-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CpaDcgSIe2+5o+ZvXDO5V+dmJA+9Zf5oozxHt3BpHUQcmaPQM0+1AtPfiRvOX1Ru FLTbfPnCbR4OP3uxwTqnLA== 0000897101-06-002487.txt : 20061201 0000897101-06-002487.hdr.sgml : 20061201 20061201152037 ACCESSION NUMBER: 0000897101-06-002487 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20061031 FILED AS OF DATE: 20061201 DATE AS OF CHANGE: 20061201 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DONALDSON CO INC CENTRAL INDEX KEY: 0000029644 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL & COMMERCIAL FANS & BLOWERS & AIR PURIFYING EQUIP [3564] IRS NUMBER: 410222640 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07891 FILM NUMBER: 061251051 BUSINESS ADDRESS: STREET 1: 1400 W. 94TH ST. CITY: MINNEAPOLIS STATE: MN ZIP: 55431 BUSINESS PHONE: 6128873131 MAIL ADDRESS: STREET 1: 1400 W 94TH STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55431 10-Q 1 donaldson064618s1_10q.htm FORM 10-Q FOR PERIOD ENDED OCTOBER 31, 2006 Donaldson Company, Inc. Form 10-Q for period ended October 31, 2006
 
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2006 OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO _________________.

Commission File Number 1-7891


DONALDSON COMPANY, INC.

(Exact name of registrant as specified in its charter)

Delaware   41-0222640
(State or other jurisdiction
of incorporation or organization)
  (I.R.S. Employer
Identification No.)

1400 West 94th Street
Minneapolis, Minnesota 55431
(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (952) 887-3131



Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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, and (2) has been subject to such filing requirements for the past 90 days.   Yes x   No o   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x    Accelerated filer o    Non-accelerated filer o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $5 Par Value – 80,703,237 shares as of October 31, 2006


 
 

 



PART I.   FINANCIAL INFORMATION

Item  1.   Financial Statements

DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Thousands of dollars, except share and per share amounts)
(Unaudited)

    Three Months Ended
October 31
   
 
    2006     2005  
   
Net sales       $ 446,419     $ 403,396  
Cost of sales         302,553       271,864  
   
Gross margin         143,866       131,532  
Operating expenses         90,180       88,138  
   
Operating income         53,686       43,394  
Other income, net         (1,530 )     (2,929 )
Interest expense         2,883       2,425  
   
Earnings before income taxes         52,333       43,898  
Income taxes         16,328       11,700  
   
Net earnings       $ 36,005     $ 32,198  
   
Weighted average shares outstanding         81,317,771       84,024,553  
Diluted shares outstanding         83,483,381       86,122,289  
Basic earnings per share       $ .44     $ .38  
Diluted earnings per share       $ .43     $ .37  
Dividends paid per share       $ .090     $ .080  

See Notes to Condensed Consolidated Financial Statements.



2



DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands of dollars, except share amounts)
(Unaudited)

    October 31,
2006
    July 31,
2006
 
   
ASSETS                
Current Assets                
Cash and cash equivalents       $ 50,269     $ 45,467  
Accounts receivable, less allowance of $7,624 and $8,398         312,452       312,214  
Inventories         169,723       153,165  
Prepaid and other current assets         54,526       50,559  
   
Total current assets         586,970       561,405  
Property, plant and equipment, at cost         727,970       708,034  
Less accumulated depreciation         (399,617 )     (390,670 )
   
Property, plant and equipment, net         328,353       317,364  
Goodwill         110,927       110,609  
Intangible assets         21,671       22,129  
Other assets         113,466       112,560  
   
Total Assets       $ 1,161,387     $ 1,124,067  
   
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current Liabilities                
Short-term borrowings       $ 83,239     $ 73,368  
Current maturities of long-term debt         6,014       6,541  
Trade accounts payable         160,375       163,783  
Other current liabilities         115,257       116,177  
   
