[LOGO](TM)
DONALDSON
ANNUAL REPORT ON FORM 10-K
DONALDSON COMPANY, INC.
JULY 31, 2001
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
Act of 1934 for the fiscal year ended July 31, 2001 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
Exchange Act of 1934 (No Fee Required)
for the transition period from __________ to __________.
Commission File Number: 1-7891
DONALDSON COMPANY, INC.
-----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 41-0222640
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 WEST 94TH STREET, MINNEAPOLIS, MINNESOTA 55431
--------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (952) 887-3131
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH ON WHICH REGISTERED
------------- -------------------
Common Stock, $5 Par Value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of September 21, 2001 was $1,187,746,010.
The shares of common stock outstanding as of September 21, 2001 were
44,097,328.
Documents Incorporated by Reference
-----------------------------------
Portions of the 2001 Annual Report to Shareholders of the registrant are
incorporated by reference in Parts I and II, as specifically set forth in Parts
I and II.
Portions of the Proxy Statement for the 2001 annual shareholders meeting
are incorporated by reference in Part III, as specifically set forth in Part
III.
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PART I
ITEM 1. BUSINESS
GENERAL
Donaldson Company, Inc. ("Donaldson" or the "Company") was founded in 1915
and organized in its present corporate form under the laws of the State of
Delaware in 1936.
The Company is a leading worldwide manufacturer of filtration systems and
replacement parts. The Company's product mix includes air and liquid filters and
exhaust and emission control products for mobile equipment; in-plant air
cleaning systems; air intake systems for industrial gas turbines; and
specialized filters for such diverse applications as computer disk drives,
aircraft passenger cabins and semiconductor processing. Products are
manufactured at more than three dozen plants around the world and through three
joint ventures. The Company has two reporting segments engaged in the design,
manufacture and sale of systems to filter air and liquid and other complementary
products. The two segments are Engine Products and Industrial Products. Products
in the Engine Products segment consist of air intake systems, exhaust systems,
liquid filtration systems and replacement parts. The Engine Products segment
sells to original equipment manufacturers (OEMs) in the construction,
industrial, mining, agriculture and transportation markets and to independent
distributors, OEM dealer networks, private label accounts and large private
fleets. Products in the Industrial Products segment consist of dust, fume and
mist collectors, static and pulse-clean air filter systems for industrial gas
turbines, computer disk drive filter products and other specialized air
filtration systems. The Industrial Products segment sells to various industrial
end-users, OEMs of gas-fired turbines, OEMs and end users requiring highly
purified air.
The table below shows the percentage of total net sales contributed by the
principal classes of similar products for each of the last three fiscal years:
YEAR ENDED JULY 31
2001 2000 1999
---- ---- ----
Engine Products Segment
Off-Road Equipment Products
(including Defense Products) 16% 18% 19%
Truck and Automotive Products 7% 14% 17%
Aftermarket Products 31% 30% 29%
Industrial Products Segment
Dust Collection Products 19% 17% 16%
Gas Turbine Systems Products 17% 11% 9%
Special Applications Products 10% 10% 10%
The segment detail information in Note H in the Notes to Consolidated
Financial Statements on page 28 of the 2001 Annual Report to Shareholders is
incorporated herein by reference.
COMPETITION
The Company's business is not considered to be seasonal. Principal methods
of competition in both the Engine Products and Industrial Products segments are
price, geographic coverage, service and product performance. The Company
competes in a number of filtration markets in both the Engine Products and
Industrial segments and both segments operate in a highly competitive
environment. The Company estimates that it is a market leader in its primary
product lines within the Industrial Products segment. Its principal competitors
vary from country to country and include several large regional or global
competitors and a significant number of small competitors who compete in a
limited geographical region or in a limited number of product applications. The
Company estimates that within the Engine
2
Products segment it is a market leader in its off-road equipment and truck
product lines and is a significant participant in the aftermarket for
replacement filters and hard parts in its engine-related businesses. The Engine
Products segment principal competitors vary from country to country and include
several large regional or global competitors, and small local and regional
competitors, especially in the engine aftermarket businesses.
RAW MATERIALS
The Company experienced no significant or unusual problems in the purchase
of raw materials or commodities. Donaldson has more than one source of raw
materials essential to its business. The Company is not required to carry
significant amounts of inventory to meet rapid delivery demands or secure
supplier allotments.
PATENTS AND TRADEMARKS
The Company owns various patents and trademarks which it considers in the
aggregate to constitute a valuable asset. However, it does not regard the
validity of any one patent or trademark as being of material importance.
MAJOR CUSTOMERS
Sales to General Electric Company and subsidiaries ("GE") accounted for 12
percent of net sales in 2001. There were no sales over 10 percent of net sales
to one customer in 2000. Sales to Caterpillar, Inc. and subsidiaries
("Caterpillar") accounted for 11 percent of net sales in 1999. Caterpillar has
been a customer of the Company for many years and it purchases several models
and types of products primarily from the Engine Products segment for a variety
of applications. GE has also been a customer of the Company for many years and
it purchases several models and types of products from the Industrial Products
segment for a variety of applications, the majority of which are for use on
their gas turbine systems. Sales to the U.S. Government do not constitute a
material portion of the Company's business.
BACKLOG
At August 31, 2001, the backlog of orders expected to be delivered within
90 days was $191,858,000. The 90 day backlog at August 31, 2000 was
$191,852,000.
RESEARCH AND DEVELOPMENT
During 2001 the Company spent $28,425,000 on research and development
activities relating to the development of new products or improvements of
existing products or manufacturing processes. The Company spent $27,304,000 in
2000 and $23,603,000 in 1999 on research and development activities. Essentially
all commercial research and development is Company-sponsored.
ENVIRONMENTAL MATTERS
The Company does not anticipate any material effect on its capital
expenditures, earnings or competitive position due to compliance with government
regulations involving environmental matters.
EMPLOYEES
The Company employed 8,230 persons in worldwide operations as of July 31,
2001.
GEOGRAPHIC AREAS
Note H of the Notes to Consolidated Financial Statements on page 28 in the
2001 Annual Report to Shareholders contains information regarding the Company's
geographic areas and is incorporated herein by reference.
3
ITEM 2. PROPERTIES
The Company's principal office and research facilities are located in
Bloomington, a suburb of Minneapolis, Minnesota. European administrative and
engineering offices are located in Leuven, Belgium.
Manufacturing activities are carried on in fourteen plants in the United
States, three in the United Kingdom, two in Mexico, Germany, Japan, China and
South Africa and one each in Australia, France, Hong Kong, Italy, Belgium and
India. Page 31 of the 2001 Annual Report to Shareholders lists the principal
plant locations and is incorporated herein by reference. Note H on page 28 of
the 2001 Annual Report to Shareholders presents identifiable assets by
geographic area and is incorporated herein by reference.
The Company is a lessee under several long-term leases. These leases
provide for options to purchase the facilities at the end of the lease term and
have been capitalized.
The Company's properties are considered to be suitable for their present
purposes, well maintained and in good operating condition.
ITEM 3. LEGAL PROCEEDINGS
The Company has been party to various legal proceedings arising in the
ordinary course of business. In the opinion of management, the outcome of
litigation currently pending will not materially affect the Company's results of
operations, financial condition or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Not Applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Current information regarding executive officers is presented below. All
terms of office are for one year. There are no arrangements or understandings
between individual officers and any other person pursuant to which he was
selected as an officer.
<TABLE>
<CAPTION>
FIRST YEAR ELECTED OR
APPOINTED AS AN
NAME AGE POSITIONS AND OFFICES HELD OFFICER
---- --- -------------------------- -------
<S> <C> <C> <C>
William G. Van Dyke 56 Chairman, President and 1979
Chief Executive Officer
William M. Cook 48 Senior Vice President, International 1994
and Chief Financial Officer
James R. Giertz 44 Senior Vice President, 1994
Commercial and Industrial
Norman C. Linnell 42 Vice President, General 1996
Counsel and Secretary
Nickolas Priadka 55 Senior Vice President, 1989
Engine Systems and Parts
Lowell F. Schwab 53 Senior Vice President, Operations 1994
Thomas A. Windfeldt 52 Vice President, Controller 1985
and Treasurer
</TABLE>
All of the above-named executive officers have held executive management
positions with Registrant during the past five years.
4
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information in the sections "Quarterly Financial Information
(Unaudited)" and "NYSE Listing," on pages 30 and 32, and restrictions on payment
of dividends in Note D, page 24 of the 2001 Annual Report to Shareholders is
incorporated herein by reference. As of September 21, 2001, there were
approximately 1,799 shareholders of record of Common Stock.
The high and low sales prices for registrant's common stock for each full
quarterly period during 2001 and 2000, are as follows:
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
2000 $19.50 - 23.50 $20.63 - 24.81 $20.25 - 24.06 $19.13 - 24.25
2001 $19.13 - 23.86 $21.62 - 29.48 $24.39 - 28.92 $27.30 - 33.05
ITEM 6. SELECTED FINANCIAL DATA
The information for the years 1997 through 2001 on pages 8 and 9 of the
2001 Annual Report to Shareholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth in the section "Management's Discussion and
Analysis" on pages 10 through 15 of the 2001 Annual Report to Shareholders is
incorporated herein by reference.
A. MARKET RISK
Market Risk disclosure as discussed under "Market Risk" and "Foreign
Currency" on page 14 of the 2001 Annual Report to Shareholders is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes to Consolidated Financial
Statements on pages 16 through 30, and the Quarterly Financial Information
(Unaudited) on page 30 of the 2001 Annual Report to Shareholders is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE - Not applicable.
5
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the captions "Nominees For Election" and "Directors
Continuing In Office" on page 5 and under the heading "Compliance With Section
16(a) of the Securities Exchange Act of 1934" on page 19 of the Company's
definitive proxy statement dated October 12, 2001 is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under "Director Compensation" on page 6 and in the section
"Executive Compensation" on pages 13 through 15, the "Pension Benefits" on page
18 and under the caption "Change-in-Control Arrangements" on page 19 of the
Company's definitive proxy statement dated October 12, 2001, is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the section "Security Ownership" on page 3 of the
Company's definitive proxy statement dated October 12, 2001, is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Not Applicable.
6
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed with this report:
(1) Financial Statements
Consolidated Balance Sheets -- July 31, 2001 and 2000
(incorporated by reference from page 17 of the 2001 Annual Report
to Shareholders)
Consolidated Statements of Earnings -- years ended July 31, 2001,
2000 and 1999 (incorporated by reference from page 16 of the 2001
Annual Report to Shareholders)
Consolidated Statements of Cash Flows -- years ended July 31,
2001, 2000 and 1999 (incorporated by reference from page 18 of
the 2001 Annual Report to Shareholders)
Consolidated Statements of Changes in Shareholders' Equity --
years ended July 31, 2001, 2000 and 1999 (incorporated by
reference from page 19 of the 2001 Annual Report to Shareholders)
Notes to Consolidated Financial Statements (incorporated by
reference from pages 20 through 30 of the 2001 Annual Report to
Shareholders)
Reports of Independent Public Accountants (filed as part of this
report)
(2) Financial Statement Schedules --
Schedule II Valuation and qualifying accounts
All other schedules (Schedules I, III, IV and V) for which
provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are not required under the
related instruction, or are inapplicable, and therefore have been
omitted.
(3) Exhibits
The exhibits listed in the accompanying index are filed as part
of this report or incorporated by reference as indicated therein.
(b) Reports on Form 8-K
A report on Form 8-K was filed on May 22, 2001. On May 22, 2001 the
Company issued a press release in the form attached as exhibit 99.1
to its Form 8-K reporting its results of operation for the three
months ended April 30, 2001.
7
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DONALDSON COMPANY, INC.
(Registrant)
Date: October 26, 2001 By: /s/ William G. Van Dyke
---------------- ------------------------------------
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ William G. Van Dyke Chairman, President and
---------------------------------- Chief Executive Officer
William G. Van Dyke
/s/ William M. Cook Senior Vice President,
---------------------------------- International and
William M. Cook Chief Financial Officer
/s/ Thomas A. Windfeldt Vice President, Controller
---------------------------------- and Treasurer
Thomas A. Windfeldt
*F. Guillaume Bastiaens Director
----------------------------------
F. Guillaume Bastiaens
*Paul B. Burke Director
----------------------------------
Paul B. Burke
*Janet M. Dolan Director
----------------------------------
Janet M. Dolan
*Jack W. Eugster Director
----------------------------------
Jack W. Eugster
*John F. Grundhofer Director
----------------------------------
John F. Grundhofer
*Kendrick B. Melrose Director
----------------------------------
Kendrick B. Melrose
*Jeffrey Noddle Director
----------------------------------
Jeffrey Noddle
*S. Walter Richey Director
----------------------------------
S. Walter Richey
*Stephen W. Sanger Director
----------------------------------
Stephen W. Sanger
*By /s/ Norman C. Linnell Date: October 26, 2001
----------------------------------
Norman C. Linnell
*As attorney-in-fact
8
DONALDSON COMPANY, INC. AND SUBSIDIARIES
FORM 10-K
Item 14(a)(1)
Index of Independent Public Accountants' Reports
Report of Arthur Andersen LLP ...................................... 10 & 11
Report of Ernst & Young LLP ........................................ 12
9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of Donaldson Company, Inc.:
We have audited the accompanying consolidated balance sheets of Donaldson
Company, Inc. (a Delaware corporation) and subsidiaries as of July 31, 2001 and
2000, and the related consolidated statements of earnings, changes in
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Donaldson Company,
Inc. and subsidiaries as of July 31, 2001 and 2000, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Minneapolis, Minnesota,
August 27, 2001
10
Report of Independent Public Accountants
To the Shareholders and Board of Directors
of Donaldson Company, Inc.
We have audited, in accordance with auditing standards generally
accepted in the United States, the consolidated financial statements included in
Donaldson Company Inc.'s annual report to shareholders incorporated by reference
in this Form 10-K, and have issued our report thereon dated August 27, 2001. Our
audit was made for the purpose of forming an opinion on those statements taken
as a whole. The schedule listed as part of item 14 in this Form 10-K is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ Arthur Anderson LLP
Minneapolis, Minnesota,
August 27, 2001
11
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Donaldson Company, Inc.
