Airbus Group 0.15 % xxxiii 10.03%

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our models assumptions for the payout ratio as a percentage of sales, and the dividend per share amount.

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There are three major trends that are currently driving demand for Pall Corporation:

1.) High growth Biopharmaceuticals industry

2.) Achieve cost reductions through restructurings

3.) Favorable government regulations

The Biopharmaceuticals division plays as a key driver for Pall Corporation’s overall growth. The global Biopharmaceuticals market has reached $262 billion in 2013 and keeps growing. However, there are only three major players in this market, which means there is huge room for Pall to gain more market share and grow revenue within this promising market. Within the past three years, the Biopharmaceuticals division of Pall Corporation has shown an average sales growth rate of 11%, which is the highest among all Pall’s business segments. This attractive growth rate is expected to remain for the next five years.

Pall Corporation has been continuously conducting restructurings to achieve more efficiency in its operations. Pall has been increasing the profitability of its overall business portfolio by selling off business units that are losing money. In addition, Pall actively conduct acquisitions to realize synergies. As a result, the company is able to keep lowering SG&A costs and other operating expenses to boost its net earnings.

With the increasing awareness of water scarcity and societal trends toward cleaner living, more and more

people care about the safety of their drinking water. Governments in developing countries have started finding ways to provide citizens with cleaner drinking water. As a result, demands for purification systems and filters will increase significantly. Therefore we believe Pall Corporation’s water purification and filtration technology, will see more sales growth in both the Food & Beverage and Process Technologies business segments. Overall, these trends provide nice support for the company’s long-term sustainable growth.

• Market Leader in the filtration industry, due to product innovation and advanced membrane technologies

• Quick expansion through strategic acquisitions

• Continuous improvements in operational model resulting in significant fixed cost reductions

• Promising outlook for the biotechnology and pharmaceutical industries

• Diversified end markets and geographic regions

• Recovering process technology market with a positive future outlook, due to increasing global demand for water and treatment facilities

• Highly fragmented market leads to intense competition

• With over 60% of operations outside the US, Pall is at risk to foreign currency and interest rate fluctuations

• Potential negative impacts on business growth due to unfavorable regulations and policies in emerging markets

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VALUATION ANALYSIS

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Valuation Summary

From multiple valuation techniques, we finally arrive at the HOLD recommendation for the investment on Pall Corporation’s stocks. Our valuation analysis mainly include following models: discounted cash flow (DCF), economic Profit (EP), dividend discount model (DDM), and relative valuation focusing on price-to-earnings ratios (P/E) and price/earnings-to-growth ratios (PEG).

The DCF and EP models give us an intrinsic value of Pall’s stocks at $87.66. The DDM yields an intrinsic stock price of $60.92. The relative P/E and PEG ratios analysis show a per share value of $76.02 and $62.43 for 2014, respectively. Overall, we believe our DCF and EP models give us the best prediction of Pall Corporation’s intrinsic stock value. The current trading price of Pall’s stocks falls in our target price range of 85.47 – 89.85, which confirm us that Pall’s stocks are fairly valued. As a result, we recommend a HOLD for investments in Pall’s stocks.

Revenue Decomposition

Overall, we estimate Pall Corporation’s total revenues will have an average growth rate of 7.07% in the next five years due to the business’s high growth potential. Starting from 2019, the company will enter into a constant growth stage with a continuing growth rate of 4.99% for total sales, which is slightly below the long-term GDP growth plus the inflation. According to the management guidance, we expect Pall will accomplish the following three goals to maintain its healthy revenue growth:

• Focus on revenue growth from the fast growing and profitable Biotechnology industry.

• Maintain competitive market share in the Process Technologies industry and improve revenue growth by enhancing technology development.

• Turnaround negative sales growths in Food & Beverage and Microelectronics segments, and maintain stable systems sales growth.

The Biopharmaceutical division is not only the largest but also the most profitable segment for Pall Corporation. Among all Pall’s operations, the Biopharmaceuticals segment has a highest average growth rate of 9.41% during the last three years. The global Biopharmaceuticals industry has reached $262 billion in 2013 according to IBIS Worldxxxviii. A key growth driver for our company is the increasing

adoption of single

xxxix. As a result, we believe there is huge room for our company to gain more market share and grow revenue within this promising market. We expect that Pall’s Biopharmaceuticals division will keep growing at an average of 11% throughout 2018. After reaching the constant growth stage in 2019, the division will still maintain a 5.8% growth rate due to its strong growing momentum, which is 0.8% higher than the GDP growth plus inflation in the long run.

-use processing technologies for drug production as a replacement for “hard-piped” steel factories

The Process Technologies division serves as the second largest component in Pall’s overall sales in 2013. The division serves a broad range of end-markets, including energy producers and users as well as Machinery & Equipment companies, which accounts for the largest customer base for our company. Thus, revenues from Process Technologies are vulnerable related to the performance of the Energy and Machinery & Equipment industries. As we can see in the revenue decomposition table, growth of sales for Process Technologies dropped down to -6.93% from a 6.91% in 2012, and the deep drop was mainly caused by weak performances among all the end-markets, especially in Europe and Asia. The slowdown in the Machinery & Equipment industry accounts for the most important impactxl. However, with the improving global economy and increasing manufacturing activities, we expect Pall’s Process Technologies sales will turn around and grow in line with the overall economy. Therefore, we forecast sales from the Process Technologies division to grow at an average level of 3.9% from 2014 to 2018, and increase constantly with the GDP growth plus inflation in continuing years after 2019.

Both Food & Beverage and Microelectronics segments met negative sales growths during the past two years. The weak sales performance for Food & Beverage was majorly caused by the softness in the wine market in France and Australiaxli. While, the downturn in the sales of Microelectronics consumables reflected weak performance in the end market, including display and data storage industries. Although Food & Beverage division had three negative growth numbers in a row, there was a clear trend that the division is recovering. Also, we believe the consumption expansion in Latin America will further help turnaround Food & Beverage sales growth. As a result, we expect the sales to grow at a moderate average rate of 3% throughout 2018, and grow at 4.5% in the constant growth stage. For the sales of the Microelectronics division, we believe the company will benefit from the growth in the Graphic

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Arts end market in Europe and turn sales growth into positive. However, we expect the growth will not be as strong as 18.24% in 2011 due to the decreasing PC sales in the global market, which we believe will erode the Microelectronics sales by more than 10% for our company. Therefore, we forecast the Microelectronics division to grow at an average rate of 5.3% in the next 5 years, and 4.5% during the continuing growth period. The weak capital spending in the Food & Beverage market from Asia and Americas caused the 2013 negative growth in systems sales within the Life Sciences business sector. However, we believe more and more people will care about the safety of drinking water, along with the availability of clean water moving forward. As a result, we estimate the system sales will grow at an average rate of 8.2% starting from 2014, which in line with the historical growth rate in 2012. The diminished funds available for Municipal Water projects led to a decrease in system sales in the Industrial business sector. We believe the budgets on Municipal Water projects will become stable going forward as economy improves. However, the funds will not be as large as before because water purification systems are not required to be changed yearly. We decide to assign a moderate average growth rate of 4.23% in next five years for the system sales within the Industrial segment, and a 4.38% growth rate in continuing years.

Discounted Cash Flow and Economic Profit Model

Our DCF and EP models result in an intrinsic stock price of $87.66, which is 2% higher than the current stock price. The premium mainly come from Pall Corporation’s expected strong revenue growth and continuing cost reduction.

Sales from the life sciences segment increased 7% in the first quarter of 2014, which was driven by the robust increases in the company’s medical and biopharmaceuticals businesses. At the meantime, Pall’s microelectronics business within the industrials segment also gained a 20% growth. With the company’s continued product innovation and competitive strength, we expect Pall will keep its current growth momentum and its overall revenue will keep increasing at an average rate of 7.07% in the next five years and 4.99% in the constant growth stage. As a result, we estimate Pall will grow its total sales by 47.72% six years from now.

At the same time, the company focuses on improving its operating structure to create more cost reduction by carrying out effective acquisition plans. In the past 10

years, Pall’s SG&A expenses as % of sales have dropped from 32.95% in 2004 to 30.60% in 2013. We believe Pall will remain on this track to achieve further improvement on SG&A and other costs going forward. We expect SG&A will drop to 29.60% after five years, which in turn will help increase the company’s overall intrinsic value.