Total current liabilities         364,885       359,869  
Long-term debt         96,343       100,495  
Deferred income taxes         40,930       40,890  
Other long-term liabilities         75,292       76,011  
   
Total Liabilities         577,450       577,265  
   
SHAREHOLDERS’ EQUITY                
Preferred stock, $1 par value, 1,000,000 shares authorized, no shares issued                
Common stock, $5 par value, 120,000,000 shares authorized,
88,643,194 issued
        443,216       443,216  
Retained earnings         303,885       275,598  
Stock compensation plans         20,508       20,535  
Accumulated other comprehensive income         53,555       51,194  
Treasury stock, at cost – 7,868,999 and 8,102,921 shares at October 31, 2006 and July 31, 2006, respectively         (237,227 )     (243,741 )
   
Total Shareholders’ Equity         583,937       546,802  
   
Total Liabilities and Shareholders’ Equity       $ 1,161,387     $ 1,124,067  
   

See Notes to Condensed Consolidated Financial Statements.



3



DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of dollars)
(Unaudited)

    Three Months Ended
October 31
   
 
    2006     2005  
   
OPERATING ACTIVITIES                
Net earnings       $ 36,005     $ 32,198  
Adjustments to reconcile net earnings to net cash
 provided by operating activities:
               
Depreciation and amortization         11,722       11,442  
Changes in operating assets and liabilities         (27,962 )     13,345  
Tax benefit of equity plans         (3,079 )     (11,549 )
Payment of litigation judgment               (14,170 )
Stock option expense         272       259  
Other, net         347       (772 )
   
 Net cash provided by operating activities         17,305       30,753  
INVESTING ACTIVITIES                
Net expenditures on property and equipment         (18,014 )     (13,343 )
Acquisitions, investments and divestitures, net         (652 )      
   
 Net cash used in investing activities         (18,666 )     (13,343 )
FINANCING ACTIVITIES                
Purchase of treasury stock         (3,727 )     (48,126 )
Proceeds from long-term debt         1,020        
Repayments of long-term debt         (5,178 )     (163 )
Change in short-term borrowings         15,534       (15,467 )
Dividends paid         (7,250 )     (6,706 )
Tax benefit of equity plans         3,079       11,549  
Exercise of stock options         2,666       592  
   
 Net cash provided by (used in) financing activities         6,144       (58,321 )
Effect of exchange rate changes on cash         19       176  
   
Increase (decrease) in cash and cash equivalents         4,802       (40,735 )
Cash and cash equivalents – beginning of year         45,467       134,066  
   
Cash and cash equivalents – end of period       $ 50,269     $ 93,331  
   

See Notes to Condensed Consolidated Financial Statements.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note A – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Donaldson Company, Inc. (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. 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. Operating results for the three month period ended October 31, 2006 are not necessarily indicative of the results that may be expected for future periods. The year end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2006.

Note B – Inventories

The components of inventory as of October 31, 2006 and July 31, 2006 are as follows (thousands of dollars):

    October 31,
2006
    July 31,
2006
 
   
Materials       $ 53,944     $ 56,194  
Work in process         23,155       20,304  
Finished products         92,624       76,667  
   
Total inventories       $ 169,723     $ 153,165  
   

Note C – Accounting for Stock-Based Compensation

On August 1, 2005, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R, Share Based Payment – Revised 2004, using the modified prospective transition method. Under this method, stock-based employee compensation cost is recognized using the fair-value based method for all new awards granted after August 1, 2005. Compensation costs for unvested stock options and awards that were outstanding at August 1, 2005, are recognized over the requisite service period based on the grant-date fair value of those options and awards as previously calculated under the pro-forma disclosures under SFAS 123. The Company determined the fair value of these awards using the Black-Scholes option pricing model. Option grants are priced at the fair market value of the Company’s stock on the date of grant.