We have audited the accompanying consolidated statements of earnings,
changes in shareholders' equity and cash flows of Donaldson Company, Inc. and
subsidiaries for the year ended July 31, 1999. Our audit also included the
related financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of their operations and cash
flows of Donaldson Company, Inc. and subsidiaries for the year ended July 31,
1999, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
September 8, 1999
12
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
(Thousands of Dollars)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
----------------------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS END OF
DESCRIPTION OF PERIOD EXPENSES (A) & (B) DEDUCTIONS (C) PERIOD
------------------------------------ ------------ ------------ ---------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Year ended July 31, 2001:
Allowance for doubtful accounts
deducted from accounts receivable $ 4.380 $2,512 $ (154) $ (429) $6,309
======= ====== ====== ======== ======
Restructuring Reserves -- AirMaze
Acquisition $ 1,183 $ (1,017) $ 166
======= ======== ======
Restructuring Reserves -- DCE
Acquisition $ 2,775 $1,555 $ (2,205) $2,125
======= ====== ======== ======
Year ended July 31, 2000:
Allowance for doubtful accounts
deducted from accounts receivable $ 4,341 $1,077 $ (156) $ (882) $4,380
======= ====== ====== ======== ======
Restructuring Reserves -- AirMaze
Acquisition $ 0 $1,488 $ (305) $1,183
======= ====== ======== ======
Restructuring Reserves -- DCE
Acquisition $ 0 $2,775 $2,775
======= ====== ======
Year ended July 31, 1999:
Allowance for doubtful accounts
deducted from accounts receivable $ 3,696 $ 959 $ (43) $ (271) $4,341
======= ====== ====== ======== ======
</TABLE>
------------------
Note A -- Allowance for doubtful accounts foreign currency translation losses
(gains) recorded directly to equity.
Note B -- Aquisition related restructuring reserves recorded to goodwill.
Note C -- Bad debts charged to allowance, net of recoveries.
13
EXHIBIT INDEX
ANNUAL REPORT ON FORM 10-K
* 3-A -- Certificate of Incorporation of Registrant as currently in effect
(Filed as Exhibit 3-A to Form 10-Q for the Second Quarter ended
January 31, 1998)
* 3-B -- By-laws of Registrant as currently in effect (Filed as Exhibit 3-B
to Form 10-Q for the Second Quarter ended January 31, 1999)
* 4 -- **
* 4-A -- Preferred Stock Amended and Restated Rights Agreement (Filed as
Exhibit 4.1 to Form 8-K Report Dated January 12, 1996)
*10-A -- Annual Cash Bonus Plan (Filed as Exhibit 10-A to 1995 Form 10-K
Report)***
*10-B -- Supplementary Retirement Agreement with William A. Hodder (Filed as
Exhibit 10-B to 1993 Form 10-K Report)***
*10-C -- 1980 Master Stock Compensation Plan as Amended (Filed as Exhibit
10-C to 1993 Form 10-K Report)***
*10-D -- Form of Performance Award Agreement under 1991 Master Stock
Compensation Plan (Filed as Exhibit 10-D to 1995 Form 10-K
Report)***
*10-E -- Copy of ESOP Restoration Plan as Amended and Restated (Filed as
Exhibit 10-E to Form 10-Q for the Second Quarter ended January 31,
1998)***
*10-F -- Deferred Compensation Plan for Non-employee Directors as amended
(Filed as Exhibit 10-F to 1990 Form 10-K Report)***
*10-G -- Form of "Change in Control" Agreement with key employees as amended
(Filed as Exhibit 10-G to Form 10-Q for the Second Quarter ended
January 31, 1999)***
*10-H -- Independent Director Retirement and Benefit Plan as amended (Filed
as Exhibit 10-H to 1995 Form 10-K Report)***
*10-I -- Excess Pension Plan (1999 Restatement)***
*10-J -- Supplementary Executive Retirement Plan (1999 Restatement)***
*10-K -- 1991 Master Stock Compensation Plan as amended (Filed as Exhibit
10-K to 1998 Form 10-K Report)***
*10-L -- Form of Restricted Stock Award under 1991 Master Stock Compensation
Plan (Filed as Exhibit 10-L to 1992 Form 10-K Report)***
*10-M -- Form of Agreement to Defer Compensation for certain Executive
Officers (Filed as Exhibit 10-M to 1993 Form 10-K Report)***
*10-N -- Stock Option Program for Nonemployee Directors (Filed as Exhibit
10-N to 1998 Form 10-K Report)***
14
*10-O -- Salaried Employees' Pension Plan -- 1997 Restatement (Filed as
Exhibit l0-0 to 1997 10-K Report)***
*10-P -- Eighth Amendment of Employee Stock Ownership Plan Trust Agreement
1987 Restatement (Filed as Exhibit 10-P to 1997 10-K Report)***
*10-Q -- Deferred Compensation and 401(K) Excess Plan (1999 Restatement)***
*10-R -- Note Purchase Agreement among Donaldson Company, Inc. and certain
listed Insurance Companies dated as of July 15, 1998 (Filed as
Exhibit 10-R to 1998 Form 10-K Report)
*10-S -- First Supplement to Note Purchase Agreement among Donaldson
Company, Inc. and certain listed Insurance Companies dated as of
August 1, 1998 (Filed as Exhibit 10-S to 1998 Form 10-K Report)
*10-T -- Deferred Stock Option Gain Plan (1999 Restatement)***
11 -- Computation of net earnings per share ("Earnings Per Share" in
"Summary of Significant Accounting Policies" in Note A, page 20 of
the 2001 Annual Report to Shareholders is incorporated herein by
reference)
13 -- Portions of Registrant's Annual Report to Shareholders for the year
ended July 31, 2001
21 -- Subsidiaries ("Wholly Owned Subsidiaries" and "Joint Ventures" on
page 31 of the 2001 Annual Report to Shareholders is incorporated
herein by reference)
23 -- Consent of Arthur Andersen LLP
23(A) -- Consent of Ernst & Young LLP
24 -- Powers of Attorney
99 -- Litigation Reform Act of 1995 -- Cautionary Statement
* Exhibit has heretofore been filed with the Securities and Exchange
Commission and is incorporated herein by reference as an exhibit.
** Pursuant to the provisions of Regulation S-K Item 601(b)(4)(iii)(A) copies
of instruments defining the rights of holders of certain long-term debts of
Registrant and its subsidiaries are not filed and in lieu thereof
Registrant agrees to furnish a copy thereof to the Securities and Exchange
Commission upon request.
*** Denotes compensatory plan or management contract.
Note: Exhibits have been furnished only to the Securities and Exchange
Commission. Copies will be furnished to individuals upon request and payment of
$20 representing Registrant's reasonable expense in furnishing such exhibits.
15
Exhibit 13
ELEVEN-YEAR COMPARISON OF RESULTS
Donaldson Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Thousands of dollars, except per share amounts) 2001 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $1,137,015 $1,092,294 $ 944,139 $ 940,351
Gross margin $ 341,734 327,521 275,681 263,262
Gross margin percentage 30.1% 30.0% 29.2% 28.0%
Operating income $ 112,108 105,594 88,390 86,799
Operating income percentage 9.9% 9.7% 9.4% 9.2%
Interest expense $ 11,608 9,880 6,993 4,671
Earnings before income taxes $ 104,928 100,333 89,210 86,441
Income taxes $ 29,380 30,100 26,763 29,390
Effective income tax rate 28.0% 30.0% 30.0% 34.0%
Net earnings $ 75,548 70,233 62,447 57,051
Return on sales 6.6% 6.4% 6.6% 6.1%
Return on average shareholders' equity 25.2% 25.9% 24.1% 22.8%
Return on investment 19.1% 19.4% 19.0% 20.5%
FINANCIAL POSITION
Total assets $ 706,830 677,525 542,246 512,987
Current assets $ 407,227 383,347 326,388 300,817
Current liabilities $ 217,279 243,590 142,055 165,068
Working capital $ 189,948 139,757 184,333 135,749
Current ratio 1.9 1.6 2.3 1.8
Current debt $ 59,416 85,313 20,696 45,896
Long-term debt $ 99,259 92,645 86,691 51,553
Total debt $ 158,675 177,958 107,387 97,449
Shareholders' equity $ 319,093 280,165 262,763 255,671
Long-term capitalization ratio 23.7% 24.9% 24.8% 16.8%
Property, plant and equipment, net $ 207,658 204,545 182,180 178,867
Net expenditures on property, plant and equipment $ 38,924 36,417 29,539 54,705
Depreciation and amortization $ 38,577 34,326 27,686 25,272
SHAREHOLDER INFORMATION
Net earnings per share - assuming dilution $ 1.66 1.51 1.31 1.14
Dividends paid per share $ .295 .27 .23 .19
Shareholders' equity per share $ 7.19 6.27 5.69 5.28
Shares outstanding (000s) 44,383 44,658 46,197 48,382
Common stock price range, per share
High $ 33.05 24.81 25.88 27.19
Low $ 19.13 19.13 14.44 18.56
-----------------------------------------------------------------------------------------------------------------
</TABLE>
Amounts are adjusted for all stock splits and reflect adoption of SFAS 128.
Operating income is gross margin less selling, general and administrative, and
research and development expense.
Return on investment is net earnings divided by average long-term debt plus
average shareholders' equity.
Long-term capitalization ratio is long-term debt divided by long-term debt plus
shareholders' equity.
(1)Excludes the cumulative effect of an accounting change of $2,206, or $.08 per
share, in 1994.
8
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 833,348 $ 758,646 $ 703,959 $ 593,503 $ 533,327 $ 482,104 $ 457,692
250,273 222,874 197,979 166,599 152,236 133,574 129,858
30.0% 29.4% 28.1% 28.1% 28.5% 27.7% 28.4%
82,715 75,642 65,531 52,079 45,246 41,249 41,304
9.9% 10.0% 9.3% 8.8% 8.5% 8.6% 9.0%
2,358 2,905 3,089 3,362 2,723 2,681 3,526
79,094 71,120 63,172 50,193 44,682 41,721 39,385
28,474 27,684 24,636 18,244 16,468 15,952 15,337
36.0% 38.9% 39.0% 36.3% 36.9% 38.2% 38.9%
50,620 43,436 38,536 31,949(1) 28,214 25,769 24,048
6.1% 5.7% 5.5% 5.4% 5.3% 5.3% 5.3%
21.4% 19.3% 18.8% 17.6% 16.9% 17.2% 18.0%
20.8% 18.5% 17.6% 16.0% 15.0% 14.8% 14.9%
467,501 402,850 381,042 337,360 300,217 286,348 253,194
283,367 250,751 247,904 220,308 196,014 187,360 169,398
177,346 138,578 123,747 115,757 93,666 89,956 77,537
106,021 112,173 124,157 104,551 102,348 97,404 91,861
1.6 1.8 2.0 1.9 2.1 2.1 2.2
42,674 13,145 20,800 16,956 7,595 11,425 6,380
4,201 10,041 10,167 16,028 18,920 23,482 25,673
46,875 23,186 30,967 32,984 26,515 34,907 32,053
243,865 228,880 221,173 189,697 174,008 160,303 138,947
1.7% 4.2% 4.4% 7.8% 9.8% 12.8% 15.6%
154,595 124,913 110,640 99,559 90,515 84,899 72,863
47,327 39,297 25,334 24,642 15,005 15,538 16,208
21,494 21,674 20,529 16,365 14,752 14,047 12,187
.99 .84 .73 .59(1) .51 .46 .42
.17 .15 .14 .12 .10 .09 .07
4.93 4.52 4.23 3.58 3.19 2.91 2.51
49,452 50,650 52,370 53,020 54,564 55,138 55,478
20.38 14.00 14.00 13.06 10.06 7.94 6.56
12.69 11.94 10.94 9.13 7.00 5.19 4.06
---------------------------------------------------------------------------------------------------------
</TABLE>
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
The following discussion of the company's financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements and Notes thereto (including Note H, Segment Reporting) and other
financial information included elsewhere in this Report.
FISCAL 2001 COMPARED TO FISCAL 2000 The company reported record sales in 2001 of
$1.137 billion. This was an increase of 4.1 percent over prior-year sales of
$1.092 billion. Excluding the impact of businesses acquired in 2000, sales for
the year ended July 31, 2001 were up 0.5 percent over the prior year. This
modest growth in sales for the year reflected the diversification of our
Industrial Products and Engine Products segments as shown by the strength in the
gas turbine market offsetting the slump in the North American truck market.
Sales for the Industrial Products segment were a record $530.2 million, up 26.7
percent over the prior year. Excluding the acquisition of DCE, sales for the
year were up 18.9 percent from the prior year. Leading this increase were sales
in gas turbine products with an increase over the prior year of 66.6 percent to
record sales of $195.0 million, reflecting the continued high demand in this
market. Sales in dust collection and special application products also increased
from the prior year by 12.5 percent and 8.9 percent, respectively. Excluding the
acquisition of DCE, dust collection product sales decreased 4.4 percent from the
prior year. Sales for the Engine Products segment of $606.8 million were down
10.0 percent over the prior year reflecting the U.S. economic weakness and the
strong U.S. dollar overseas. Worldwide markets for medium and heavy-duty trucks
were severely depressed, reflected in a decrease in transportation product sales
of 47.6 percent from the prior year. Excluding the company's second quarter exit
from a block of truck related business due to unfavorable commercial terms,
sales were down 37.1 percent from the prior year. Sales in off-road products
decreased 5.9 percent from the prior year while aftermarket product sales
increased 5.0 percent.
Domestic Industrial Products sales increased 28.1 percent from the prior
year. This increase was led by strong sales of gas turbine systems products
domestically reflecting continued demand for large turbines in North America,
with domestic sales almost doubling from the prior year. Domestic dust
collection product sales grew slightly with an increase of 1.7 percent while
sales in special application products domestically decreased 8.2 percent.
Domestic Engine Products sales were down 10.5 percent from the prior year. The
medium and heavy-duty truck market continued to show its effects on the
company's transportation product sales domestically with a decrease of 51.8
percent from the prior year. This was somewhat offset by increases in domestic
aftermarket and off-road product sales of 1.7 percent and 13.1 percent,
respectively.