Dividend Discount Model

Our dividend discount model yields an intrinsic stock price of $60.92. We expect Pall Corporation will have a 35% payout ratio during the forecast years, which in line with the company’s historical dividend policy. As a result, we estimate the dividend per share of Pall’s stocks will reach $1.83 in 2019. We do not believe the DDM model provides an accurate valuation for Pall Corp and have decided not to take it into consideration for our investment recommendation. The filtration industry and Pall are currently in the growth stage, with expected growth rates of 6-7% for the industry and a price 30 times earnings for PLL. We believe it is in the company’s best interest to invest earnings back into the company to take advantage of high growth rates. We believe that once the industry matures, that the company will increase its payout ratio to satisfy investor needs.

Relative P/E and PEG Ratios

We use two metrics, P/E ratio and PEG ratio, in our relative valuation analysis. The 2014 forward P/E ratio calculation yields an implied stock price of $76.02, and the 2014 forward PEG ratio analysis produces a price of $62.43.

We select the six highly comparable companies for our relative valuation analysis. All of them operate in the filtration and purification industry specializing in liquid filtration technologies. The companies are listed as follows:

1. Donaldson Company, Inc. (DCI)

2. Clarcor, Inc. (CLC)

3. ESCO Technologies, Inc. (ESE)

4. Pentair, Inc. (PNR)

5. Ecolab, Inc. (ECL)

After comparisons, we find Pall Corporation obsesses healthy valuation multiples. Pall carries relative high P/E ratio of 25.6 and PEG ratio of 2.5 for 2014 among all its peers selected in our comparable analysis. The

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high P/E and PEG ratios reflect Pall’s strong growth potential and relatively low risks due to its diversified business portfolio. However, the rich valuation will limit the room of growth for Pall’s stock price. We expect the company’s stock will not likely outperform the overall market, and that is also why we give a HOLD recommendation.

Weighted Average Cost of Capital

According to calculation, our estimation of Pall Corporation’s weighted average cost of capital is 9.33%.

Cost of Equity: We use the Capital Asset Pricing Model (CAPM) to compute Pall’s cost of equity. For the risk-free rate, we use the yield to maturity of the 30-year US Treasury bond as of April 18, 2014, which is 3.52%. We get Pall’s raw beta of 1.30 from Bloomberg, which is calculated on a 2-year weekly basis. In addition, we compute the equity risk premium as 4.80% by averaging 4.96% and 4.64%. We take 4.96% from the New York University Professor Aswath Damodaran’s website and 4.64% from the US Historical Average Risk Premiums table on our course website.xlii After adding the risk-free rate to the product of equity risk premium and beta, we calculate the company’s cost of equity as 9.76%.

Cost of Debt: Pall Corporation currently has one publicly traded bond with a rating of BBB+. We find the bond has a yield-to-maturity of 4.52% from Bloomberg. To verify the rate, we add default premium to risk-free rate that corresponds to the bond’s rating and maturity period, and the calculation gives us the same number. We believe the 4.52% cost of debt reflects the true required rate of return on Pall’s long-term debt.

Capital Structure: Pall Corporation does not have any preferred stocks and thus its capital only consists of common stock and debt. We realize the company constantly maintained a very low level of debt and rarely changed its overall capital structure in the past. Also, the management does not provide any guidance on whether the company will take more debt leverage in near future. So, we believe Pall will keep its capital structure constant going forward. Currently, the company has $9,732 million in equity and $708 million in debt, which represents 93% and 7% of the total capital, respectively. We use these weights in our WACC calculation and assume the cost of capital will hold constant during the forecast period.

Sensitivity Analysis

We perform sensitivity analysis to test what are the impacts on the intrinsic stock price if the key assumptions are changed. In our analysis, we test the following nine key assumptions: beta, risk-free rate, equity risk premium, CV growth rate, cost of debt, marginal tax rate, COGS as % of sales, R&D as % of sales, and SG&A as % of sales.

Beta: We currently use an equity beta of 1.30 from Bloomberg, which is based on the weekly return over a 2-year period. According to the first sensitivity table, while keeping risk-free rate the same at 3.50%, a 1.28 beta would raise the stock price to $89.90; however a 1.32 beta would lower the stock price to $86.25. The table illustrates how small changes in beta could cause significant price fluctuations. If Pall Corporation decides to issue more debt to expand its operations in the future, the company’s equity beta will potentially rise and lead to a higher cost of equity, and in turn, the intrinsic stock price will drop.

Risk-Free Rate: We use the yield-to-maturity of the US 30-year Treasury bond as the risk-free rate in our model, which was 3.52% as of April 18, 2014. As we can see from the first sensitivity table, when we hold equity beta constant at 1.30, a 3.25% risk-free rate would yield a $93.07 intrinsic stock price, however a 3.75% risk-free rate would result in an intrinsic stock price of $83.52. The results show that minor differences in risk-free rate could have substantive impact on the intrinsic stock price. The Federal Reserve has announced it will keep trimming asset purchases during its recent meeting. Thus, it is likely that yields on treasury bonds will rise in near future, causing the risk-free rate to rise and stock price to fall.

Continuing Value (CV) Growth Rate: The CV growth rate plays a significant role in valuing our company. According to the DCF model, more than 85% of the total value of operating asset comes from the company’s operation in its continuing growth stage. From the second sensitivity table, we can see different CV growth rates of 4.75% and 5.25% could yield a $7.45 difference in intrinsic stock price, while holding equity risk-premium constant at 4.80%. We expect the CV growth rate to be 4.99% for Pall Corporation, which in line with our outlook for the future GDP growth, inflation, and the company’s profitable business.

Equity Risk Premium (ERP): The equity risk premium reflects investors’ perception of the risk level of stocks compared to other assets, and it continuously plays an important role in stock valuation for decades. According

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to our sensitivity analysis, the intrinsic stock price will increase when ERP decreases. While keeping CV growth rate the same at 5%, a 4.6% ERP gives a stock price of 93.06, and a 5.00% ERP yields an $83.18 intrinsic stock price. Since last year, the stock market has continuously broken historical high levels. As a result, investors may view stocks as risker assets than before, and ERP will likely rise. An increase in ERP will finally cause intrinsic stock price to drop.

Cost of Debt and Marginal Tax Rate: We use 4.52% for the cost of debt of Pall Corporation, which is based on the yield of the company’s publicly traded bonds with the longest maturity period. From the third sensitivity table, costs of debt of 4.00% and 5.00% will produce intrinsic stock prices of $88.21 and $87.16, respectively. Risk-free rate and the company’s bond rating will directly affect the cost of debt. We expect the risk-free rate will increase when the Fed eventually stops its quantitative easing program. Increases in cost of debt will result in lower intrinsic stock prices. However, the suppression on stock price caused by the increasing cost of debt will not be significant because the company maintains a fairly low level of debt in its capital structure. We project a marginal tax rate of 25% by averaging the reported marginal tax rates in the past 10 years. The 25% marginal tax rate is relatively low for Pall Corporation compared to other peers because our company has extensive foreign operations and enjoy significant tax credits abroad. Changes in marginal tax rate will also affect the company’s overall value. According to our sensitivity analysis, holding the cost of debt at 4.50%, marginal tax rates of 25% and 28% will provide different stock price of $87.68 and $84.47 respectively. Higher marginal tax rates will reduce the free cash flow generated by our company and in turn will reduce the intrinsic stock price.

Cost of Goods Sold (COGS) as % of Sales: The average COGS as % of sales in the past 10 years is 46%, and there is an obvious trend that Pall Corporation’s COGS has kept decreasing. We expect the company to keep this trend and reduce its COGS as % of sales further in following years by taking advantage of scale of economy. The decreasing COGS will help the company to generate more cash flows and finally boost the intrinsic stock price. As showed in the fourth sensitivity analysis data table, while keeping CV growth rate constant at 5%, a 42% for COGS as % of sales yields an intrinsic stock price of $94.21, and a 44% results in a $83.42 stock price.

Research and Development (R&D) Expenses: We forecast R&D expenses to grow as % of sales going forward. The historical average of R&D is 3.06% of sales, and the expenses have not fluctuated substantively since 2004. However, we learn from the management guidance that Pall Corporation plans to enhance its R&D and file more patents to increase the company’s competitive advantage within the filtration industry. So, we predict the company will raise the R&D expenses as % of sales to 3.4% in the forecast years. Higher R&D expenses will lead to lower intrinsic values. As showed in the last sensitivity table, making SG&A as % of sales stay at the same level of 29.5%, a 3% for R&D as % of sales produces an intrinsic stock price of $90.33. However, a 3.8% R&D expense as percent of sales yields $86.03.

Selling, General & Administrative (SG&A) Expenses: We also predict SG&A expenses as % of sales during forecast years. SG&A plays as one of the key factors that impact our company’s value. A minor decrease in SG&A will significantly raise the intrinsic stock price. In the last sensitivity table, when we hold R&D as % of sales constant, changes in SG&A as % of sales from 29% to 30% will cause a $5.17 fluctuation in stock price. We expect Pall Corporation will keep the aggressive acquisition plan to maintain its rapid growth, and realize more synergies to reduce its SG&A expenses and operate more efficiently. Thus, we forecast the company’s SG&A as % of sales will keep dropping and help increase the company’s intrinsic value in the long run.

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Important Disclaimer

This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report

i Data from Pall Corporation 2013 Annual Report ii Yahoo Finance iii http://www.prweb.com/releases/pharmaceutical-membrane/filtration-market-2018/prweb11648969.htm iv http://bea.gov/newsreleases/national/gdp/2014/pdf/gdp4q13_3rd.pdf v http://www.bloomberg.com/markets/economic-calendar/ vi United States Department of Agriculture Economic Research Service http://view.officeapps.live.com/op/view.aspx?src=http%3A%2F%2Fwww.ers.usda.gov%2Fdatafiles%2FInternational_Macroeconomic_Data%2FHistorical_Data_Files%2FHistoricalRealGDPValues.xls

vii http://bea.gov/newsreleases/national/gdp/2014/pdf/gdp4q13_3rd.pdf viii http://finance.yahoo.com/echarts?s=%5ETNX+Interactive#symbol=%5ETNX;range=5y ix US Department of The Treasury

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

x IBIS, crude oil price http://clients1.ibisworld.com/reports/us/bed/default.aspx?entid=990007

xi IBISWorld Business Environment Profiles, World Price of crude oil

http://clients1.ibisworld.com/reports/us/bed/default.aspx?entid=990007

xii Data from Oanda Forex Trading http://www.oanda.com/currency/historical-rates/

xiii http://clients1.ibisworld.com/reports/us/iexpert/default.aspx?entid=949 xiv Data From Yahoo Finance, as of 2/21/2014

xv CFA Institute Industry Guides, The Machinery Industry, xvi Avedon Capital Partners, Filtration & Separation Industry Analysis Presentation,

http://avedoncapital.nl/system/resources/BAhbBlsHOgZmSSJDMjAxMS8xMi8yMi8wMC8zNy80OC80MjEvRmlsdHJhdGlvbl9pbmR1c3RyeV9zdHVkeV9leGNlcnB0Xy5wZGYGOgZFVA/Filtration

xvii Avedon Capital Partners, Filtration & Separation Industry Analysis Presentation,

http://avedoncapital.nl/system/resources/BAhbBlsHOgZmSSJDMjAxMS8xMi8yMi8wMC8zNy80OC80MjEvRmlsdHJhdGlvbl9pbmR1c3RyeV9zdHVkeV9leGNlcnB0Xy5wZGYGOgZFVA/Filtration

xviiixviii Data From Yahoo Finance as of 4/20/2014 xix Pall Corporation’s 2013 10K Report, Competition Section xx Avedon Capital Partners, Filtration & Separation Industry Analysis Presentation,

http://avedoncapital.nl/system/resources/BAhbBlsHOgZmSSJDMjAxMS8xMi8yMi8wMC8zNy80OC80MjEvRmlsdHJhdGlvbl9pbmR1c3RyeV9zdHVkeV9leGNlcnB0Xy5wZGYGOgZFVA/Filtration

xxi Data from Pall Corporation’s 2013 10K Report xxii Data from Pall Corporation’s 2013 10K Report xxiii Thomson ONE

https://www.thomsonone.com/Workspace/Main.aspx?View=Action%3dOpen&BrandName=www.thomsonone.com&IsSsoLogin=True

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xxiv Data from Pall Corporation’s corporate Website (http://news.pall.com/) xxv Avedon Capital Partners, Filtration & Separation Industry Analysis Presentation xxvi Data from Pall Corporation’s 2013 10K Report xxvii Pall Corporation’s 2013 Annual Report xxviiixxviiixxviii Pall Corporation’s 2013 10K Report xxix Data From Bloomberg, PLL Equity Earnings and Estimates, 4/21/14 xxx Pall Corporation PLL Q2 2014 Earnings Call Transcript xxxi Pall Corporation’s 2013 10K xxxii Pall Corporation’s Company Website

xxxiii Bloomberg, PLL US Equity, Supply Chain Analysis xxxiv Data from Pall Corporation’s 2013 Annual Report xxxv Data from Yahoo Finance as of 2/17/2014 xxxvi Data from Yahoo Finance as of 2/17/2014 xxxvii http://www.nasdaq.com/symbol/pll/dividend-history xxxviii http://clients1.ibisworld.com/reports/gl/industry/ataglance.aspx?entid=2010 xxxix Pall Corporation’s 2013 10K xl Pall Corporation’s 2013 10K xli Pall Corporation’s 2013 10K xlii http://pages.stern.nyu.edu/~adamodar/

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PALL CORPORATION Key Assumptions of Valuation Model Ticker Symbol

PLL

Current Share Price 85.45 Fiscal Year End July 31 Dividend Yield 1.42% KEY ASSUMPTIONS Cost of equity 9.76% Cost of Debt 4.52% Marginal Tax Rate 25.00% 10-Year Treasury 2.73% Beta 1.30 Risk-Free Rate 3.52% Equity Risk-Premium 4.80% CV growth rate 4.99% WACC 9.33%

PALL CORPORATION Revenue Decomposition (in millions)

Fiscal Years Ending July 31 2011 2012 2013 2014E 2015E 2016E 2017E 2018E CV 2019E By Business Segment

BioPharmaceuticals $ 681 $ 752 $ 812 $ 902 $ 1,010 $ 1,141 $ 1,278 $ 1,419 $ 1,501 9.78% 10.42% 8.04% 11.0% 12.0% 13.0% 12.0% 11.0% 5.8%

Food & Beverage $ 191 $ 182 $ 178 $ 183 $ 190 $ 199 $ 207 $ 216 $ 226 -12.45% -4.51% -2.56% 3.0% 4.0% 4.5% 4.3% 4.2% 4.5%

Medical $ 201 $ 195 $ 209 $ 221 $ 235 $ 250 $ 263 $ 276 $ 289 -49.80% -2.68% 6.86% 6.0% 6.5% 6.0% 5.5% 5.0% 4.5% System Sales $ 112 $ 121 $ 111 $ 120 $ 131 $ 143 $ 156 $ 168 $ 177 8% -9% 8.0% 9.0% 9.5% 9.0% 8.0% 5.5% Total Life Sciences Sales $ 1,184 $ 1,254 $ 1,309 $ 1,425 $ 1,566 $ 1,732 $ 1,904 $ 2,079 $ 2,193 -4.34% 5.87% 4.45% 8.86% 9.87% 10.62% 9.93% 9.19% 5.00%

Process Technologies $ 587 $ 628 $ 584 $ 605 $ 626 $ 651 $ 677 $ 708 $ 743 22.34% 6.91% -6.93% 3.5% 3.6% 4.0% 4.0% 4.5% 5.0%

Aerospace $ 201 $ 224 $ 237 $ 249 $ 260 $ 271 $ 279 $ 288 $ 297 -51.82% 11.18% 5.96% 5.0% 4.5% 4.0% 3.0% 3.2% 3.0%

Microelectronics $ 315 $ 308 $ 276 $ 288 $ 302 $ 319 $ 338 $ 357 $ 373 18.24% -2.18% -10.40% 4.5% 5.0% 5.5% 6.0% 5.5% 4.5% System Sales $ 230 $ 259 $ 242 $ 250 $ 259 $ 270 $ 281 $ 294 $ 306 12.50% -6.65% 3.6% 3.7% 4.1% 4.2% 4.4% 4.1% Total Industrial Sales $ 1,333 $ 1,418 $ 1,339 $ 1,392 $ 1,449 $ 1,511 $ 1,576 $ 1,647 $ 1,719 14.51% 6.38% -5.60% 3.99% 4.07% 4.33% 4.28% 4.47% 4.38% Total Sales By Segment $ 2,517 $ 2,672 $ 2,648 $ 2,818 $ 3,015 $ 3,244 $ 3,481 $ 3,726 $ 3,912 4.80% 6.14% -0.88% 6.40% 7.00% 7.60% 7.30% 7.05% 4.99%

PALL CORPORATION Income Statement (in millions)