In U.S. dollars, total international sales increased 5.6 percent from the
prior year. Excluding the negative impact of foreign currency translation of
$35.6 million, sales increased 14.4 percent over the prior year. Total
international Industrial Products sales were up 24.9 percent from the prior
year. Sales of all products within this segment were strong internationally,
with increases across the board. Leading this growth were sales of dust
collection products with an increase of 34.1 percent from the prior year. Sales
of gas turbine products and special application products increased 20.2 percent
and 18.9 percent from the prior year, respectively. Total international Engine
Products sales were down 8.9 percent compared to the prior year despite an
increase in aftermarket product sales of 11.3 percent. International sales of
off-road and transportation products decreased from the prior year by 28.3
percent and 29.0 percent, respectively.
The company reported record net earnings for 2001 of $75.5 million compared
to $70.2 million in 2000, an increase of 7.6 percent. Net earnings per share -
diluted were $1.66, up 10.0 percent from $1.51 in the prior year. With only a
modest increase in sales, the increase in net earnings is also a result of cost
management, particularly in plant rationalization efforts throughout the year
and other cost reduction initiatives in the second half of the year. This along
with the decrease in the company's effective tax rate due to increased
profitability from foreign operations helped to offset the effect of negative
foreign currency exchange rates. The Industrial Products segment continued to
grow, contributing 46.6 percent of consolidated sales, approximately 70.0
percent of the operating income and all of the growth in operating income for
the year. International operating income totaled approximately 68.9 percent and
62.1 percent of consolidated operating income in 2001 and 2000, respectively.
International operations also contributed all of the growth in operating income.
Europe's operating income increased 7.1 percent (16.2 percent in local currency)
as a result of strong gas turbine results, the completion of the DCE integration
and improved results in most markets. Asia-Pacific's operating
10
income increased by 38.0 percent (44.4 percent in local currency), led by
increases from Japan's ROI improvement project and strong disk drive results in
the Hong Kong and Wuxi, China, operations.
Gross margin for 2001 remained virtually flat with only a slight increase to
30.1 percent compared to 30.0 percent in the prior year. This reflects an
improved product mix and benefits of plant rationalization efforts, offsetting
strong pricing pressure from major customers.
Operating expenses as a percentage of sales for 2001 and 2000 were 20.2
percent and 20.3 percent, respectively. Operating expenses in 2001 totaled
$229.6 million compared to $221.9 million in 2000, an increase of $7.7 million,
or 3.5 percent. The increase in operating expenses relative to the prior year
reflects higher sales levels and the continued impact of the businesses acquired
in 2000. Selling expenses in 2001 were flat as compared to 2000. General and
administrative expenses increased $7.2 million from the prior year.
Interest expense increased $1.7 million, or 17.5 percent, primarily due to
higher short-term debt levels throughout the year related to last year's
acquisitions. Other income totaled $4.4 million in 2001 compared to other income
of $4.6 million in the prior year. The major components of other income in 2001
were: interest income of $1.2 million, earnings from non-consolidated joint
ventures of $3.0 million, and other miscellaneous income and expense items
netting to $0.2 million of miscellaneous income.
The effective income tax rate of 28.0 percent in 2001 decreased from the 30.0
percent tax rate in 2000. The tax rate was adjusted in the third quarter to
provide for the increased contributions from the company's international
operations in lower tax rate countries and reflects the foreign tax credit
generated by the receipt of a dividend from the company's operations in Japan.
The company anticipates that it will have a comparable proportion of income
coming from its international operations located in lower tax rate countries in
2002. The company anticipates that its effective income tax rate will be
approximately 28.0 percent in 2002.
Total backlog was $355.3 million, up 7.2 percent from the same period last
year. In the Industrial Products segment, total backlog increased 16.8 percent
from the same period last year. In the Engine Products segment, total backlog
was down 1.3 percent compared to the same period last year. Hard order backlog,
goods scheduled for delivery in 90 days, was $179.9 million, down 2.1 percent
from $183.7 million in the prior year. Within the Industrial Products segment,
hard order backlog for gas turbine products increased 28.7 percent from the
prior year. This increase was offset by decreases in dust collection and special
application products of 26.2 percent and 24.1 percent, respectively, resulting
in a slight overall increase in the Industrial Products segment from the prior
year. In the Engine products segment, overall hard order backlog decreased 4.5
percent from the prior year. Within this segment, off-road and transportation
products posted decreases of 6.4 percent and 16.3 percent, respectively, while
aftermarket hard order backlog increased 4.5 percent from the prior year.
FISCAL 2000 COMPARED TO FISCAL 1999 The company exceeded one billion dollars in
sales in 2000, reporting record sales of $1.092 billion. This was an increase of
15.7 percent over prior-year sales of $944.1 million. Businesses acquired in
this fiscal year contributed $56.7 million of revenues for the year. Excluding
the impact of acquisitions, sales for the year ended July 31, 2000 were up 9.7
percent over the prior year. Sales for the Engine Products segment of $674.0
million were up 10.2 percent over the prior year. Sales for the Industrial
Products segment of $418.3 million were up 25.7 percent over the prior year.
Overall, growth was strong across essentially all the markets within both the
Engine Products and Industrial Products segments with the exception of a 5.9
percent decline in sales of transportation products within the Engine Products
segment, reflecting a slowdown in the North America heavy-duty truck market and
a decrease in automotive sales due to the loss of the CK platform business.
Continued increases in sales for the gas turbine systems and special application
products reflected continued high demand in those markets. The increase in sales
also reflected strengthening in other markets such as dust collection, engine
aftermarket and off-road products.
Domestic Engine Products sales were up 8.7 percent from the prior year. This
increase was led by strong sales in engine aftermarket products, which increased
domestically by 23.6 percent including businesses acquired during the year.
Exclusive of acquisitions, domestic aftermarket product sales increased 10.4
percent. Domestic sales in off-road equipment products were also strong with an
increase of 14.7 percent from the prior year reflecting growth in the
agricultural, mining and large equipment markets compared to the prior year.
Domestic sales in transportation products were down 1.8 percent with mixed
results coming from an increase of 10.2 percent
11
in domestic truck sales offset by a sharp decline in domestic automotive sales.
Domestic Industrial Products sales increased 17.8 percent from the prior year
including businesses acquired during the year. Exclusive of acquisitions,
domestic Industrial Products sales were still strong with an increase of 15.6
percent. This increase was led by continued strong sales of gas turbine systems
products (55.4 percent increase from the prior year) reflecting continued demand
for large turbines in North America. Domestic dust collection product sales grew
at a more modest rate with an increase of 7.2 percent while increases in special
applications products increased only slightly overall.
In U.S. dollars, total international sales increased 23.0 percent from the
prior year. Excluding the negative impact of foreign currency translation of
$12.3 million, sales increased 26.8 percent over the prior year. Total
international Engine Products sales were up 13.3 percent compared to the prior
year despite lower overall sales of automotive products. International sales of
off-road products and aftermarket products were strong, posting increases of
21.9 percent and 20.1 percent from the prior year, respectively. International
Industrial Products sales were up 39.0 percent from the prior year including
businesses acquired during the year. Businesses acquired during the year
contributed $28.7 million of international sales in the Industrial Products
segment. Excluding these sales, the Industrial Products segment showed an
increase of 15.9 percent in international sales from the prior year. A sharp
increase in international sales in dust collection products was due largely to
acquisitions during the year but excluding acquisitions, sales still showed an
increase of 6.7 percent. Also contributing to the increase in international
sales for the Industrial Products segment were disk drive products and gas
turbine products with increases of 18.8 percent and 14.9 percent, respectively,
over the prior year.
The company reported record net earnings for 2000 of $70.2 million compared
to $62.4 million in 1999, an increase of 12.5 percent. Net earnings per share -
diluted were $1.51, up 15.3 percent from the prior year. This reflects revenue
growth as well as the impact of the company's stock repurchase program. An
increase in sales levels from the prior year and the benefit from continued cost
reduction efforts were the primary reasons for the higher earnings. The
Industrial Products segment contributed almost half of the operating profit and
all of the earnings growth for 2000. International operating income totaled
approximately 62.1 percent and 57.6 percent of consolidated operating income in
2000 and 1999, respectively.
Gross margin for 2000 increased to 30.0 percent compared to 29.2 percent in
the prior year. The increase in gross margin for the year reflects the growth in
net sales achieved in both operating segments of the company as well as the
positive impact of the continuous focus on productivity improvements.
Operating expenses as a percentage of sales for 2000 and 1999 were 20.3
percent and 19.8 percent, respectively. Operating expenses in 2000 totaled
$221.9 million compared to $187.3 million in 1999, an increase of $34.6 million,
or 18.5 percent. The increase in operating expenses relative to the prior year
reflects higher sales levels and the impact of the acquired businesses. Selling
expenses in 2000 increased $17.1 million, primarily due to the higher sales
levels. General and administrative expenses increased $13.8 million from the
prior year due to several factors including increased programming and
information technology costs associated with Year 2000 efforts, increases in
workers' compensation, increases in medical costs and employee compensation. In
addition, there was $1.8 million of goodwill amortization related to the
businesses acquired during the year.
Interest expense increased $2.9 million, or 41.3 percent, primarily due to an
increase in debt for the financing of acquisitions in the year as well as an
increase in short-term borrowing. Other income totaled $4.6 million in 2000
compared to other income of $7.8 million in the prior year. The major components
of other income in 2000 were: interest income of $2.7 million, earnings from
non-consolidated joint ventures of $4.4 million, charitable contributions of
$0.9 million, loss on sale of fixed assets of $1.0 million, and other
miscellaneous income and expense items netting to $0.6 million of miscellaneous
expense.
The effective income tax rate of 30.0 percent in 2000 was unchanged from the
30.0 percent tax rate in 1999.
Total backlog of $331.3 million was up 16.8 percent from the prior year-end.
Hard order backlog, goods scheduled for delivery in 90 days, was $183.7 million
and $157.1 million at July 31, 2000 and 1999, respectively. Hard order backlog
for the Engine Products segment decreased slightly from 1999. This decrease
resulted from a decrease in backlog for truck and automotive products of 32.1
percent, offset by double-digit increases in both aftermarket products and
off-road equipment products of 22.2 percent and 15.5 percent, respectively. Hard
order backlog for the Industrial Products segment increased $28.2 million from
1999. This increase was due to significant increases in backlog for both dust
collection and
12
gas turbine products of 81.1 percent and 45.6 percent, respectively, followed by
a more modest increase in special application products of 6.6 percent.
Liquidity and Capital Resources
FINANCIAL CONDITION At July 31, 2001, the company's capital structure was
comprised of $59.4 million of current debt, $99.3 million of long-term debt and
$319.1 million of shareholders' equity. The ratio of long-term debt to total
long-term capital was 23.7 percent and 24.9 percent at July 31, 2001 and 2000,
respectively.
Total debt outstanding decreased $19.3 million to $158.7 million outstanding
at July 31, 2001. The decrease resulted from a reduction in short-term
borrowings outstanding at the end of the year of $25.6 million as compared to
the prior year, offset by an increase in long-term debt of $6.6 million from the
prior year. The increase in long-term debt is primarily due to the addition of a
guaranteed note of $6.4 million in our Japan operations.
The company has a multi-currency revolving credit facility totaling $100.0
million with a group of banks and an additional $35.0 million available for use
under uncommitted facilities which provide unsecured borrowings for general
corporate purposes. There was $57.7 million outstanding under these facilities
at July 31, 2001. The company believes that the combination of present capital
resources, internally generated funds, and unused financing sources are adequate
to meet cash requirements for 2002.
Shareholders' equity increased $38.9 million in 2001 to $319.1 million. The
increase was primarily due to current year earnings of $75.5 million offset
primarily by $10.3 million of treasury stock repurchases and
$13.1 million of dividend payments as well as a foreign currency translation
adjustment in other comprehensive income of $13.7 million.
CASH FLOWS During fiscal 2001, $82.8 million of cash was generated from
operating activities, compared with $88.5 million in 2000 and $100.9 million in
1999. The decrease in 2001 was primarily due to an increase in accounts
receivable of $35.2 million during the year and contribution to employee pension
plans offsetting increased earnings.
In addition to cash generated from operating activities, the company
decreased its outstanding short-term debt by $24.4 million while net long-term
debt increased by $8.3 million. Cash flow generated by operations was used
primarily to support $38.9 million for capital expenditures, $10.3 million for
stock repurchases and $13.1 million for dividend payments. Cash and cash
equivalents increased $4.1 million during 2001.
Capital expenditures for property, plant and equipment totaled $38.9 million
in 2001, compared to $36.4 million in 2000 and $29.5 million in 1999. Capital
expenditures primarily related to productivity enhancing investments at various
plants worldwide and continuing upgrades to the U.S. information systems.
Capital spending in 2002 is planned to be $45.1 million. Significant planned
expenditures include the further upgrade of U.S. information systems and
investment in manufacturing equipment and tooling. It is anticipated that 2002
capital expenditures will be financed primarily by cash generated from
operations.
DIVIDENDS The company's dividend policy is to maintain a payout ratio which
allows dividends to increase with the long-term growth of earnings per share,
while sustaining dividends in down years. The company's dividend payout ratio
target is 20.0 percent to 25.0 percent of the average earnings per share of the
last three years. The current quarterly dividend of 7.5 cents per share equates
to 20.1 percent of the 1999 through 2001 average net earnings per share.
SHARE REPURCHASE PLAN In January 2001, the Board of Directors authorized the
company to repurchase 4.5 million shares of common stock of which no shares had
been repurchased as of July 31, 2001. Management and the Board of Directors
believe the share repurchase program is an excellent means of returning value to
the shareholders.
In fiscal 2001, the company repurchased 0.5 million shares of common stock on
the open market for $10.3 million under the share repurchase plan authorized in
November 1998, at an average price of $21.16 per share. The company repurchased
1.7 million shares for $35.9 million in 2000 and 2.4 million shares for $44.5
million in 1999.
ENVIRONMENTAL MATTERS The company has established reserves for potential
environmental liabilities and plans to continue to accrue reserves in
appropriate amounts. While uncertainties exist with respect to the amounts and
timing
13
of the company's ultimate environmental liabilities, management believes that
such liabilities, individually and in the aggregate, will not have a material
adverse effect on the company's financial condition or results of operations.
NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Com
binations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Major
provisions of these statements are as follows: all business combinations must
now use the purchase method of accounting, the pooling of interest method of
accounting is now prohibited; intangible assets acquired in a business
combination must be recorded separately from goodwill if they arise from
contractual or other legal rights or are separable from the acquired entity and
can be sold, transferred, licensed, rented or exchanged, either individually or
as a part of a related contract, asset or liability; goodwill and intangible
assets with indefinite lives are not amortized, but tested for impairment
annually, except in certain circumstances, and whenever there is an impairment
indicator; all acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting; effective August 1, 2002,
goodwill is no longer subject to amortization. The company has adopted the
provisions of these statements as of August 1, 2001. As required by SFAS 142,
the company will perform an impairment test on goodwill and other intangible
assets as of the adoption date. Thereafter, the company will perform impairment
tests annually and whenever events or circumstances occur indicating that
goodwill or other intangible assets might be impaired. Beginning August 1, 2001,
amortization of goodwill will cease. Goodwill amortization expense was $3.8
million, $2.7 million and $0.7 million at July 31, 2001, 2000 and 1999,
respectively. The company estimates that goodwill amortization expense would
have been approximately $3.5 million in 2002.
MARKET RISK The company's market risk includes the potential loss arising from
adverse changes in foreign currency exchange rates and interest rates. The
company manages foreign currency market risk, from time to time, through the use
of a variety of financial and derivative instruments. The company does not enter
into any of these instruments for trading purposes to generate revenue. Rather,
the company's objective in managing these risks is to reduce fluctuations in
earnings and cash flows associated with changes in foreign currency exchange
rates. The company uses forward exchange contracts and other hedging activities
to hedge the U.S. dollar value resulting from anticipated foreign currency
transactions. The company's market risk on interest rates is the potential
increase in fair value of long-term debt resulting from a potential decrease in
interest rates. See further discussion of these market risks below.
FOREIGN CURRENCY During 2001, the U.S. dollar strengthened throughout the year
relative to the currencies of the foreign countries in which the company
operates. The stronger dollar had a negative impact on the company's
international results because the foreign denominated revenues and earnings
directly translated into fewer U.S. dollars.
It is not possible to determine the true impact of foreign currency
translation changes; however, the direct effect on net sales and net earnings
can be estimated. For the year ended July 31, 2001, the impact of foreign
currency translation resulted in an overall decrease in net sales of $35.6
million and a decrease in net earnings of $3.2 million. The most significant
impact on the company's results due to foreign currency translation was in
Europe, where the stronger U.S. dollar relative to both the euro and pound
sterling directly resulted in a decrease in net sales of $23.2 million and a
decrease in net earnings of $2.9 million. The strength of the U.S. dollar
relative to the Japanese yen during 2001 resulted in a decrease in net sales of
$6.7 million and a decrease in net earnings of $0.2 million. In addition,
fluctuation in the exchange rates for the Australian dollar and the South
African rand also contributed to the company's translation losses, resulting in
a decrease in net sales of $2.4 million and $3.0 million respectively. Going
forward, the company expects local currency results to remain strong; excluding
the effect of translation, revenues outside the U.S. increased 14.4 percent for
the year ended July 31, 2001.
The company maintains significant assets and operations in Europe, countries
of the Asia-Pacific Rim, South Africa and Mexico. As a result, exposure to
foreign currency gains and losses exists. A portion of the company's foreign
currency exposure is hedged by incurring liabilities, including bank debt,
denominated in the local currency in which the company's foreign subsidiaries
are located.
The foreign subsidiaries of the company purchase products and parts in
various currencies. As a result, the company may be exposed to cost increases
relative to local currencies in the markets to which it sells. To mitigate such
adverse trends, the company, from time to time, enters into forward exchange
contracts and other hedging
14
activities. Additionally, foreign currency positions are partially offsetting
and are netted against one another to reduce exposure.
Some products made in the United States are sold abroad, primarily in Canada.
As a result, sales of such products are affected by the value of the U.S. dollar
relative to other currencies. Any long-term strengthening of the U.S. dollar
could depress these sales. Also, competitive conditions in the company's markets
may limit its ability to increase product pricing in the face of adverse
currency movements.
INTEREST Our exposure to market risks for changes in interest rates relates
primarily to our short-term investments, short-term borrowings and interest rate
swap agreement. We have no earnings or cash flow exposure due to market risks on
our long-term debt obligations as a result of the fixed-rate nature of the debt.
However, interest rate changes would affect the fair market value of the debt.
At July 31, 2001, the fair value of the company's long-term debt approximates
market. Market risk is estimated as the potential decrease in fair value
resulting from a hypothetical one-half percent increase in interest rates and
amounts to approximately $3.2 million.
On June 6, 2001, the company entered into an interest rate swap agreement
effectively converting a portion of the company's interest rate exposure from a
fixed rate to a variable rate basis to hedge against the risk of higher
borrowing costs in a declining interest rate environment. The company does not
enter into interest rate swap contracts for speculative or trading purposes; as
the differential to be paid or received on the interest rate swap agreement is
accrued and recognized as an adjustment to interest expense as interest rates
change. The interest rate swap agreement has an aggregate notional amount of
$27.0 million maturing on July 15, 2008. The variable rate is based on the
current six-month London Interbank Offered Rates ("LIBOR"). This transaction
resulted in a decrease to interest expense of $45,000 for the year ended July
31, 2001.
Forward-Looking Statements
The company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and is making this cautionary
statement in connection with such safe harbor legislation. This Annual Report to
Shareholders, any Form 10-K, Form 10-Q or Form 8-K of the company or any other
written or oral statements made by or on behalf of the company may include
forward-looking statements which reflect the company's current views with
respect to future events and financial performance but involve uncertainties
that could significantly impact results. The words "believe," "expect,"
"anticipate," "intends," "estimate," "forecast," "project," "should" and similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. All forecasts
and projections in this Annual Report are "forward-looking statements," and are
based on management's current expectations of the company's near-term results,
based on current information available pertaining to the company.
The company wishes to caution investors that any forward-looking statements
made by or on behalf of the company are subject to uncertainties and other
factors that could cause actual results to differ materially from such
statements. These uncertainties and other risk factors include, but are not
limited to: risks associated with changing world economic and political factors,
the company's international operations, interest and currency rate fluctuations,
commodity prices, highly competitive markets, changes in capital spending levels
by customers, changes in product demand and changes in the geographic and
product mix of sales, integration of acquisitions and acquisition opportunities,
ongoing plant and product line rationalization projects, ongoing information
technology improvements, research and development expenditures, government laws
and regulations, including diesel emissions controls. For a more detailed
explanation of the foregoing and other risks, see exhibit 99 to our current
Annual Report on Form 10-K, which is filed with the Securities and Exchange
Commission. The company wishes to caution investors that other factors may in
the future prove to be important in affecting the company's results of
operations. New factors emerge from time to time and it is not possible for
management to predict all such factors, nor can it assess the impact of each
such factor on the business or the extent to which any factor, or a combination
of factors, may cause actual results to differ materially from those contained
in any forward-looking statements.
Investors are further cautioned not to place undue reliance on such
forward-looking statements as they speak only to the company's views as of the
date the statement is made. The company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
15
CONSOLIDATED STATEMENTS OF EARNINGS
Donaldson Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Thousands of dollars, except share and per share amounts) Year ended July 31, 2001 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 1,137,015 $ 1,092,294 $ 944,139
Cost of sales 795,281 764,773 668,458
-------------------------------------------------------------------------------------------------------------------------------
Gross Margin 341,734 327,521 275,681
Selling, general and administrative 201,201 194,623 163,688
Research and development 28,425 27,304 23,603
-------------------------------------------------------------------------------------------------------------------------------
Operating Income 112,108 105,594 88,390
Interest expense 11,608 9,880 6,993
Other (income) expense, net (4,428) (4,619) (7,813)
-------------------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 104,928 100,333 89,210
Income taxes 29,380 30,100 26,763
-------------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 75,548 $ 70,233 $ 62,447
===============================================================================================================================
Weighted Average Shares - Basic 44,381,082 45,716,482 46,899,127
===============================================================================================================================
Weighted Average Shares - Diluted 45,612,165 46,664,196 47,793,180
===============================================================================================================================
Net Earnings Per Share - Basic $ 1.70 $ 1.54 $ 1.33
===============================================================================================================================
Net Earnings Per Share - Diluted $ 1.66 $ 1.51 $ 1.31
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
CONSOLIDATED BALANCE SHEETS
Donaldson Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Thousands of dollars, except share amounts) At July 31, 2001 2000
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 36,136 $ 32,017
Accounts receivable, less allowance of $6,309 and $4,380 230,046 202,361
Inventories
Raw materials 50,426 45,064
Work in process 21,209 20,171
Finished products 40,999 54,128
------------------------------------------------------------------------------------------------------------
Total Inventories 112,634 119,363
Deferred income taxes 12,746 18,411
Prepaids and other current assets 15,665 11,195
------------------------------------------------------------------------------------------------------------
Total Current Assets 407,227 383,347
Property, Plant and Equipment, at cost
Land 6,890 7,432
Buildings 117,029 119,203
Machinery and equipment 345,073 333,310
Construction in progress 22,603 9,756
------------------------------------------------------------------------------------------------------------
491,595 469,701
Less accumulated depreciation (283,937) (265,156)
------------------------------------------------------------------------------------------------------------
207,658 204,545
Deferred Income Taxes -- 408
Intangible Assets 61,658 63,885
Other Assets 30,287 25,340
------------------------------------------------------------------------------------------------------------
$ 706,830 $ 677,525
============================================================================================================
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 59,393 $ 85,034
Current maturities of long-term debt 23 279
Trade accounts payable 100,287 90,188
Accrued employee compensation and related taxes 29,945 29,759
Accrued liabilities 17,597 27,974
Other current liabilities 10,034 10,356
------------------------------------------------------------------------------------------------------------
Total Current Liabilities 217,279 243,590
Long-term Debt 99,259 92,645
Deferred Income Taxes 9,189 --
Other Long-term Liabilities 62,010 61,125
Commitments and Contingencies (Note J)
Shareholders' Equity
Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued -- --
Common stock, $5.00 par value, 80,000,000 shares authorized,
49,655,954 shares issued in 2001 and 2000 248,280 248,280
Additional paid-in capital -- 2,967
Retained earnings 203,499 142,176
Accumulated other comprehensive loss (24,235) (10,523)
Treasury stock - 5,273,121 and 4,998,342 shares in 2001 and 2000, at cost (108,451) (102,735)
------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 319,093 280,165
------------------------------------------------------------------------------------------------------------
$ 706,830 $ 677,525
============================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
Donaldson Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Thousands of dollars) Year ended July 31, 2001 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 75,548 $ 70,233 $ 62,447
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization 38,577 34,326 27,686
Equity in (earnings) loss of affiliates (635) 74 (2,187)
Deferred income taxes 7,093 (449) 489
Other (12,949) 3,121 10,344
Changes in operating assets and liabilities, net of acquired businesses
Accounts receivable (35,220) (5,704) (13,244)
Inventories 2,816 (26,227) 21,382
Prepaids and other current assets 2,838 (3,316) (3,095)
Trade accounts payable and other accrued expenses 4,731 16,437 (2,960)
---------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 82,799 88,495 100,862
INVESTING ACTIVITIES
Purchases of property and equipment, net (38,924) (36,417) (29,539)
Acquisitions and investments in affiliates -- (88,220) (230)
---------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (38,924) (124,637) (29,769)
FINANCING ACTIVITIES
Proceeds from long-term debt 9,462 5,752 35,546
Repayments of long-term debt (1,136) (4,522) (404)
Change in short-term borrowings (24,417) 66,328 (24,422)
Purchase of treasury stock (10,297) (35,923) (44,535)
Dividends paid (13,092) (12,384) (10,830)
Exercise of stock options 525 326 1,617
---------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (38,955) 19,577 (43,028)
Effect of exchange rate changes on cash (801) (1,053) (1,084)
---------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 4,119 (17,618) 26,981
Cash and Cash Equivalents, Beginning of Year 32,017 49,635 22,654
---------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 36,136 $ 32,017 $ 49,635
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Donaldson Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
(Thousands of dollars, except per share amounts) Stock Capital Earnings Income (Loss) Stock Total
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE JULY 31, 1998 $ 248,280 $ 1,570 $ 39,594 $ (5,135) $ (28,638) $ 255,671
--------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net earnings 62,447 62,447
Foreign currency translation (535) (535)
----------
Comprehensive income 61,912
Treasury stock acquired (44,535) (44,535)
Stock options exercised (3,350) 3,004 (346)
Performance awards (1,071) (174) 802 (443)
Tax reduction - employee plans 1,334 1,334
Cash dividends ($.23 per share) (10,830) (10,830)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE JULY 31, 1999 248,280 1,833 87,687 (5,670) (69,367) 262,763
Comprehensive income
Net earnings 70,233 70,233
Foreign currency translation (4,853) (4,853)
----------
Comprehensive income 65,380
Treasury stock acquired (35,923) (35,923)
Stock options exercised (3,360) 2,555 (805)
Tax reduction - employee plans 1,134 1,134
Cash dividends ($.27 per share) (12,384) (12,384)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE JULY 31, 2000 248,280 2,967 142,176 (10,523) (102,735) 280,165
Comprehensive income
Net earnings 75,548 75,548
Foreign currency translation (13,717) (13,717)
Additional minimum pension liability (341) (341)
Net gain on cash flow hedging derivatives 346 346
----------
Comprehensive income 61,836
Treasury stock acquired (10,297) (10,297)
Stock options exercised (6,196) (1,124) 4,262 (3,058)
Performance awards (9) 319 310
Tax reduction - employee plans 3,229 3,229
Cash dividends ($.295 per share) (13,092) (13,092)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE JULY 31, 2001 $ 248,280 $ -- $ 203,499 $ (24,235) $(108,451) $ 319,093
================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Donaldson Company, Inc. and Subsidiaries
A Summary of Significant
Accounting Policies
DESCRIPTION OF BUSINESS Donaldson Company, Inc., is a leading worldwide
manufacturer of filtration systems and replacement parts. The company's product
mix includes air and liquid filters and exhaust and emission control products
for mobile equipment; in-plant air cleaning systems; air intake systems and
exhaust products for industrial gas turbines; and specialized filters for such
diverse applications as computer disk drives, aircraft passenger cabins and
semi-conductor processing. Products are manufactured at more than three dozen
Donaldson plants around the world and through three joint ventures.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of Donaldson Company, Inc. and all majority-owned subsidiaries (the
company). All significant inter-company accounts and transactions have been
eliminated. The company also has three joint ventures that are not
majority-owned, all accounted for on the equity method. Certain amounts in prior
periods have been reclassified to conform to the current presentation. The
reclassifications had no impact on the company's net earnings or shareholders'
equity as previously reported.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
FOREIGN CURRENCY TRANSLATION For most foreign operations, local currencies are
considered the functional currency. Assets and liabilities are translated using
the exchange rates in effect at the balance sheet date. Results of operations
are translated using the average exchange rates prevailing throughout the
period. Translation gains or losses, net of applicable deferred taxes, are
accumulated in the foreign currency adjustment in accumulated other
comprehensive income(loss) in shareholders' equity. There were no significant
foreign currency transaction gains or losses in 2001. Foreign currency
transaction losses of $0.2 million in 2000 and gains of $0.2 million in 1999 are
included in earnings before income taxes.