Fiscal Years Ending July 31 2011 2012 2013 2014E 2015E 2016E 2017E 2018E CV 2019E Net sales $ 2,741 $ 2,672 $ 2,648 $ 2,818 $ 3,015 $ 3,244 $ 3,481 $ 3,726 $ 3,912 Cost of sales 1,270 1,180 1,170 1,217 1,302 1,401 1,503 1,609 1,689 Gross profit 1,471 1,491 1,478 1,601 1,713 1,843 1,978 2,117 2,223 Selling, general & administrative expenses 813 843 810 834 892 960 1,030 1,103 1,158 Depreciation Expense 98 111 106 112 113 114 117 121 125 Research & development expense 87 83 94 96 103 110 118 127 133 Restructuring & other charges, net 34 67 40 35 35 35 35 35 35 Interest expense, net 19 20 16 29 30 35 33 35 37 Earnings (loss) from continuing operations before income taxes 420 367 412 495 541 588 644 697 735 Provision for income taxes 104 86 82 124 135 147 161 174 184 Net earnings from continuing operations 279 281 330 371 405 441 483 523 551 Earnings from discontinued operations, net of income taxes 36 38 245 - - - - - - Net earnings (loss) 315 319 575 371 405 441 483 523 551 Basic Earnings Per Share From Continuing Operations

2.40

2.42

2.93

3.35

3.69

4.05

4.46

4.90

5.23

Basic Earings Per Share 2.71 2.75 5.10 3.35 3.69 4.05 4.46 4.90 5.23

Total Shares Outstanding 116.52 116.06 112.80 110.78 109.77 108.93 108.19 106.74 105.42

Dividends Per Share 0.69 0.81 1.00 1.17 1.29 1.42 1.56 1.71 1.83

PALL CORPORATION Balance Sheet (in millions)

Fiscal Years Ending July 31 2,011 2,012 2,013 2014E 2015E 2016E 2017E 2018E CV 2019E Current Assets: Cash & cash equivalents $ 558 $ 500 $ 937 $ 1,068 $ 1,282 $ 1,332 $ 1,505 $ 1,698 $ 1,896 Accounts receivable, net 647 655 566 606 648 697 748 801 841 Inventory 445 365 381 409 437 470 505 540 567 Other current assets 160 195 166 190 204 219 235 252 264 Assets held for sale - 137 - - - - - - - Total current assets 1,809 1,852 2,050 2,272 2,570 2,719 2,992 3,291 3,568 Property, plant & equipment, at cost 1,706 1,609 1,650 1,766 1,889 2,022 2,163 2,315 2,477 Less accumulated depreciation & amortization 911 858 875 988 1,101 1,215 1,332 1,452 1,577 Property, plant & equipment, net 795 751 775 778 789 807 831 862 899 Goodwill 291 339 342 342 342 342 342 342 342 Intangible assets 62 151 137 143 148 154 161 167 174 Other non-current assets 276 254 168 185 203 224 246 271 298 Total assets 3,232 3,348 3,473 3,721 4,054 4,246 4,573 4,933 5,282 Current liabilities: Notes payable 215 205 170 181 193 208 223 239 251 Accounts payable 225 185 157 180 192 207 222 238 250 Accrued liabilities 294 380 313 317 339 365 392 419 440 Income taxes payable 35 57 61 87 95 103 113 122 129 Current portion of long-term debt 1 0 0 0 92 0 0 0 0 Dividends payable 20 24 28 32 35 39 42 46 48 Total current liabilities 790 852 729 797 947 922 992 1,064 1,118 Long-term debt, net of current portion 492 491 467 477 499 525 552 582 609 Income taxes payable - non-current 175 162 142 223 243 265 290 314 331 Deferred income taxes 11 9 32 21 23 25 28 30 32 Other non-current liabilities 275 324 288 296 317 341 365 391 411 Total liabilities 1,743 1,838 1,658 1,814 2,029 2,077 2,228 2,381 2,500 Stockholders equity: Common equity 259 284 311 342 377 415 457 504 556 Retained earnings 1,619 1,841 2,285 2,526 2,790 3,076 3,390 3,730 4,088 Treasury stock, at cost (484) (552) (740) (990) (1,170) (1,350) (1,530) (1,710) (1,890) Stock option loans (0.13) (0.05) - - - - - - - Accumulated other comprehensive income/(loss) 95 (63) (41) 28 28 28 28 28 28 Total stockholders' equity 1,490 1,510 1,815 1,906 2,024 2,169 2,345 2,552 2,782 Total Liabilities and stockholders' equity 3,232 3,348 3,473 3,721 4,054 4,246 4,573 4,933 5,282

PALL CORPORATION Cash Flow Statement (in millions)

Fiscal Years Ending July 31 2014E 2015E 2016E 2017E 2018E CV 2019E Cash from Operating Activities

Net Income 371 405 441 483 523 551 Adjustments to reconcile net income to cash from operating activities:

Depreciation and amortization 112 113 114 117 121 125 Deferred income taxes (10) 2 2 2 2 2

Working Capital Adjustments: Change in Accounts Receivables (39) (42) (49) (51) (53) (40) Change in Inventory (27) (29) (33) (34) (36) (27) Change in Other current assets (24) (13) (15) (16) (17) (13) Change in Notes Payable 11 13 15 15 16 12 Change in Accounts Payable 23 13 15 15 16 12 Change in accrued liabilities 4 22 26 27 28 21 Change in income taxes payable 26 8 8 10 9 7 Change in dividends payable 5 3 3 4 3 2

Net Cash Provided by Operating Activities 450 494 526 572 612 652 Cash from Investing Activities Capital expenditures (116) (124) (132) (142) (151) (162) Capitalization of intangible assets (5) (6) (6) (6) (6) (7) Increase in other non-current assets (17) (18) (20) (22) (25) (27) Net Cash Used for Investing Activities (138) (148) (159) (170) (182) (196)

Cash from Financing Activities Change in Current portion of long-term debt 0 92 (92) 0 0 0 Changes in long-term debt, net of current portion 10 21 26 28 30 27 Change in Other non-current liabilities 8 21 24 25 26 20 Issuance of new stocks 31 35 38 42 47 52 Payment of dividend (130) (142) (154) (169) (183) (193) Repurchases of common stock (250) (180) (180) (180) (180) (180) Change in income taxes payable - non-current 81 21 21 25 24 17 Change in accumulated other comprehensive income 69 0 0 0 0 0 Net Cash Used by Financing Activities (181) (133) (317) (229) (237) (258)

Net Change in Cash 131 214 50 173 193 198 Cash, beginning year balance 937 1068 1282 1332 1505 1698 Cash, ending year balance 1068 1282 1332 1505 1698 1896

PALL CORPORATION Cash Flow Statement (in millions)

Fiscal Years Ending July 31 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Operating activities: Net earnings (loss) 152 141 145 127 217 196 241 315 319 575 Adjustments to reconcile net earnings to net cash provided by operting activities:

Restructuring & other charges, net 12 39 12 21 2 4 1 7 3 1 Depreciation & amortization of long-lived assets 89 91 96 94 93 89 94 98 111 106 Non-cash stock compensation 0 0 12 14 16 23 25 26 32 30 Excess tax benefits from stock based compensation arrangements 0 0 (2) (8) (2) (0) (3) (13) (8) (16) Amortization of deferred revenue 0 0 (1) (2) (2) (2) (2) (2) (2) (2) Deferred income taxes (19) (2) 7 (18) (31) (11) (5) 11 (9) 11 Provisions for doubtful accounts 3 4 2 3 3 3 1 1 3 7 Loss/(gain) on sale of assets 0 0 0 0 0 0 0 0 (12) (390) Other net income adjustments 0 0 0 0 0 (0) 1 4 1 1 Changes in operating assets and liabilities, net of acquisitions and dispositions:

Inventories (16) (55) (34) (47) (5) 57 (8) (5) 24 (17) Accounts receivable (27) (25) (13) (16) (32) 20 (15) (42) (51) 82 Income taxes receivable or payable 0 (24) (7) 115 (113) 1 (7) 4 22 7 Accounts payable & accrued expenses (10) 8 (4) 54 (0) (42) 67 39 84 (124) Other assets 24 (10) (7) (11) 28 20 (24) (7) (21) 14 Other liabilities (3) (5) 13 6 17 (31) (20) (9) (22) 99