CASH EQUIVALENTS The company considers all highly liquid temporary investments
with a maturity of three months or less when purchased to be cash equivalents.
Cash equivalents are carried at cost which approximates market value.
INVENTORIES Inventories are stated at the lower of cost or market. Domestic
inventories are valued using the last-in, first-out (LIFO) method, while the
international subsidiaries use the first-in, first-out (FIFO) method.
Inventories valued at LIFO were approximately 53 percent and 52 percent of total
inventories at July 31, 2001 and 2000, respectively.
The FIFO cost of inventories valued under the LIFO method exceeded the LIFO
carrying values by $22.5 million and $21.2 million at July 31, 2001 and 2000,
respectively.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost.
Additions, improvements or major renewals are capitalized, while expenditures
that do not enhance or extend the asset's useful life are charged to operating
expense as incurred. Depreciation is computed principally by use of declining
balance methods on facilities and equipment acquired on or prior to July 31,
1992. The company adopted the straight-line depreciation method for all property
acquired after July 31, 1992. Accelerated depreciation methods are generally
used for income tax purposes.
The estimated useful lives of property, plant and equipment are as follows:
--------------------------------------------------------------------------------
Buildings 10 to 40 years
Machinery and equipment 3 to 10 years
--------------------------------------------------------------------------------
INTANGIBLE ASSETS Intangible assets, primarily consisting of goodwill, are
amortized on a straight-line basis over periods ranging up to 20 years.
Amortization expense was $3.8 million, $2.7 million and $0.7 million at July 31,
2001, 2000 and 1999, respectively. Accumulated amortization was $9.6 million and
$5.8 million as of July 31, 2001 and 2000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS The company reviews the long-lived assets,
including identifiable intangibles and associated goodwill, for impairment when
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If impairment indicators are present and the estimated
future undiscounted cash flows are less than the carrying value of the assets
and any related goodwill, the carrying value is reduced to the estimated fair
value as measured by the undiscounted cash flows.
20
INCOME TAXES Deferred tax assets and liabilities are recognized for the expected
future tax consequences attributed to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to reverse.
COMPREHENSIVE INCOME The company adopted Statement of Financial Accounting
Standards (SFAS) 130, "Reporting Comprehensive Income," in the first quarter of
fiscal 1999. Comprehensive income consists of net income, foreign currency
translation adjustments, additional minimum pension liability and net gain or
loss on cash flow hedging derivatives, and is presented in the Consolidated
Statements of Changes in Shareholders' Equity. Accumulated other comprehensive
income consists of accumulated foreign currency translation adjustment,
accumulated additional minimum liability related to pension and accumulated net
gain or loss on cash flow hedging derivatives. The adoption of SFAS 130 had no
impact on the company's results of operations or shareholders' equity.
EARNINGS PER SHARE The company follows SFAS 128, "Earnings per Share," to
present earnings per share calculations. The company's basic net earnings per
share is computed by dividing net earnings by the weighted average number of
outstanding common shares. The company's diluted net earnings per share is
computed by dividing net earnings by the weighted average number of outstanding
common shares and dilutive shares relating to stock options.
The following table presents information necessary to calculate basic and
diluted earnings per share:
(In thousands, except per share amounts) 2001 2000 1999
--------------------------------------------------------------------------------
Weighted average shares - basic 44,381 45,716 46,899
Dilutive shares 1,231 948 894
--------------------------------------------------------------------------------
Weighted average shares - diluted 45,612 46,664 47,793
================================================================================
Net earnings for basic and diluted
earnings per share computation $ 75,548 $ 70,233 $ 62,447
================================================================================
Net earnings per share - basic $ 1.70 $ 1.54 $ 1.33
================================================================================
Net earnings per share - diluted $ 1.66 $ 1.51 $ 1.31
================================================================================
TREASURY STOCK Repurchased Common Stock is stated at cost and is presented as a
separate reduction of shareholders' equity.
RESEARCH AND DEVELOPMENT All expenditures for research and development are
charged against earnings in the year incurred.
STOCK-BASED COMPENSATION SFAS 123, "Accounting for Stock-Based Compensation,"
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. Compensation cost for
performance equity units is recorded based on the quoted market price of the
company's stock at the end of the period.
REVENUE RECOGNITION Revenue is recognized when product is shipped and invoiced
or performance of services is complete.
PRODUCT WARRANTIES The company provides for estimated warranty costs and accrues
for specific items at the time their existence is known and the amounts are
determinable.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133," effective beginning fiscal
2001. SFAS 133 and SFAS 138 require the company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of the hedged assets,
liabilities or firm commitments are recognized through earnings or in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The company enters into foreign exchange contracts and
other hedging activities to mitigate potential foreign currency gains and losses
relative to local currencies in the markets to which it sells.
21
In order to comply with the implementation requirements of SFAS 133 and SFAS
138, the company undertook a comprehensive review of its contractual
relationships to ensure that all potential free-standing and embedded
derivatives were identified. As a result, all of the company's existing
derivative positions qualified for hedge accounting per SFAS 133 and SFAS 138,
and the impact of adoption was not considered material to the company's results
of operations or financial position. The company's documentation policies for
derivatives were revised as considered necessary to comply with SFAS 133
requirements. However, the company made no substantive changes to its risk
management strategy as a result of adopting SFAS 133 and SFAS 138. As a result
of the implementation of SFAS 133 and SFAS 138, the company has recorded a
credit to other comprehensive income of $0.3 million for the year ended July 31,
2001.
In June 2001 the company entered into an interest rate swap agreement which
was determined to be a fair value hedge under SFAS 133 and SFAS 138 (see Note
D). As of July 31, 2001, the interest rate swap had a fair value of $0.2 million
which has been recorded as an increase to long-term debt. As a result of
adopting these new accounting standards, there has been no material impact on
the results of operations of the company for fiscal year ended July 31, 2001.
NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board
issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." Major provisions of these statements are as follows:
all business combinations must now use the purchase method of accounting, the
pooling of interest method of accounting is now prohibited; intangible assets
acquired in a business combination must be recorded separately from goodwill if
they arise from contractual or other legal rights or are separable from the
acquired entity and can be sold, transferred, licensed, rented or exchanged,
either individually or as a part of a related contract, asset or liability;
goodwill and intangible assets with indefinite lives are not amortized, but
tested for impairment annually, except in certain circumstances, and whenever
there is an impairment indicator; all acquired goodwill must be assigned to
reporting units for purposes of impairment testing and segment reporting;
effective August 1, 2002, goodwill is no longer subject to amortization. The
company has adopted the provisions of these statements as of August 1, 2001. As
required by SFAS 142, the company will perform an impairment test on goodwill
and other intangible assets as of the adoption date. Thereafter, the company
will perform impairment tests annually and whenever events or circumstances
occur indicating that goodwill or other intangible assets might be impaired.
Beginning August 1, 2001, amortization of goodwill will cease. Goodwill
amortization expense was $3.8 million, $2.7 million and $0.7 million at July 31,
2001, 2000 and 1999, respectively. The company estimates that goodwill
amortization expense would have been approximately $3.5 million in 2002.
B Acquisitions, Plant Closure
and Plant Opening
ACQUISITIONS All acquisitions were accounted for as purchases. The purchase
prices assigned to the net assets acquired were based on the fair value of such
assets and liabilities at the respective acquisition dates. The operating
results of these acquired companies have been included in the consolidated
statement of earnings from the dates of acquisition. Consolidated pro forma
earnings and earnings per share would not be materially different from the
reported amounts for all years presented.
The company completed the purchase of all of the outstanding shares of
AirMaze Corporation for $31.9 million in cash effective November 1, 1999.
AirMaze Corporation was merged into Donaldson Company, Inc. effective April 1,
2000. AirMaze products include heavy-duty air and liquid filters, air/oil
separators and high purity air filter products. AirMaze manufacturing facilities
are located in Stow, Ohio and Greeneville, Tennessee. The excess of purchase
price over the fair values of the net assets acquired was $26.8 million and has
been recorded as goodwill which is being amortized on a straight-line basis over
20 years. AirMaze operations are a part of the company's Engine Products
segment. As of July 31, 2001, the balance of restructuring liabilities recorded
in conjunction with the acquisition was approximately $0.2 million for costs
associated with the termination and relocation of employees. Costs incurred and
charged to this reserve associated with the termination and relocation of
employees amounted to $0.3 million for the fiscal year ended July 31, 2001.
22
The integration of AirMaze resulted in a reduction in the work force of
approximately 15 employees during fiscal 2001. Adjustments to this reserve for
the fiscal year ended July 31, 2001, amounted to a decrease of $0.7 million. The
remaining employee terminations and relocations are expected to be completed by
the end of fiscal 2002.
The company acquired the DCE dust control business of Invensys, plc for $56.4
million effective February 1, 2000. DCE, headquartered in Leicester, England
(UK) with smaller facilities in Germany and the United States and assembly
operations in South Africa, Australia and Japan, is a major participant in the
global dust collection industry. The excess of purchase price over the fair
values of the net assets acquired was $33.2 million and has been recorded as
goodwill which is being amortized on a straight-line basis over 20 years. DCE
operations are part of the company's Industrial Products segment. As of July 31,
2001, the balance of restructuring liabilities recorded in conjunction with the
acquisition was approximately $2.1 million of costs associated with the closure
and sale of acquired facilities as well as termination and relocation of
employees. Costs incurred and charged to these reserves associated with the
closure and sale of acquired facilities amounted to $0.8 million for the fiscal
year ended July 31, 2001. Costs incurred and charged to these reserves
associated with the termination and relocation of employees amounted to $0.8
million during the year ended July 31, 2001. The integration of DCE resulted in
a reduction in the work force of approximately 140 employees during fiscal 2001.
Adjustments to these reserves for the fiscal year ended July 31, 2001, amounted
to an increase of $0.9 million. The remaining closure or sale of facilities and
employee terminations and relocations are expected to be completed by the end of
fiscal 2002.
PLANT CLOSURES During 2001, the company closed its manufacturing facilities
located in Mooresville, North Carolina, and Louisville, Kentucky. The closures
of these facilities were completed by the end of the fiscal year. For the
closure of the Mooresville manufacturing facility, a pretax charge of $0.7
million was recorded in fiscal 2001 in general and administrative expense in the
company's consolidated statement of earnings. For the closure of the Louisville
manufacturing facility, costs were charged against the purchase liabilities
recorded in conjunction with the acquisition of DCE. See discussion of these
purchase liabilities in Note B. These charges were primarily related to
severance and other employee related costs associated with the elimination of
approximately 130 positions in Mooresville and 80 positions in Louisville.
During 2000, the company closed its manufacturing facilities located in
Oelwein, Iowa. The closure of the facility was completed by the end of the
calendar year. A pretax charge of $2.8 million was recorded in fiscal 1999 in
general and administrative expense in the company's consolidated statement of
earnings. The charge was primarily related to severance and other employee
related costs associated with the elimination of approximately 125 positions.
PLANT OPENING During fiscal 2000, the company opened a new manufacturing
facility in Auburn, Alabama. The facility was constructed to produce mufflers
for the truck manufacturers located in the southwestern U.S. region and employs
approximately 100 employees.
C Credit Facilities
In December 1997, the company amended and renewed a five-year multi-currency
revolving facility with a group of participating banks under which it may borrow
up to $100.0 million. The agreement provides that loans may be made under a
selection of currencies and rate formulas including Base Rate Advance or
Eurocurrency Rate Advance. The interest rate on each advance is based on certain
adjusted leverage and debt-to-capitalization ratios. Facility fees and other
fees on the entire loan commitment are payable for the duration of this
facility. There was $50.0 million outstanding under this credit facility,
leaving $50.0 million available for further borrowing under such facility at
both July 31, 2001 and 2000. The weighted average interest rate on short-term
borrowings outstanding at July 31, 2001 and 2000 was 3.99 percent and 6.83
percent, respectively.
The company also has three agreements under uncommitted credit facilities
which provide unsecured borrowings for general corporate purposes. At July 31,
2001, there was $35.0 million available for use under these facilities. There
was $7.7 million and $12.6 million outstanding under these facilities at July
31, 2001 and 2000, respectively. The weighted average interest rate on
short-term borrowings outstanding at July 31, 2001 and 2000 was 3.98 percent and
6.89 percent, respectively.
23
International subsidiaries may borrow under various credit facilities. As of
July 31, 2001 and 2000, borrowings under these facilities were $1.7 million and
$22.4 million, respectively. The weighted average interest rate on these
international borrowings outstanding at July 31, 2001 and 2000 was 10.7 percent
and 4.7 percent, respectively.