Net cash flows from operating activities 192 162 219 333 191 327 378 430 475 384 Investing activities: Capital expenditures (61) (86) (96) (98) (124) (133) (136) (161) (159) (110) Purchases of retirement benefit assets (30) (19) (78) (23) (26) (21) (59) (75) (50) (46) Proceeds from sale of retirement benefit assets 23 19 44 23 23 19 47 63 51 46 Proceeds from sale of assets 0 0 0 0 0 0 0 0 27 538 Acquisitions of businesses, net of cash acquired (4) (31) (0) (0) 0 (37) (9) 0 (168) (22) Other investing activities (4) (3) (3) (5) (5) (14) (14) (6) (11) (7) Net cash flows from investing activities (36) (115) (116) (55) (122) (182) (169) (177) (310) 399 Financing activities: Long-term borrowings 40 315 348 80 212 171 798 35 0 0 Repayments of long-term debt (70) (330) (191) (174) (83) (214) (738) (299) (1) (0) Notes payable 8 (5) 10 1 (16) 19 (2) 175 (10) (35) Additions to deferred financing costs 0 0 0 0 0 0 (6) 0 0 (3) Purchase of treasury stock (75) (64) (101) (62) (149) (96) (100) (150) (121) (250) Dividends paid (45) (47) (52) (56) (60) (65) (71) (78) (89) (108) Net proceeds from stock plans 52 62 29 40 18 16 24 60 40 36 Excess tax benefits from stock based compensation arrangements - - 2 8 2 0 3 13 8 16 Net cash flows from financing activities (90) (93) 44 (162) (76) (169) (121) (243) (173) (344) Cash flow for year 65 (46) 147 115 (7) (23) 88 10 (8) 439 Cash & cash equivalents at beginning of year 127 207 165 318 443 454 414 499 558 500 Effect of exchange rate changes on cash & cash equivalents 7 4 6 10 18 (17) (4) 49 (49) (3) Cash & cash equivalents at end of year 199 165 318 443 454 414 499 558 500 937

PALL CORPORATION Common Size Income Statement

Fiscal Years Ending July 31 2011 2012 2013 2014E 2015E 2016E 2017E 2018E CV 2019E Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cost of sales 46.35% 44.18% 44.17% 43.18% 43.18% 43.18% 43.18% 43.18% 43.18% Gross profit 53.65% 55.82% 55.83% 56.82% 56.82% 56.82% 56.82% 56.82% 56.82% Selling, general & administrative expenses 29.68% 31.56% 30.60% 29.60% 29.60% 29.60% 29.60% 29.60% 29.60% Depreciation Expense 3.58% 4.16% 4.01% 3.99% 3.74% 3.53% 3.36% 3.24% 3.20% Research & development expense 3.17% 3.10% 3.56% 3.40% 3.40% 3.40% 3.40% 3.40% 3.40% Restructuring & other charges, net 1.23% 2.50% 1.52% 1.24% 1.16% 1.08% 1.01% 0.94% 0.89% Interest expense, net 0.69% 0.76% 0.59% 1.02% 0.99% 1.09% 0.95% 0.94% 0.95% Earnings (loss) from continuing operations before income taxes 15.31% 13.73% 15.54% 17.57% 17.93% 18.12% 18.50% 18.70% 18.78% Provision for income taxes 3.80% 3.22% 3.08% 4.39% 4.48% 4.53% 4.63% 4.68% 4.69% Net earnings from continuing operations 10.19% 10.52% 12.46% 13.17% 13.45% 13.59% 13.88% 14.03% 14.08% Earnings from discontinued operations, net of income taxes 1.32% 1.44% 9.25% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Net earnings (loss) 11.51% 11.95% 21.71% 13.17% 13.45% 13.59% 13.88% 14.03% 14.08%

PALL CORPORATION Common Size Balance Sheet

Fiscal Years Ending July 31 2011 2012 2013 2014E 2015E 2016E 2017E 2018E CV 2019E Current Assets: Cash & cash equivalents 20.35% 18.73% 35.38% 37.90% 42.51% 41.06% 43.23% 45.57% 48.47% Accounts receivable, net 23.60% 24.53% 21.39% 21.50% 21.50% 21.50% 21.50% 21.50% 21.50% Inventory 16.23% 13.65% 14.39% 14.50% 14.50% 14.50% 14.50% 14.50% 14.50% Other current assets 5.83% 7.32% 6.26% 6.75% 6.75% 6.75% 6.75% 6.75% 6.75% Assets held for sale 0.00% 5.11% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total current assets 66.01% 69.34% 77.42% 80.65% 85.26% 83.81% 85.98% 88.32% 91.22% Property, plant & equipment, at cost 62.23% 60.21% 62.32% 62.67% 62.67% 62.32% 62.15% 62.12% 63.31% Less accumulated depreciation & amortization 33.24% 32.10% 33.06% 35.06% 36.50% 37.45% 38.27% 38.98% 40.33% Property, plant & equipment, net 28.99% 28.11% 29.26% 27.62% 26.17% 24.87% 23.88% 23.14% 22.99% Goodwill 10.60% 12.69% 12.93% 12.16% 11.36% 10.56% 9.84% 9.19% 8.76% Intangible assets 2.25% 5.66% 5.18% 5.07% 4.92% 4.76% 4.61% 4.48% 4.44% Other non-current assets 10.08% 9.52% 6.35% 6.56% 6.75% 6.90% 7.07% 7.27% 7.61% Total assets 117.93% 125.31% 131.15% 132.05% 134.46% 130.89% 131.38% 132.40% 135.02% Current liabilities: Notes payable 7.84% 7.67% 6.42% 6.41% 6.41% 6.41% 6.41% 6.41% 6.41% Accounts payable 8.22% 6.92% 5.94% 6.38% 6.38% 6.38% 6.38% 6.38% 6.38% Accrued liabilities 10.74% 14.24% 11.81% 11.25% 11.25% 11.25% 11.25% 11.25% 11.25% Income taxes payable 1.26% 2.15% 2.29% 3.07% 3.14% 3.17% 3.24% 3.27% 3.29% Current portion of long-term debt 0.02% 0.02% 0.02% 0.01% 3.06% 0.01% 0.01% 0.01% 0.01% Dividends payable 0.73% 0.90% 1.06% 1.15% 1.18% 1.19% 1.21% 1.23% 1.23% Total current liabilities 28.82% 31.90% 27.53% 28.28% 31.41% 28.41% 28.50% 28.55% 28.57% Long-term debt, net of current portion 17.95% 18.37% 17.65% 16.95% 16.55% 16.17% 15.87% 15.63% 15.58% Income taxes payable - non-current 6.39% 6.05% 5.36% 7.90% 8.07% 8.15% 8.33% 8.42% 8.45% Deferred income taxes 0.39% 0.33% 1.19% 0.76% 0.78% 0.78% 0.80% 0.81% 0.81% Other non-current liabilities 10.03% 12.14% 10.88% 10.50% 10.50% 10.50% 10.50% 10.50% 10.50% Total liabilities 63.58% 68.79% 62.61% 64.39% 67.31% 64.02% 64.00% 63.91% 63.91% Stockholders equity: Common equity 9.47% 10.64% 11.74% 12.15% 12.50% 12.80% 13.14% 13.53% 14.20% Retained earnings 59.07% 68.91% 86.29% 89.66% 92.54% 94.83% 97.41% 100.11% 104.51% Treasury stock, at cost -17.65% -20.67% -27.95% -35.15% -38.82% -41.62% -43.96% -45.90% -48.32% Stock option loans 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Accumulated other comprehensive income/(loss) 3.47% -2.35% -1.54% 0.99% 0.93% 0.86% 0.80% 0.75% 0.72% Total stockholders' equity 54.35% 56.52% 68.54% 67.66% 67.15% 66.87% 67.39% 68.49% 71.11% Total Liabilities and stockholders' equity 117.93% 125.31% 131.15% 132.05% 134.46% 130.89% 131.38% 132.40% 135.02%

PALL CORPORATION Weighted Average Cost of Capital (WACC) Estimation Risk-free rate

3.52% Equity risk premium 4.80% Equity Beta 1.30 Cost of equity 9.76% Cost of debt 4.52%

Stock price 85 Shares Outstanding 113 MV of Equity 9,639 MV of Debt 708 Weight of Equity 93% Weight of Debt 7% WACC 9.33%

PALL CORPORATION Value Driver Estimation (in millions) Fiscal Years Ending July 31 2011 2012 2013 2014E 2015E 2016E 2017E 2018E CV 2019E NOPLAT Compuation EBITA: Net Sales 2741 2672 2648 2818 3015 3244 3481 3726 3912 Less: COGS 1270 1180 1170 1217 1302 1401 1503 1609 1689 Less: Selling, General, and Administrative Expenses 813 843 810 834 892 960 1030 1103 1158 Less: Depreciation & Amortizaiton of Intangibles 98 111 106 112 113 114 117 121 125 Less: R&D Expenses 87 83 94 96 103 110 118 127 133 Plus: Implied Operating Lease Interest 3 3 3 3 3 3 4 4 4 EBITA 475 457 471 562 609 662 716 771 811 Less: Adjusted Taxes: Provision for Income Taxes 104 86 82 124 135 147 161 174 184 + Tax Shield on Interest Expense 6 5 4 7 7 9 8 9 9 + Tax shield on Restructuring & other charges 11 16 9 9 9 9 9 9 9 + Tax shield on implied operating lease interest 1 1 1 1 1 1 1 1 1 Adjusted Taxes 122 108 95 141 152 165 179 193 203 Change in Deferred Taxes 3 (2) 23 (10) 2 2 2 2 2 NOPLAT 356 347 398 411 458 498 539 580 610 Invested Capital Computation Net Operating Working Capital Operating Current Assets: Normal Cash (lesser of actual or %) 55 53 53 56 60 65 70 75 78 Accounts Receivable, Net 647 655 566 606 648 697 748 801 841 Inventory 445 365 381 409 437 470 505 540 567 Other Current Asset 160 195 166 190 204 219 235 252 264 Operating Current Assets 1306 1269 1166 1261 1349 1452 1558 1667 1751 Operating Current Liabilities: Accounts Payable 225 185 157 180 192 207 222 238 250 Accrued Expenses 294 380 313 317 339 365 392 419 440 Dividends Payable 20 24 28 32 35 39 42 46 48 Income Tax Payable 35 57 61 87 95 103 113 122 129 Operating Current Liabilities 575 647 559 616 662 713 769 825 866 Net Operating Working Capital 732 622 607 645 688 738 789 843 884 Plus: Net PPE 795 751 775 778 789 807 831 862 899 Plus: Other Operating Assets Net Intangible Assets 62 151 137 143 148 154 161 167 174 Other Non-Current Liabilities 275 324 288 296 317 341 365 391 411 Capitalized PV of Operating Leases 65 61 71 73 75 77 79 82 84 Total Non-Current Operating Assets 402 536 496 511 540 572 605 640 669 Less: Other Operating Liabilities Income Tax Payable - Non-Current 175 162 142 223 243 265 290 314 331 Other Non-Current Liabilities 275 324 288 296 317 341 365 391 411 Deferred revenue 11 9 32 21 23 25 28 30 32 Total Non-current Operating Liabilities 461 495 461 540 583 631 683 735 773 Invested Capital 1468 1415 1417 1394 1433 1487 1543 1610 1679 ROIC: NOPLAT 356 347 398 411 458 498 539 580 610 Beginning Invested Capital 1350 1468 1415 1417 1394 1433 1487 1543 1610 Return on Invested Capitlal 26% 24% 28% 29% 33% 35% 36% 38% 38% FCF: NOPLAT 356 347 398 411 458 498 539 580 610 Less: Change in Invested Capital 118 (53) 2 (22) 39 53 56 67 69 Free Cash Flow 239 400 396 434 420 445 483 513 541 EP: Beginning Invested Capital 1350 1468 1415 1417 1394 1433 1487 1543 1610 ROIC 26% 24% 28% 29% 33% 35% 36% 38% 38% WACC 9% 9% 9% 9% 9% 9% 9% 9% 9% Economic Profit 231 210 266 279 328 365 400 436 459

(in millions)

DCF Model Fiscal Years Ending July 31 2013 2014E 2015E 2016E 2017E 2018E CV 2019E Future Cash Flows 434 420 445 483 513 541 NOPLAT 411 458 498 539 580 610 Continuing Value 12185 Free Cash Flows 434 420 445 483 12698 Number of Periods to Discount 1 2 3 4 5 Present Value of Free Cash Flows 397 351 340 338 8129 Value of Operating Assets 9555 Plus: Non-Operating Assets

884 Excess Cash Marketable Securities 75

Less: PV of Debt 708 Less: Other Non Equity Claims

Underfunded Pension 238 PV of Operating Leases 71 PV of ESOP 142 Litigation Liabilities 18

Value of Equity 9337 Shares Outstanding 113 Intrinsic Value 82.78 Adjusted for Partial Year 87.74

EP Model Fiscal Years Ending July 31 2013 2014E 2015E 2016E 2017E 2018E CV 2019E Economic Profit (EP) 279 328 365 400 436 459 NOPLAT 411 458 498 539 580 610 Continuing Value (CV) 10575 Total Economic Profit (EP) 279 328 365 400 11012 Number of Periods to Discount 1 2 3 4 5 Present Value of Economic Profit Beginning Invested Capital 255 275 279 280 7049 Value of Operating Assets 9555 Plus: Non-Operating Assets

884 Excess Cash Marketable Securities 75

Less: PV of Debt 708 Less: Other Non Equity Claims

Underfunded Pension 238 PV of Operating Leases 71 PV of ESOP 142 Litigation Liabilities 18

Value of Equity 9337 Shares Outstanding 113 Intrinsic Value 82.78 Adjusted for Partial Year 87.74

PALL CORPORATION Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

PALL CORPORATION Dividend Discount Model (DDM) or Fundamental P/E Valuation Model (in millions)

Key Assumptions CV growth 4.99% CV ROE 20.66%

Cost of Equity 9.76%

Fiscal Years Ending 0.01416780325754 2014E 2015E 2016E 2017E 2018E CV 2019E Earnings Per Share (EPS) 3.35 3.69 4.05 4.46 4.90 5.23 Dividends Per Share 1.17 1.29 1.42 1.56 1.71 1.83 Future Stock Price 83.08 Future Cash Flows 1.17 1.29 1.42 1.56 84.79 PV of Future Cash Flows 1.07 1.07 1.07 1.08 53.23 Intrinsic Value 57.52 Fraction of Elapsed Year 0.73 Adjusted Target Price 60.96

(in millions)

Ticker

Company

Price

EPS 2014E

EPS 2015E

P/E 14

P/E 15

5yr Gr.

PEG 14

PEG 15

DCI DONALDSON COMPANY Inc $ 42.08 $1.75 $2.00 24.0 21.1 11.1 2.2 1.9 CLC CLARCOR Inc $ 56.11 $2.72 $3.03 20.6 18.5 10.53 2.0 1.8 ESE ESCO TECHNOLOGIES Inc $ 34.95 $1.55 $1.77 22.5 19.8 12.5 1.8 1.6 PNR PENTAIR Inc $ 74.95 $3.93 $5.00 19.1 15.0 14.33 1.3 1.0 ECL ECOLAB Inc $ 107.28 $4.18 $4.82 25.7 22.3 14.23 1.8 1.6

PLL PALL CORPORATION $ 85.45 $3.35 $3.69 25.5 23.1 10.17 2.5 2.3

Relative P/E (EPS14) $ 75.05 Relative P/E (EPS15) $ 71.35 PEG Ratio (EPS14) $ 61.81 PEG Ratio (EPS15) $ 58.97

Implied Value:

PALL CORPORATION Relative Valuation Models

Average 22.4 19.3 1.8 1.6

(in millions)

Fiscal Years Ending 41851 2011 2012 2013 2014E 2015E 2016E 2017E 2018E CV 2019E Liquidity Ratios Current ratio: Current assets / Current liabilities 2.84 2.34 2.41 3.12 3.23 2.87 3.25 3.32 3.35 Quick ratio: (Cash + A/R, net + Other receivables) / Current liabilities. 1.52 1.36 2.06 2.10 2.04 2.20 2.27 2.35 2.45 Operating cash flow ratio: Operating cash flow / Current liabilities 0.54 0.56 0.53 0.56 0.52 0.57 0.58 0.58 0.58

Activity or Asset-Management Ratios Receivables turnover: Revenue / Average accounts receivable 4.52 4.10 4.33 4.81 4.81 4.82 4.81 4.81 4.76 Inventory turnover COGS / Average inventory 2.95 2.92 3.14 3.08 3.08 3.09 3.08 3.08 3.05 Fixed asset turnover Net sales / Net PPE 3.45 3.56 3.42 3.62 3.82 4.02 4.19 4.32 4.35

Financial Leverage Ratios Debt to equity ratio Total debt / Total equity 1.17 1.22 0.91 0.95 1.00 0.96 0.95 0.93 0.90 Debt ratio Total debt / Total assets 0.54 0.55 0.48 0.49 0.50 0.49 0.49 0.48 0.47 Interest coverage EBITA / Interest expense 25.14 22.63 30.13 19.50 20.45 18.66 21.60 21.97 21.82 CF to debt ratio Operating cash flow / Total debt 0.25 0.26 0.23 0.25 0.24 0.25 0.26 0.26 0.26