D Long-Term Debt
Long-term debt consists of the following:
(Thousands of dollars) 2001 2000
-------------------------------------------------------------------------------
6.20% Unsecured senior notes due July 15, 2005,
interest payable semi-annually, principal
payment of $23.0 million is due July 15, 2005 $ 23,000 $ 23,000
6.31% Unsecured senior notes due July 15, 2008,
interest payable semi-annually, principal
payment of $27.2 million is due July 15, 2008 27,157 27,000
6.39% Unsecured senior notes due August 15, 2010,
interest payable semi-annually, principal
payments of $5.0 million, to be paid annually
commencing August 16, 2006 25,000 25,000
1.9475% Guaranteed senior note due
January 29, 2005, interest payable
semi-annually, principal amount of
1.2 billion Yen is due January 29, 2005 9,592 10,962
1.51% Guaranteed note due March 28, 2006,
interest payable quarterly, principal amount
of .8 billion Yen is due March 28, 2006 6,395 --
Variable Rate Industrial Development Revenue
Bonds ("Lower Floaters") due September 1, 2024,
principal amount of $8.0 million, interest
payable monthly, and an interest rate of 2.8%
as of July 31, 2001 8,000 5,667
Other 138 1,295
-------------------------------------------------------------------------------
Total 99,282 92,924
Less current maturities 23 279
-------------------------------------------------------------------------------
Total long-term debt $ 99,259 $ 92,645
===============================================================================
Annual maturities of long-term debt for the next five years are $32.6 million
in 2005 and $6.4 million in 2006. Annual maturities in 2002, 2003 and 2004 are
not significant. The company estimates that the carrying value of long-term debt
approximates its fair market value.
On June 6, 2001, the company entered into an interest rate swap agreement
effectively converting a portion of the company's interest rate exposure from a
fixed rate to a variable rate basis to hedge against the risk of higher
borrowing costs in a declining interest rate environment. The company does not
enter into interest rate swap contracts for speculative or trading purposes; as
the differential to be paid or received on the interest rate swap agreement is
accrued and recognized as an adjustment to interest expense as interest rates
change. The interest rate swap agreement has an aggregate notional amount of
$27.0 million maturing on July 15, 2008. The variable rate is based on the
current six-month London Interbank Offered Rates ("LIBOR"). This transaction
resulted in a decrease to interest expense of $45,000 for the year ended July
31, 2001.
Total interest paid relating to all debt was $11.1 million, $9.1 million and
$6.0 million in 2001, 2000 and 1999, respectively. In addition, total interest
expense recorded in 2001, 2000 and 1999 was $11.6 million, $9.9 million and $7.0
million, respectively. Certain note agreements contain debt covenants related to
working capital levels and limitations on indebtedness. Further, the company is
restricted from paying dividends or repurchasing Common Stock if its tangible
net worth (as defined) does not exceed certain minimum levels. As of July 31,
2001, the company was in compliance with all such covenants.
E Employee Benefit Plans
PENSION PLANS Donaldson Company, Inc. and certain of its subsidiaries have
defined benefit pension plans for substantially all hourly and salaried
employees. The domestic plan provides defined benefits pursuant to a cash
balance feature whereby a participant accumulates a benefit comprised of a
percentage of current salary which varies with years of service, interest
credits and transition credits. The international plans generally provide
pension benefits based on years of service and compensation level. The company's
general funding policy is to make contributions as required by applicable
regulations. The assets are primarily invested in diversified equity and debt
portfolios. In 2000, the actuarial valuation date was changed from July 31 to
April 30. This change did not have a material impact on the actuarial valuation.
Costs for the company's pension plans include the following components:
(Thousands of dollars) 2001 2000 1999
-------------------------------------------------------------------------------
Net periodic cost:
Service cost $ 6,935 $ 6,084 $ 5,609
Interest cost 11,626 9,852 9,188
Expected return on assets (12,862) (11,475) (10,006)
Transition amount amortization 173 (1,097) (1,097)
Prior service cost amortization 119 64 30
Actuarial (gain) loss amortization (829) 71 1,094
Curtailment loss -- -- 684
-------------------------------------------------------------------------------
Net periodic benefit cost $ 5,162 $ 3,499 $ 5,502
===============================================================================
24
The funded status of the company's pension plans as of April 30, 2001 and
April 30, 2000, is as follows:
(Thousands of dollars) 2001 2000
-------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation, August 1 N/A $ 131,996
Adjustment for change in measurement date N/A 1,841
-------------------------------------------------------------------------------
Benefit obligation, May 1 $ 137,056 133,837
Addition of non-U.S. plans 16,589 --
Service cost 6,936 6,085
Interest cost 11,626 9,852
Participant contributions 125 --
Plan amendments 174 568
Actuarial (gain)/loss (10,012) (11,472)
Currency exchange rates (2,022) --
Acquisition -- 6,419
Benefits paid (10,371) (8,233)
-------------------------------------------------------------------------------
Benefit obligations, April 30 $ 150,101 $ 137,056
===============================================================================
Change in plan assets:
Fair value of plan assets, August 1 N/A $ 130,387
Adjustments for change in measurement date N/A 17,461
-------------------------------------------------------------------------------
Fair value of plan assets, May 1 $ 146,210 147,848
Addition of non-U.S. plans 7,857 --
Actual return on plan assets (10,978) (1,659)
Company contributions 11,250 2,168
Participant contributions 125 --
Currency exchange rates (892) --
Acquisition -- 6,086
Benefits paid (10,371) (8,233)
-------------------------------------------------------------------------------
Fair value of plan assets, April 30 $ 143,201 $ 146,210
===============================================================================
Reconciliation of funded status:
Funded (unfunded) status $ (6,900) $ 9,154
Unrecognized actuarial (gain) loss 2,322 (12,196)
Unrecognized prior service cost 2,527 2,472
Unrecognized net transition obligation 3,792 (3,769)
Fourth quarter contributions 1,891 52
-------------------------------------------------------------------------------
Net amount recognized in consolidated
balance sheet $ 3,632 (4,287)
===============================================================================
Amounts recognized in consolidated balance
sheet consist of:
Prepaid benefit cost $ 9,853 $ 4,614
Accrued benefit liability (6,220) (8,901)
Additional minimum liability (5,126) (280)
Intangible asset 4,784 280
Accumulated other comprehensive income 341 --
-------------------------------------------------------------------------------
Net amount recognized in consolidated
balance sheet $ 3,632 $ (4,287)
===============================================================================
The 2000 actuarial valuation results have been revised to reflect the final
valuation of a plan assumed in the acquisition of AirMaze (see Note B).
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $20.9 million, $17.1 million, and $5.8 million,
respectively, as of April 30, 2001 and $8.6 million, $5.4 million and $0.8
million, respectively, as of April 30, 2000.
Weighted-average actuarial
assumptions APRIL 30, 2001 July 31, 2000 July 31, 1999
-------------------------------------------------------------------------------
Discount rate 7.50% 8.00% 7.50%
Expected return on plan assets 9.50% 9.00% 9.00%
-------------------------------------------------------------------------------
Rate of compensation increase 5.50% 6.00% 6.00%
===============================================================================
Pension expense related to international plans were $4.3 million, $2.5
million and $2.5 million for 2001, 2000 and 1999, respectively.
401(k) SAVINGS PLAN The company provides a contributory employee savings plan
which permits participants to make contributions by salary reduction pursuant to
section 401(k) of the Internal Revenue Code. The company's contributions under
this plan are based on the level of employee contributions including a variable
contribution based on performance of the company. Total contribution expense was
$4.1 million, $4.2 million and $4.9 million for the years ended July 31, 2001,
2000 and 1999, respectively.
F Shareholders' Equity
STOCK RIGHTS On January 12, 1996, the Board of Directors of the company approved
the extension of the benefits afforded by the company's existing rights plan by
adopting a new shareholder rights plan. Pursuant to the new Rights Agreement,
dated as of January 12, 1996, by and between the company and Wells Fargo Bank
Minnesota, National Association, as Rights Agent, one Right was issued on March
4, 1996 for each outstanding share of Common Stock, par value $5.00 per share,
of the company upon the expiration of the company's existing Rights. Each of the
new Rights entitles the registered holder to purchase from the company one
one-thousandth of a share of Series A Junior Participating Preferred Stock,
without par value, at a price of $130.00 per one one-thousandth of a share. The
Rights, however, will not become exercisable unless and until, among other
things, any person acquires 15 percent or more of the outstanding Common Stock
of the company.
25
If a person acquires 15 percent or more of the outstanding Common Stock of the
company (subject to certain conditions and exceptions more fully described in
the Rights Agreement), each Right will entitle the holder (other than the person
who acquired 15 percent or more of the outstanding Common Stock) to purchase
Common Stock of the company having a market value equal to twice the exercise
price of a Right. The new Rights are redeemable under certain circumstances at
$.01 per Right and will expire, unless earlier redeemed, on March 3, 2006.
EMPLOYEE INCENTIVE PLANS In November 1991, shareholders approved the 1991 Master
Stock Compensation Plan. The Plan extends through December 2001 and allows for
the granting of nonqualified stock options, incentive stock options, restricted
stock, stock appreciation rights (SARs), dividend equivalents,
dollar-denominated awards and other stock-based awards. The Plan allows for the
granting of performance awards to a limited number of key executives. The awards
are payable in Common Stock and are based on a formula which measures
performance of the company over a three-year period. Performance award expense
totaled $2.4 million and $1.7 million in 2001 and 2000, respectively. There was
no performance award expense in 1999. Options under the Plan are granted to key
employees at or above 100 percent of the market price at the date of grant.
Options are exercisable for up to 10 years from the date of grant.
STOCK OPTIONS Stock options issued during fiscal 1999, 2000 and 2001 become
exercisable for non-executives in each of the following three years, in an equal
number of shares each year and become exercisable for executives immediately
upon the date of grant. Stock options issued during fiscal 1997 and 1998 become
exercisable in each of the following three years, in an equal number of shares
each year, for both executives and non-executives. Stock options issued prior to
fiscal l997 for non-executives and during fiscal 1996 for executives become
exercisable in a four-year period in an equal number of shares each year. Prior
to fiscal 1996, stock options vested immediately for executives. At July 31,
2001, options to purchase 3,464,159 shares are outstanding.
In fiscal 1997, the company adopted the disclosure-only provisions of SFAS
123, "Accounting for Stock-Based Compensation." SFAS 123 encourages entities to
adopt a fair value-based method of accounting for employee stock compensation
plans, but allows companies to continue to account for those plans using the
accounting prescribed by APB Opinion 25, "Accounting for Stock Issued to
Employees." The company has elected to continue to account for stock-based
compensation using APB 25, making pro forma disclosures of net earnings and
earnings per share as if the fair value-based method had been applied.
Accordingly, no compensation expense has been recorded for the stock option
plan. Had compensation expense for the stock option plan been determined under
SFAS 123 in fiscal 2001, 2000 and 1999, the company's net income and diluted
earnings per share would have been approximately $71.0 million and $1.56, and
$67.7 million and $1.45, and $61.1 million and $1.28, respectively. The pro
forma effect on net income and earnings per share is not representative of the
pro forma net earnings in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1996.
For purposes of computing compensation cost of stock options granted, the
fair value of each stock option grant was estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: risk free interest rate of 4.72 percent, 6.50 percent and 5.50
percent in 2001, 2000 and 1999, respectively; two or seven year lives in 2001
and 2000 and two, three, or seven year lives in 1999; expected volatility of
30.5 percent, 29.7 percent and 26.3 percent in 2001, 2000 and 1999,
respectively; and 1 percent expected dividend yield in 2001, 2000 and 1999.
Black-Scholes is a widely accepted stock option pricing model; however, the
ultimate value of stock options granted will be determined by the actual lives
of options granted and the actual future price levels of the company's common
stock.
The weighted average fair value for options granted during fiscal 2001, 2000
and 1999 is $8.01, $7.49 and $5.62 per share, respectively.
26
The number and option price of options granted were as follows:
Weighted
Options Average
Outstanding Exercise Price
--------------------------------------------------------------------------------
Outstanding at July 31, 1998 3,348,176 $ 12.95
Granted 495,149 20.10
Exercised (432,505) 8.65
Canceled (28,498) 18.35
--------------------------------------------------------------------------------
Outstanding at July 31, 1999 3,382,322 14.50
Granted 489,086 23.01
Exercised (204,004) 10.09
Canceled (14,468) 20.41
--------------------------------------------------------------------------------
Outstanding at July 31, 2000 3,652,936 15.86
Granted 862,515 26.04
Exercised (1,025,995) 12.88
Canceled (25,297) 21.19
--------------------------------------------------------------------------------
Outstanding at July 31, 2001 3,464,159 $ 19.24
================================================================================
At July 31, 2001 and 2000 there were 2,954,542 and 3,109,926 options
exercisable, respectively. Shares reserved at July 31, 2001 for outstanding
options and future grants were 8,140,639.
The following table summarizes information concerning currently outstanding
and exercisable options:
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
--------------------------------------------------------------------------------
$5 to $10 201,888 1.21 $ 8.73 201,888 $ 8.73
$10 to $15 837,194 2.69 12.15 837,194 12.15
$15 to $20 738,728 6.11 18.08 670,441 17.89
$20 to $25 964,827 7.22 22.90 794,297 22.92
$25 and above 721,522 8.34 26.67 450,722 27.17
--------------------------------------------------------------------------------
3,464,159 5.77 $19.24 2,954,542 $18.41
================================================================================
G Income Taxes
The components of earnings before income taxes are as follows:
(Thousands of dollars) 2001 2000 1999
--------------------------------------------------------------------------------
Earnings before income taxes:
United States $ 48,705 $ 54,913 $ 55,811
Foreign 56,223 45,420 33,399
--------------------------------------------------------------------------------
Total $104,928 $100,333 $ 89,210
================================================================================
The components of the provision for income taxes are as follows:
(Thousands of dollars) 2001 2000 1999
--------------------------------------------------------------------------------
Income Taxes:
Current:
Federal $ 8,502 $ 18,192 $ 16,717
State 622 2,361 2,471
Foreign 13,163 9,996 7,086
--------------------------------------------------------------------------------
22,287 30,549 26,274
--------------------------------------------------------------------------------
Deferred:
Federal 7,304 52 426
State 417 3 24
Foreign (628) (504) 39
--------------------------------------------------------------------------------
7,093 (449) 489
--------------------------------------------------------------------------------
Total $ 29,380 $ 30,100 $ 26,763
================================================================================
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
(Thousands of dollars) 2001 2000 1999
-------------------------------------------------------------------------------
Deferred tax assets:
Compensation and
retirement plans $ 3,619 $ 12,839 $ 8,950
Accrued expenses 6,938 7,818 9,617
NOL carryforwards 6,092 8,174 3,560
Inventories 1,938 1,526 1,595
Investment in joint venture 636 754 588
Cumulative translation
adjustment -- 4,574 2,494
Other 3,215 3,162 3,267
-------------------------------------------------------------------------------
Gross deferred tax assets 22,438 38,847 30,071
Valuation allowance $ (2,054) $ (4,499) $ (2,432)
-------------------------------------------------------------------------------
Net deferred tax assets 20,384 34,348 27,639
Deferred tax liabilities:
Depreciation and amortization (16,209) (14,626) (11,235)
Other (618) (903) (1,625)
-------------------------------------------------------------------------------
Gross deferred tax liabilities (16,827) (15,529) (12,860)
-------------------------------------------------------------------------------
Net deferred tax assets $ 3,557 $ 18,819 $ 14,779
===============================================================================
27
The following table reconciles the U.S. statutory income tax rate with the
effective income tax rate:
2001 2000 1999
-------------------------------------------------------------------------------
Statutory U.S. federal rate 35.0% 35.0% 35.0%
State income taxes 0.4 1.5 1.8
Foreign taxes at lower rates (8.2) (6.1) (5.5)
Other 0.8 (0.4) (1.3)
-------------------------------------------------------------------------------
28.0% 30.0% 30.0%
===============================================================================
At July 31, 2001, certain international subsidiaries had available net
operating loss carryforwards of approximately $20.0 million to offset future
taxable income. The majority of such carryforwards expire after 2003. Due to the
uncertainty of the realizability of a portion of these losses, a valuation
allowance of $2.1 million has been recorded as of July 31, 2001. Unremitted
earnings of international subsidiaries amounted to approximately $133.5 million
at July 31, 2001. The majority of those earnings are intended to be indefinitely
reinvested and, accordingly, no deferred U.S. income taxes have been provided.
If a portion were to be remitted, foreign tax credits would substantially offset
any resulting incremental U.S. income tax liability. It is not practicable to
estimate the amount of unrecognized taxes on these undistributed earnings due to
the complexity of the computation.
The company made cash payments for income taxes of $16.2 million, $24.6
million and $20.8 million in 2001, 2000 and 1999, respectively.
H Segment Reporting
The company adopted SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information," effective with fiscal year-end 1999. This standard
requires companies to disclose selected financial data by operating segment. A
segment is defined as a component with business activity resulting in revenue
and expense that has separate financial information evaluated regularly by the
company's chief operating decision maker in determining resource allocation and
assessing performance. The company has identified two reportable segments:
Engine Products and Industrial Products. Segment selection was based on the
internal organizational structure, management of operations and performance
evaluation by management and the company's Board of Directors.
The Engine Products segment sells to original equipment manufacturers (OEMs)
in the construction, industrial, mining, agriculture and transportation markets
and to independent distributors, OEM dealer networks, private label accounts and
large private fleets. Products include air intake systems, exhaust systems,
liquid filtration systems and replacement filters.
The Industrial Products segment sells to various industrial end-users, OEMs
of gas-fired turbines, OEMs and end-users requiring highly purified air.
Products include dust, fume and mist collectors, static and pulse-clean air
filter systems and specialized air filtration systems.
Corporate and Unallocated include corporate expenses determined to be
non-allocable to the segments, interest income and expense, non-operating income
and expense, and expenses not allocated to the business segments in the same
period. Assets included in Corporate and Unallocated principally are cash and
cash equivalents, inventory reserves, certain prepaids, certain investments,
other assets and assets allocated to intercompany transactions.
The company has developed an internal measurement system to evaluate
performance and allocate resources based on profit or loss from operations
before income taxes. The company's manufacturing facilities serve both reporting
seg ments. Therefore, the company uses a complex allocation methodology to
assign costs and assets to the segments. A certain amount of costs and assets
are assigned to intercompany activity and are not assigned to either segment.
Certain accounting policies applied to the reportable segments differ from those
described in the summary of significant accounting policies. The reportable
segments account for receivables on a gross basis and account for inventory on a
standard cost basis.
Segment allocated assets are primarily accounts receivable, inventories and
property, plant and equipment. Reconciling items included in Corporate and
Unallocated are created based on accounting differences between segment
reporting and the consolidated, external reporting as well as internal
allocation methodologies.
28
Segment detail is summarized as follows (in thousands):
Engine Industrial Corporate & Total
Products Products Unallocated Company
--------------------------------------------------------------------------------
2001
Net sales $ 606,810 $ 530,205 $ -- $1,137,015
Depreciation and
amortization 23,100 11,268 4,209 38,577
Equity earnings in
unconsolidated
affiliates 3,017 -- -- 3,017
Earnings before
income taxes 49,539 72,891 (17,502) 104,928
Assets 315,706 228,505 162,619 706,830
Equity investments in
unconsolidated
affiliates 14,115 -- -- 14,115
Capital expenditures,
net of acquired
businesses 23,308 11,370 4,246 38,924
================================================================================
2000
Net sales $ 673,982 $ 418,312 $ -- $1,092,294
Depreciation and
amortization 20,959 8,509 4,858 34,326
Equity earnings in
unconsolidated
affiliates 4,392 -- -- 4,392
Earnings before
income taxes 57,453 53,862 (10,982) 100,333
Assets 320,805 172,837 183,883 677,525
Equity investments in
unconsolidated
affiliates 13,600 -- -- 13,600
Capital expenditures,
net of acquired
businesses 22,236 9,028 5,153 36,417
================================================================================
1999
Net sales $ 611,378 $ 332,761 $ -- $ 944,139
Depreciation and
amortization 18,486 7,506 1,694 27,686
Equity earnings in
unconsolidated
affiliates 3,610 -- -- 3,610
Earnings before
income taxes 61,896 36,373 (9,059) 89,210
Assets 327,035 160,201 55,010 542,246
Equity investments in
unconsolidated
affiliates 13,833 -- -- 13,833
Capital expenditures,
net of acquired
businesses 19,723 8,008 1,808 29,539
================================================================================
Following are net sales by product within the Engine Products segment and
Industrial Products segment:
(In thousands) 2001 2000 1999
--------------------------------------------------------------------------------
Engine Product segment:
Off-road products $ 181,795 $ 193,229 $ 181,200
Transportation products 79,670 151,950 162,291
Aftermarket products 345,345 328,803 267,887
--------------------------------------------------------------------------------
Total Engine Product
segment 606,810 673,982 611,378
--------------------------------------------------------------------------------
Industrial Product segment:
Dust collection products 217,343 193,119 153,480
Gas turbine products 195,042 117,038 84,229
Special application products 117,820 108,155 95,052
--------------------------------------------------------------------------------
Total Industrial Product
segment 530,205 418,312 332,761
--------------------------------------------------------------------------------
Total company $1,137,015 $1,092,294 $ 944,139
================================================================================
Geographic sales by origination and property, plant and equipment (in
thousands):
Property, Plant &
Net Sales Equipment - Net
--------------------------------------------------------------------------------
2001
United States $ 711,268 $ 138,631
Europe 211,397 36,801
Asia-Pacific 185,395 19,609
Other 28,955 12,617
--------------------------------------------------------------------------------
Total $1,137,015 $ 207,658
================================================================================
2000
United States $ 688,899 $ 135,480
Europe 206,429 37,698
Asia-Pacific 166,221 22,304
Other 30,745 9,063
--------------------------------------------------------------------------------
Total $1,092,294 $ 204,545
================================================================================
1999
United States $ 616,254 $ 122,513
Europe 166,431 28,616
Asia-Pacific 138,453 21,911
Other 23,001 9,140
--------------------------------------------------------------------------------
Total $ 944,139 $ 182,180
================================================================================
Sales to one customer accounted for 12 percent of net sales in 2001. There
were no sales over 10 percent of net sales to any customer in 2000. Sales to one
customer accounted for 11 percent of net sales in 1999.
29
I Quarterly Financial
Information (Unaudited)
(Thousands of dollars, First Second Third Fourth
except per share amounts) Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------
2001
Net Sales $289,869 $279,631 $269,721 $297,794
Gross Margin 85,956 86,316 79,180 90,282
Net Earnings 16,804 18,105 17,826 22,813
Diluted Earnings
Per Share .37 .40 .39 .50
Dividends Declared
Per Share .075 .075 .075 .075
--------------------------------------------------------------------------------
2000
Net Sales $246,550 $259,256 $285,277 $301,211
Gross Margin 73,881 79,595 84,812 89,233
Net Earnings 17,008 17,406 17,450 18,369
Diluted Earnings
Per Share .36 .37 .38 .40
Dividends Declared
Per Share .07 .07 .07 .07
================================================================================
J Commitments and Contingencies
The company is involved in litigation arising in the ordinary course of
business. In the opinion of management, the outcome of litigation currently
pending will not materially affect the company's results of operations,
financial condition or liquidity.
30
WORLDWIDE OPERATIONS
WORLD HEADQUARTERS
Donaldson Company, Inc.
MINNEAPOLIS, MINNESOTA
U.S. PLANTS
AUBURN, ALABAMA
OLD SAYBROOK, CONNECTICUT
DIXON, ILLINOIS
FRANKFORT, INDIANA
CRESCO, IOWA
GRINNELL, IOWA
NICHOLASVILLE, KENTUCKY
PORT HURON, MICHIGAN
CHILLICOTHE, MISSOURI
STOW, OHIO
PHILADELPHIA, PENNSYLVANIA
GREENEVILLE, TENNESSEE
BALDWIN, WISCONSIN
STEVENS POINT, WISCONSIN
DISTRIBUTION CENTERS
ONTARIO, CALIFORNIA
RENSSELAER, INDIANA
ANTWERP, BELGIUM
SINGAPORE
JOINT VENTURES
Advanced Filtration Systems Inc.
CHAMPAIGN, ILLINOIS
MSCA, LLC
MONTICELLO, INDIANA
PT Panata Jaya Mandiri
JAKARTA, INDONESIA
SUBSIDIARIES
Torit Australia Pty. Ltd.
SYDNEY, AUSTRALIA
Donaldson Australasia Pty. Limited
WYONG, AUSTRALIA
Donaldson Sales, Inc.
BARBADOS
Donaldson Coordination Center, B.V.B.A.
LEUVEN, BELGIUM
Donaldson Europe, B.V.B.A.
LEUVEN, BELGIUM
BRUGGE, BELGIUM (PLANT)
DCE Scandinavia APS
HORSHOLM, DENMARK
Donaldson France, S.A.S.
BRON, FRANCE
Tecnov Donaldson, S.A.S.
DOMJEAN, FRANCE
DCE S.A.
PARIS, FRANCE
DCE Neotechnik GmbH
BIELEFELD, GERMANY
Donaldson Gesellschaft m.b.H.
DULMEN, GERMANY
Donaldson India Filter Systems Pvt. Ltd.
NEW DELHI, INDIA
PT Donaldson Systems Indonesia
JAKARTA, INDONESIA
Donaldson Italia s.r.l.
OSTIGLIA, ITALY
Nippon Donaldson Limited
TOKYO, JAPAN
Donaldson Luxembourg S.a.r.l.
LUXEMBOURG
Donaldson, S.A. de C.V.
AGUASCALIENTES, MEXICO
Diemo S.A. de C.V.
GUADALAJARA, MEXICO
Donaldson Filtration Industrial
S. de R.L. de C.V.
MONTERREY, MEXICO
Donaldson Torit, B.V.
HAARLEM, NETHERLANDS
DCE Benelux B.V.
KROMMENIE, NETHERLANDS
Air Master China Ltd.
HONG KONG, S.A.R., PEOPLE'S REPUBLIC
OF CHINA
Donaldson Far East Limited
HONG KONG, S.A.R., PEOPLE'S REPUBLIC
OF CHINA
Guilin Air King Enterprises Ltd.
GUILIN, PEOPLE'S REPUBLIC OF CHINA
Donaldson (Wuxi) Filters Co., Ltd.
WUXI, PEOPLE'S REPUBLIC OF CHINA
Donaldson Filtration (Asia Pacific)
Pte. Ltd.
SINGAPORE
Donaldson Filtration Systems
(Proprietary) Ltd.
CAPE TOWN, SOUTH AFRICA
Donaldson Korea Co., Ltd.
SEOUL, SOUTH KOREA
DCE Donaldson Sistemas
de Filtracion, S.L.
BARCELONA, SPAIN
Donaldson Filtros Iberica S.L.
MADRID, SPAIN
Donaldson Filter Components Limited
HULL, UNITED KINGDOM
DCE Donaldson Ltd.
LEICESTER, UNITED KINGDOM
Tetratec Europe Limited
WIGAN, UNITED KINGDOM
31
CORPORATE AND SHAREHOLDER INFORMATION
NYSE LISTING
The common shares of Donaldson Company, Inc. are traded on the New York Stock
Exchange, under the symbol DCI.
SHAREHOLDER INFORMATION
For any concerns relating to your current or prospective shareholdings, please
contact Shareowner Services at (800)468-9716 or (651)450-4064.
DIVIDEND REINVESTMENT PLAN
As of September 21, 2001, 1,107 of Donaldson Company's approximately 1,799
shareholders of record were participating in the Dividend Reinvestment Plan.
Under the plan, shareholders can invest Donaldson Company dividends in
additional shares of company stock. They may also make periodic voluntary cash
investments for the purchase of company stock.
Both alternatives are provided without service charges or brokerage
commissions. Shareholders may obtain a brochure giving further details by
writing Wells Fargo Bank Minnesota, N.A., Shareowner Services, P.O. Box 64854,
St. Paul, MN 55164-0854.
ANNUAL MEETING
The annual meeting of shareholders will be held at 10 a.m. on Friday, November
16, 2001, at Donaldson Company, Inc., 1400 West 94th Street, Bloomington,
Minnesota. You are welcome to attend.
10-K REPORTS
Copies of the Report 10-K, filed with the Securities and Exchange Commission,
are available on request from Shareholder Services, Donaldson Company, Inc.,
M.S. 101, P.O. Box 1299, Minneapolis, MN 55440.
AUDITORS
Arthur Andersen LLP
Minneapolis, Minnesota
PUBLIC RELATIONS COUNSEL
Padilla Speer Beardsley Inc.