Profitability Ratios ROA Net Income/ Average total Assets 10.13% 9.70% 16.86% 10.32% 10.43% 10.62% 10.95% 11.00% 10.79% ROE Net income / Average total equity 23.61% 21.29% 34.58% 19.95% 20.63% 21.03% 21.40% 21.35% 20.66% Profit margin Net income / Revenue 11.51% 11.95% 21.71% 13.17% 13.45% 13.59% 13.88% 14.03% 14.08%

Payout Policy Ratios Dividend payout ratio Dividend per share / Earnings per share from continuing operations 28.59% 33.26% 34.19% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00%

PALL CORPORATION Key Management Ratios

Sensitivity Analysis

2.00% 2.25% 2.50% 2.75% 3.00% 3.25%

Risk-free rate 3.50% 3.75% 4.00% 4.25% 4.50% 4.75% 5.00%

Equity Beta

19% 20% 21% 22% 23% 24%

Marginal tax rat 25% 26% 27% 28% 29% 30% 31%

Cost of debt

3.50% 3.75% 4.00% 4.25% 4.50%

CV growth rate 4.75% 5.00% 5.25% 5.50% 5.75% 6.00% 6.25% 6.50%

Equity Risk-Premium

3.50% 3.75% 4.00% 4.25% 4.50% 4.75%

CV growth rate 5.00% 5.25% 5.50% 5.75% 6.00% 6.25% 6.50%

COGS as % of Sales

R&D as % of Sales

28.00% 28.25% 28.50% 28.75% 29.00% 29.25%

SG&A (% of Sal 29.50% 29.75% 30.00% 30.25% 30.50% 30.75% 31.00%

$ 87.74 1.25 1.26 1.27 1.28 1.29 1.30 1.31 1.32 1.33 1.34 1.35 141.07

129.87 120.31 112.06 104.87

138.77 136.55 134.40 127.92 126.03 124.19 118.64 117.01 115.43 110.61 109.19 107.81 103.59 102.35 101.13

132.32 122.41 113.88 106.46 99.95

130.29 120.68 112.38 105.15 98.79 93.15

128.33 118.99 110.92 103.87 97.65

126.43 124.58 122.79 117.36 115.76 114.21 109.49 108.11 106.75 102.62 101.40 100.20

96.55 95.47 94.41

121.05 112.70 105.43 99.04 93.37

98.54 97.41 96.31 95.23 94.18 92.14 91.15 90.19 89.24 88.32 92.93 91.92 90.94 89.98 89.04 88.11 87.21 86.33 85.46 84.61 83.78 87.91 87.01 86.13 85.27 84.42 83.59

79.51 75.81 72.43 69.33 66.49

82.78 81.98 81.20 80.43 79.68 83.41 79.35 75.65 72.29

82.60 81.81 81.03 78.61 77.89 77.18 74.99 74.33 73.68 71.68 71.08 70.49

80.26 76.49 73.05 69.91 67.02

78.77 75.14 71.81 68.77 65.97

78.05 77.34 76.64 74.48 73.83 73.19 71.21 70.62 70.04 68.22 67.68 67.14

75.96 72.57 69.46 66.61

69.21 68.65 68.09 67.55 65.47 64.96 64.47 63.98

$ 87.74 3.25% 3.50% 3.75% 4.00% 4.25% 4.50% 4.75% 5.00% 5.25% 5.50% 5.75% 95.61 95.32 95.04 94.75 94.47 94.19 93.91 93.63 93.35 93.08 92.80

94.53 94.24 93.96 93.67 93.39 93.11 92.84 92.56 92.29 92.01 91.74 93.44 93.16 92.88 92.60 92.32 92.04 91.77 91.49 91.22 90.95 90.68 92.36 92.08 91.80 91.52 91.25 90.97 90.70 90.43 90.16 89.89 89.62 91.27 91.00 90.72 90.44 90.17 89.90 89.63 89.36 89.09 88.83 88.57 90.19 89.91 89.64 89.37 89.10 88.83 88.56 88.29 88.03 87.77 87.51 89.10 88.83 88.56 88.29 88.02 87.76 87.49 87.23 86.97 86.71 86.45 88.02 87.75 87.48 87.21 86.95 86.68 86.42 86.16 85.90 85.65 85.39 86.93 86.67 86.40 86.14 85.87 85.61 85.35 85.10 84.84 84.58 84.33 85.85 85.58 85.32 85.06 84.80 84.54 84.28 84.03 83.77 83.52 83.27 84.76 84.50 84.24 83.98 83.73 83.47 83.22 82.96 82.71 82.46 82.21 83.68 83.42 83.16 82.91 82.65 82.40 82.15 81.90 81.65 81.40 81.15 82.59 82.34 82.08 81.83 81.58 81.33 81.08 80.83 80.58 80.34 80.09

$ 87.74 3.80% 4.00% 4.20% 4.40% 4.60% 4.80% 5.00% 5.20% 5.40% 5.60% 5.80% 90.37 85.81 81.68 77.93 74.50 71.35 68.46 65.79 63.31 61.02 58.88

94.15 89.15 84.65 80.58 76.88 73.49 70.40 67.54 64.91 62.47 60.21 98.38 92.87 87.94 83.50 79.49 75.84 72.51 69.45 66.64 64.05 61.64

103.16 97.04 91.61 86.75 82.37 78.41 74.81 71.53 68.52 65.75 63.19 108.59 101.75 95.72 90.36 85.57 81.25 77.35 73.80 70.57 67.60 64.87 114.84 107.12 100.37 94.42 89.13 84.40 80.15 76.30 72.81 69.61 66.69 122.08 113.28 105.66 99.00 93.13 87.92 83.25 79.06 75.27 71.82 68.67 130.59 120.44 111.75 104.23 97.65 91.86 86.72 82.12 77.98 74.24 70.85 140.72 128.84 118.81 110.23 102.81 96.32 90.61 85.53 81.00 76.92 73.24 152.99 138.85 127.11 117.20 108.73 101.40 95.01 89.37 84.37 79.89 75.87 168.15 150.98 137.00 125.40 115.61 107.25 100.02 93.71 88.15 83.21 78.80 187.37 165.98 148.99 135.17 123.71 114.04 105.79 98.65 92.42 86.94 82.07 212.52 185.01 163.84 147.03 133.36 122.04 112.49 104.34 97.30 91.15 85.74

$ 87.74 39% 40% 41% 42% 43% 44% 45% 46% 47% 48% 49% 89.09 84.85 80.60 76.36 72.12 67.87 63.63 59.38 55.14 50.89 46.65

91.86 87.47 83.07 78.68 74.29 69.89 65.50 61.10 56.71 52.32 47.92 94.88 90.33 85.77 81.22 76.66 72.10 67.54 62.99 58.43 53.87 49.32 98.21 93.47 88.74 84.00 79.26 74.53 69.79 65.06 60.32 55.59 50.85

101.87 96.94 92.01 87.07 82.14 77.21 72.27 67.34 62.41 57.47 52.54 105.94 100.79 95.64 90.48 85.33 80.18 75.03 69.87 64.72 59.57 54.41 110.48 105.08 99.68 94.29 88.89 83.49 78.09 72.70 67.30 61.90 56.50 115.57 109.90 104.23 98.56 92.88 87.21 81.54 75.87 70.20 64.52 58.85 121.33 115.35 109.36 103.38 97.40 91.42 85.43 79.45 73.47 67.49 61.50 127.89 121.55 115.22 108.88 102.54 96.21 89.87 83.54 77.20 70.86 64.53 135.43 128.69 121.95 115.21 108.46 101.72 94.98 88.23 81.49 74.75 68.00 144.20 136.99 129.77 122.56 115.34 108.13 100.91 93.69 86.48 79.26 72.05 154.52 146.75 138.98 131.21 123.44 115.66 107.89 100.12 92.35 84.57 76.80

$ 87.74 2.40% 2.60% 2.80% 3.00% 3.20% 3.40% 3.60% 3.80% 4.00% 4.20% 4.40% 101.39 100.31 99.24 98.16 97.08 96.01 94.93 93.85 92.77 91.70 90.62

100.10 99.02 97.94 96.87 95.79 94.71 93.64 92.56 91.48 90.41 89.33 98.81 97.73 96.65 95.58 94.50 93.42 92.34 91.27 90.19 89.11 88.04 97.51 96.44 95.36 94.28 93.21 92.13 91.05 89.97 88.90 87.82 86.74 96.22 95.14 94.07 92.99 91.91 90.84 89.76 88.68 87.61 86.53 85.45 94.93 93.85 92.78 91.70 90.62 89.54 88.47 87.39 86.31 85.24 84.16 93.64 92.56 91.48 90.41 89.33 88.25 87.17 86.10 85.02 83.94 82.87 92.34 91.27 90.19 89.11 88.04 86.96 85.88 84.81 83.73 82.65 81.57 91.05 89.98 88.90 87.82 86.74 85.67 84.59 83.51 82.44 81.36 80.28 89.76 88.68 87.61 86.53 85.45 84.38 83.30 82.22 81.14 80.07 78.99 88.47 87.39 86.31 85.24 84.16 83.08 82.01 80.93 79.85 78.77 77.70 87.18 86.10 85.02 83.94 82.87 81.79 80.71 79.64 78.56 77.48 76.41 85.88 84.81 83.73 82.65 81.58 80.50 79.42 78.34 77.27 76.19 75.11

Present Value of Operating Lease Obligations Present Value of Operating Lease Obligations Present Value of Operating Lease Obligations Present Value of Operating Lease Obligations Present Value of Operating Lease Obligations

Operating Fiscal Years Ending July 31 Leases Operating

Fiscal Years Ending 141.068758225173 Leases Operating Fiscal Years Ending 130.293652439555 Leases Operating

Fiscal Years Ending 121.0470807 Leases Operating Fiscal Years Ending Leases

2014 26.46 2013 24.816 2012 27.045 2011 23.128 2010 21.982 2015 17.827 2014 16.977 2013 17.827 2012 17.1732 2010 14.335 2016 11.796 2015 9.894 2014 12.095 2013 10.911 2010 9.922 2017 7.714 2016 6.244 2015 5.879 2014 7.092 2010 6.056 2018 4.558 2017 4.138 2016 3.822 2015 3.022 2010 4.617

Thereafter 11.433 Total Minimum Payments 79.788

Less: Interest 9 PV of Minimum Payments 71

Thereafter 5.745 Total Minimum Payments 67.814

Less: Interest 7 PV of Minimum Payments 61

Thereafter 6.238 Total Minimum Payments 72.906

Less: Interest 7 PV of Minimum Payments 65

Thereafter 6.283 Total Minimum Payments 67.6092

Less: Interest 7 PV of Minimum Payments 60

Thereafter 5.587 Total Minimum Payments 62.499

Less: Interest 7 PV of Minimum Payments 56

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 4.52% Pre-Tax Cost of Debt 4.52% Pre-Tax Cost of Debt 4.52% Pre-Tax Cost of Debt 4.52% Pre-Tax Cost of Debt 4.52% Number Years Implied by Year 6 Payment 2.5 Number Years Implied by Year 6 Payment 1.4 Number Years Implied by Year 6 Payment 1.6 Number Years Implied by Year 6 2.1 Number Years Implied by Year 6 1.2

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment

Present Value of Operating Lease Obligations

Present Value of Operating Lease Obligations Present Value of Operating Lease Obligations Present Value of Operating Lease Obligations Present Value of Operating Lease Obligations

Operating Fiscal Years Ending Leases Operating Operating Operating Operating 2009 22.39 Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases 2010 14.749 2008 21.224 2007 22.333 2006 23.281 2005 26.696 2011 8.727 2009 13.572 2008 13.357 2007 15.021 2006 20.519 2012 5.001 2010 9.073 2009 7.778 2008 8.988 2007 13.859 2013 2.691 2011 4.569 2010 3.701 2009 5.901 2008 8.115 Thereafter 5.235 2012 2.405 2011 1.391 2010 3.297 2009 4.787 Total Minimum Payments 58.793 Thereafter 1.876 Thereafter 5.131 Thereafter 7.083 Thereafter 3.684 Less: Interest 6 Total Minimum Payments 52.719 Total Minimum Payments 53.691 Total Minimum Payments 63.571 Total Minimum Payments 77.66 PV of Minimum Payments 53 Less: Interest 5 Less: Interest 5 Less: Interest 7 Less: Interest 8

PV of Minimum Payments 48 PV of Minimum Payments 48 PV of Minimum Payments 57 PV of Minimum Payments 70

Capitalization of Operating Leases

Pre-Tax Cost of Debt 4.52%

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Number Years Implied by Year 6 Payment 1.9 Pre-Tax Cost of Debt 4.52% Pre-Tax Cost of Debt 4.52% Pre-Tax Cost of Debt 4.52% Pre-Tax Cost of Debt 4.52% Number Years Implied by Year 6 Payment 1.0 Number Years Implied by Year 6 Payment 3.7 Number Years Implied by Year 6 2.1 Number Years Implied by Year 6 1.0

Lease PV Lease Year Commitment Payment 1 22.39

Year Lease

Commitment PV Lease Payment

Year Lease Commitment PV Lease

Payment Year Lease PV Lease

Commitment Payment Year Lease PV Lease

Commitment Payment 2 14.749 13.5 1 21.224 20.3 1 22.333 21.4 1 23.281 22.3 1 26.696 25.5 3 8.727 7.6 2 13.572 12.4 2 13.357 12.2 2 15.021 13.7 2 20.519 18.8 4 5.001 4.2 3 9.073 7.9 3 7.778 6.8 3 8.988 7.9 3 13.859 12.1 5 2.691 2.2 4 4.569 3.8 4 3.701 3.1 4 5.901 4.9 4 8.115 6.8

1 26.46 25.3 1 24.816 23.7 1 27.045 25.9 1 23.128 22.1 1 21.982 21.0 2 17.827 16.3 2 16.977 15.5 2 17.827 16.3 2 17.1732 15.7 2 14.335 13.1 3 11.796 10.3 3 9.894 8.7 3 12.095 10.6 3 10.911 9.6 3 9.922 8.7 4 7.714 6.5 4 6.244 5.2 4 5.879 4.9 4 7.092 5.9 4 6.056 5.1 5 4.558 3.7 5 4.138 3.3 5 3.822 3.1 5 3.022 2.4 5 4.617 3.7

6 & beyond 4.558 8.5 6 & beyond 4.138 4.4 6 & beyond 3.822 4.7 6 & beyond 3.022 4.7 6 & beyond 4.617 4.3 PV of Minimum Payments 70.6 PV of Minimum Payments 60.9 PV of Minimum Payments 65.5 PV of Minimum Payments 60.5 PV of Minimum Payments 55.9

6 & beyond 2.691 3.9 5 2.405 1.9 5 1.391 1.1 5 3.297 2.6 5 4.787 3.8 PV of Minimum Payments 52.8 6 & beyond 1.876 1.4 6 & beyond 1.391 3.7 6 & beyond 3.297 5.3 6 & beyond 3.684 2.8

PV of Minimum Payments 47.9 PV of Minimum Payments 48.3 PV of Minimum Payments 56.8 PV of Minimum Payments 69.9

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 3,572,000 Average Time to Maturity (years): 3.94 Expected Annual Number of Options Exercised: 0.91

Current Average Strike Price: $ 50.53 Cost of Equity: 9.76% Current Stock Price: $ 85.45

2014E 2015E 2016E 2017E 2018E 2019E Increase in Shares Outstanding: 0.91 0.91 0.91 0.85 Average Strike Price: $ 50.53 $ 50.53 $ 50.53 $ 50.53 Increase in Common Stock Account: 46 46 46 43

Change in Treasury Stock 250 180 180 180 180 180 Expected Price of Repurchased Shares: $ 85.45 $ 93.79 $ 102.94 $ 112.99 $ 124.02 $ 136.12 Number of Shares Repurchased: 2.93 1.92 1.75 1.59 1.45 1.32

Shares Outstanding (beginning of the year) 113 111 110 109 108 107 Plus: Shares Issued Through ESOP 0.91 0.91 0.91 0.85 Less: Shares Repurchased in Treasury 2.93 1.92 1.75 1.59 1.45 1.32 Shares Outstanding (end of the year) 110.78 109.77 108.93 108.19 106.74 105.42

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol

PLL

Current Stock Price 85.45 Risk Free Rate 3.52% Current Dividend Yield 1.37% Annualized St. Dev. of Stock Re turns 30.27%

Average Average B-S Value Range of Number Exercise Remaining Option of Options Outstanding Options of Shares Price Life (yrs) Price Granted Range 1 1,363,000 52.50 2.70 $ 36.72 $ 50,042,724 Range 2 2,209,000 49.31 4.70 $ 41.43 $ 91,513,210 Total 3,572,000 $ 50.53 3.94 $ 43.85 $ 141,555,935