Minneapolis, Minnesota
TRANSFER AGENT AND REGISTRAR
Wells Fargo Bank Minnesota, N.A.
South St. Paul, Minnesota
SIX-YEAR QUARTERLY HIGH-LOW STOCK PRICES
[BAR CHART]
High Low
--------------------------------------------------
1996
1st Quarter 13.19 11.94
2nd Quarter 13.06 12.06
3rd Quarter 13.94 12.81
4th Quarter 14.00 12.00
--------------------------------------------------
1997
1st Quarter 14.63 12.69
2nd Quarter 17.00 14.31
3rd Quarter 18.31 15.38
4th Quarter 20.38 17.75
--------------------------------------------------
1998
1st Quarter 27.19 20.31
2nd Quarter 25.69 22.25
3rd Quarter 26.19 22.63
4th Quarter 25.13 18.56
--------------------------------------------------
1999
1st Quarter 21.94 14.44
2nd Quarter 21.00 17.69
3rd Quarter 23.50 17.25
4th Quarter 25.88 21.94
--------------------------------------------------
2000
1st Quarter 23.50 19.50
2nd Quarter 24.81 20.63
3rd Quarter 24.06 20.25
4th Quarter 24.25 19.13
--------------------------------------------------
2001
1ST QUARTER 23.86 19.13
2ND QUARTER 29.48 21.62
3RD QUARTER 28.92 24.39
4TH QUARTER 33.05 27.30
--------------------------------------------------
32
BOARD OF DIRECTORS
F. GUILLAUME BASTIAENS, 58,
Vice Chairman,
Cargill, Inc., Minneapolis
(Agribusiness).
DIRECTOR SINCE 1995.(2)(3)
PAUL B. BURKE, 45,
Chairman and Chief Executive Officer,
BMC Industries, Inc., Minneapolis
(Manufacturing).
DIRECTOR SINCE 1996.(1)(3)
JANET M. DOLAN, 52,
President and Chief Executive Officer,
Tennant Company, Minneapolis
(Manufacturing).
DIRECTOR SINCE 1996.(2)(3)
JACK W. EUGSTER, 56,
Non- Executive Chairman,
ShopKo Stores, Inc., Green Bay, WI
(Specialty Discount Retailer).
DIRECTOR SINCE 1993.(1)(3)
JOHN F. GRUNDHOFER, 62,
Chairman,
U.S. Bancorp, Minneapolis
(Financial Services).
DIRECTOR SINCE 1997.(1)(3)
KENDRICK B. MELROSE, 61,
Chairman and Chief Executive Officer,
The Toro Company, Minneapolis
(Manufacturing).
DIRECTOR SINCE 1991.(1)(2)
JEFFREY NODDLE, 55,
President and Chief Executive Officer,
SUPERVALU INC., Minneapolis
(Food Retailer and Distributor).
DIRECTOR SINCE 2000.(1)(2)
S. WALTER RICHEY, 65,
Retired Chairman, President
and Chief Executive Officer,
Meritex, Inc., Minneapolis
(Distribution Services).
DIRECTOR SINCE 1991.(2)(3)
STEPHEN W. SANGER, 55,
Chairman and Chief
Executive Officer,
General Mills, Inc., Minneapolis
(Consumer Products).
DIRECTOR SINCE 1992.(1)(2)
WILLIAM G. VAN DYKE, 56,
Chairman, President and
Chief Executive Officer,
Donaldson Company, Inc.
DIRECTOR SINCE 1994.
(1) Human Resources Committee
(2) Audit Committee
(3) Corporate Governance Committee
CORPORATE OFFICERS
WILLIAM G. VAN DYKE, 56,
Chairman, President and
Chief Executive Officer.
29 YEARS SERVICE.
WILLIAM M. COOK, 48,
Senior Vice President, International
and Chief Financial Officer.
21 YEARS SERVICE.
JAMES R. GIERTZ, 44,
Senior Vice President,
Commercial and Industrial.
8 YEARS SERVICE.
NICKOLAS PRIADKA, 55,
Senior Vice President,
Engine Systems and Parts.
32 YEARS SERVICE.
LOWELL F. SCHWAB, 53,
Senior Vice President, Operations.
22 YEARS SERVICE.
DALE M. COUCH, 58,
Vice President and General Manager,
Asia Pacific.
4 YEARS SERVICE.
NORMAN C. LINNELL, 42,
Vice President, General Counsel
and Secretary.
6 YEARS SERVICE.
JOHN E. THAMES, 51,
Vice President, Human Resources.
13 YEARS SERVICE.
GEERT HENK TOUW, 56,
Vice President and General Manager,
Europe/Africa/Middle East.
16 YEARS SERVICE.
THOMAS A. WINDFELDT, 52,
Vice President, Controller
and Treasurer.
21 YEARS SERVICE.
33
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 333-56027, 33-27086, 2-90488, and 33-44624.
/s/ Arthur Andersen LLP
Minneapolis, Minnesota,
October 26, 2001
16
EXHIBIT 23(A)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
Number 333-56027 on Form S-8 dated June 4, 1998, Registration Statement Number
33-27086 on Form S-8 dated February 17, 1989, Registration Statement Number
2-90488 on Form S-8 dated May 2, 1984 as amended through Post Effective
Amendment No. 1 dated January 7, 1988, and Registration Statement Number
33-44624 dated December 20, 1991 of our report dated September 8, 1999, with
respect to the consolidated financial statements and related financial statement
schedule of Donaldson Company, Inc. included in the Annual Report on Form 10-K
for the year ended July 31, 2001.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
October 24, 2001
17
EXHIBIT 24
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 2001, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf said report so
signed for filing with the Securities and Exchange Commission.
Dated: October 2, 2001
/s/ F. Guillaume Bastiaens
-----------------------------------------
F. Guillaume Bastiaens
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 2001, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf said report so
signed for filing with the Securities and Exchange Commission.
Dated: October 9, 2001
/s/ Paul B. Burke
-----------------------------------------
Paul B. Burke
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 2001, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf said report so
signed for filing with the Securities and Exchange Commission.
Dated: October 4, 2001
/s/ Janet M. Dolan
-----------------------------------------
Janet M. Dolan
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 2001, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf said report so
signed for filing with the Securities and Exchange Commission.
Dated: October 2, 2001
/s/ Jack W. Eugster
-----------------------------------------
Jack W. Eugster
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 2001, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf said report so
signed for filing with the Securities and Exchange Commission.
Dated: October 3, 2001
/s/ John F. Grundhofer
-----------------------------------------
John F. Grundhofer
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 2001, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf said report so
signed for filing with the Securities and Exchange Commission.
Dated: October 2, 2001
/s/ Kendrick B. Melrose
-----------------------------------------
Kendrick B. Melrose
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 2001, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf said report so
signed for filing with the Securities and Exchange Commission.
Dated: October 2, 2001
/s/ Jeffrey Noddle
-----------------------------------------
Jeffrey Noddle
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 2001, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf said report so
signed for filing with the Securities and Exchange Commission.
Dated: October 5, 2001
/s/ S. Walter Richey
-----------------------------------------
S. Walter Richey
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 2001, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf said report so
signed for filing with the Securities and Exchange Commission.
Dated: October 5, 2001
/s/ Stephen W. Sanger
-----------------------------------------
Stephen W. Sanger
EXHIBIT 99
FACTORS AFFECTING FUTURE OPERATING RESULTS
From time to time, the Company, through its management, may make forward-looking
statements reflecting the Company's current views with respect to future events
and financial performance. These forward-looking statements, which may be in
reports filed under the Securities Exchange Act of 1934, as amended ( The
"Exchange Act"), in press releases and in other documents and materials as well
as in written or oral statements made by or on behalf of the company, are
subject to certain risks and uncertainties, including those discussed below
which could cause actual results to differ materially from historical results or
those anticipated. The words or phrases " will likely result," "are expected
to," "will continue," "estimate," "project," "believe," "expect," "anticipate,"
"forecast" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 21e of the Exchange Act and Section 27A
of the Securities Act of 1933, as amended, as enacted by the Private Securities
Litigation Reform Act of 1995.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date such statements are made. In
addition, the company wishes to advise readers that the factors listed below, as
well as other factors could affect the company's financial or other performance
and could cause the Company's actual results for future periods to differ
materially from any opinions or statements expressed with respect to future
periods or events in any current statement. This discussion of factors is not
intended to be exhaustive, but rather to highlight important risk factors that
impact results. General economic and political conditions and many other
contingencies that may cause the Company's actual results to differ from those
currently anticipated are not separately discussed. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
RISKS ASSOCIATED WITH CURRENCY FLUCTUATIONS
The Company maintains international subsidiaries and operations in many
countries, and the results of operations and the financial position of each of
the company's subsidiaries is reported in the relevant foreign currency and then
translated into United States ("U.S.") dollars at the applicable foreign
currency exchange rate for inclusion in the Company's consolidated financial
statements. As exchange rates between these foreign currencies and the U.S.
dollar fluctuate, the translation effect of such fluctuations may have an
adverse effect on the Company's results of operations or financial position as
reported in U.S. dollars.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company does business and has manufacturing operations in numerous
countries, including China, Hong Kong, India, Indonesia, Japan, Korea, Singapore
and other Asia-Pacific countries, Europe, Canada, Mexico, Central America and
South America. The stability, growth and profitability of this portion of the
company's business may be affected by changes in political and military events,
trade, monetary and fiscal policies and the laws and regulations of the United
States and other trading nations. In addition, the Company's international
operations are subject to the risk of new and different political and military
events, legal and regulatory requirements in local jurisdictions, tariffs and
trade barriers, potential difficulties in staffing and managing local
operations, credit risk of local customers and distributors, potential
difficulties in protecting intellectual property,
risk of nationalization of private enterprises, potential imposition of
restrictions on investments, potentially adverse tax consequences, including
imposition or increase of withholding and other taxes on remittances and other
payments by subsidiaries, and local economic, political and social conditions,
including the possibility of hyper-inflationary conditions, in certain
countries. If for whatever reason, the U.S. were to enter a recession, then
demand for Company products would be negatively impacted in North America and
throughout the rest of the world.
COMPETITION AND TECHNOLOGY ISSUES
The markets in which the Company operates are highly competitive and fragmented
both geographically and by application. As a result, the Company competes with
numerous regional or specialized competitors, many of which are well established
in their respective markets. The Company has, from time to time, experienced
price pressures from competitors in certain product lines and geographic
markets. The Company's competitors and new entrants into the Company's lines of
business can be expected to continue to improve the design and performance of
their products and to introduce new products with competitive price and
performance characteristics. Competition in the Company's lines of business may
limit its ability to recover future increases in labor and raw material
expenses. Although the Company believes that it has certain technological and
other advantages over its competitors, realizing and maintaining these
advantages will require continued productive investment by the Company in
research and development, sales and marketing and customer service and support.
There can be no assurance that the Company will be successful in maintaining
such advantages. Successful product innovation by competitors that reach the
market prior to comparable innovation by the Company or that are amenable to
patent protection may adversely affect the Company's financial performance.
A number of the Company's major OEM customers manufacture products for their own
use that compete with the Company's products. Although these OEM customers have
indicated that they will continue to rely on outside suppliers, the OEMs could
elect to manufacture products for their own use and in place of the products now
supplied by the Company. In addition, customers of the Company's engine
filtration and exhaust products business line could decide to meet their
filtration requirements through alternative methods, such as engine design
modifications, rather than rely on the Company's products.
RISKS RELATING TO FUTURE ACQUISITIONS
The Company has in the past and may in the future pursue acquisitions of
complementary product lines, technologies or businesses. Future acquisitions by
the Company may result in potentially dilutive issuance's of equity securities,
the incurrence of debt and contingent liabilities and amortization expenses
related to goodwill and other intangible assets, which could adversely affect
the Company's profitability. In addition, acquisitions involve numerous risks,
including difficulties in the assimilation of the operations, technologies and
products of the acquired companies, corporate culture conflicts, the diversion
of management's attention from other business concerns, assumption of
unanticipated legal liabilities and the potential loss of key employees of the
acquired company. There can be no assurance that the Company will be able to
identify and successfully complete and integrate potential acquisitions in the
future. In the event that any such acquisition does occur, however, there can be
no assurance as to the effect thereof on the Company's business or operating
results.
ENVIRONMENTAL MATTERS
The Company is subject to various environmental laws and regulations in the
jurisdictions in which it operates, including those relating to air emissions,
wastewater discharges, the handling and disposal of solid and hazardous wastes
and the remediation of contamination associated with the use and disposal of
hazardous substances. The Company, like many of its competitors, has incurred
and will continue to incur, capital and operating expenditures and other costs
in complying with such laws and regulations in both the United States and
abroad.
PRODUCT DEMAND CONSIDERATIONS
Demand for certain of the Company's products tends to be cyclical, responding
historically to varying levels of construction, agricultural, heavy equipment
manufacturing, mining and industrial activity in the United States and in other
industrialized nations. Other factors affecting demand include the availability
and cost of financing for equipment purchases and the market availability of
used equipment.
Sales to each of Caterpillar, Inc. and its subsidiaries and General Electric and
its subsidiaries have accounted for greater than 10 percent of the Company's net
sales in one or more of the last three fiscal years. An adverse change in
Caterpillar's or General Electric's financial performance, condition or results
of operations or a material reduction in sales to this customer for any other
reason could negatively impact the Company's operating results.
AVAILABILITY OF PRODUCT COMPONENTS
The Company obtains raw material and certain manufactured components from
third-party suppliers. The Company maintains limited raw material inventories,
even brief unanticipated delays in delivery by suppliers, including those due to
capacity constraints, labor disputes, impaired financial condition of suppliers,
weather emergencies or other natural disasters, may adversely affect the
Company's ability to satisfy its customers on a timely basis and thereby affect
the Company's financial performance.
CHANGES IN THE MIX OF PRODUCTS COMPRISING REVENUE
The Company's products constitute various product lines, which have varying
profit margins. A change in the mix of products sold by the Company from that
currently experienced could adversely affect the Company's financial
performance.
RESEARCH AND DEVELOPMENT
The Company makes significant annual investment in research and development
activities to develop new and improved products and manufacturing processes.
There can be no assurance that research and development activities will yield
new or improved products or products which will be purchased by the Company's
customers, or new and improved manufacturing processes.