The following table summarizes stock option activity during the three months ended October 31, 2006:

    Options
Outstanding
    Weighted
Average
Exercise Price
 
   
Outstanding at July 31, 2006         6,281,304     $ 21.09  
Granted         113,800     $ 37.45  
Exercised         (606,450 )   $ 16.50  
Canceled         (104,237 )   $ 37.11  
   
Outstanding at October 31, 2006         5,684,417     $ 21.62  
   

The total intrinsic value of options exercised during the three months ended October 31, 2006 and 2005 was $12.6 million and $1.0 million, respectively.



5



The following table summarizes information concerning outstanding and exercisable options as of October 31, 2006:

Range of Exercise Prices     Number
Outstanding
    Weighted
Average
Remaining
Contractual
Life (Years)
    Weighted
Average
Exercise
Price
    Number
Exercisable
    Weighted
Average
Exercise
Price
 
           
$5 to $15         1,695,792       2.88     $ 11.45       1,695,792     $ 11.45  
$15 to $25         1,549,746       5.52     $ 18.22       1,549,746     $ 18.22  
$25 and above         2,438,879       6.62     $ 30.85       2,223,466     $ 30.68  
   
        5,684,417       5.20     $ 21.62       5,469,004     $ 21.19  
   

At October 31, 2006, the aggregate intrinsic value of shares outstanding and exercisable was $91.0 million and $89.9 million, respectively.

Note D - Net Earnings Per Share

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, restricted stock and stock incentive plans. Certain outstanding options were excluded from the diluted net earnings per share calculations because their exercise prices were greater than the average market price of the Company’s common stock during those periods. For the three months ended October 31, 2006 and 2005 there were 11,813 and 782,642 options excluded from the diluted net earnings per share calculation, respectively.

The following table presents information necessary to calculate basic and diluted net earnings per common share (thousands of dollars, except per share amounts):

    Three Months Ended
October 31
   
 
    2006     2005  
   
Weighted average shares outstanding basic         81,318       84,025  
Diluted share equivalents         2,165       2,097  
   
Weighted average shares outstanding – diluted         83,483       86,122  
   
Net earnings for basic and diluted
earnings per share computation
      $ 36,005     $ 32,198  
Net earnings per share – basic       $ .44     $ .38  
Net earnings per share – diluted       $ .43     $ .37  

Note E – Shareholders’ Equity

The Company reports accumulated other comprehensive income as a separate item in the shareholders’ equity section of the balance sheet. Other comprehensive income for the periods presented consists of foreign currency translation adjustments and net gains or losses on cash flow hedging derivatives.

Total comprehensive income and its components are as follows (thousands of dollars):

    Three Months Ended
October 31
   
 
    2006     2005  
   
Net earnings       $ 36,005     $ 32,198  
Foreign currency translation gain         2,060       131  
Net gain on hedging derivatives         301       255  
   
Total comprehensive income       $ 38,366     $ 32,584  
   


6



Total accumulated other comprehensive income and its components at October 31, 2006 and July 31, 2006 are as follows (thousands of dollars):

    October 31,
2006
    July 31,
2006
 
   
Foreign currency translation adjustment       $ 54,834     $ 52,774  
Net loss on hedging derivatives, net of deferred taxes         (24 )     (325 )
Additional minimum pension liability, net of deferred taxes         (1,255 )     (1,255 )
   
Total accumulated other comprehensive income       $ 53,555     $ 51,194  
   

During the first three months of fiscal 2007, the Company repurchased 0.1 million shares for $3.7 million at an average price of $37.38 per share. As of October 31, 2006 the Company has remaining authorization to repurchase up to 6.1 million shares pursuant to the current authorization.

Note F – Segment Reporting

The Company has two reportable segments, Engine Products and Industrial Products, that have been identified based on the internal organization structure, management of operations and performance evaluation. Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments, interest income and expense and non-operating income and expenses.

Segment detail is summarized as follows (thousands of dollars):

    Engine
Products
    Industrial
Products
    Corporate and
Unallocated
    Total
Company
 
       
Three Months Ended October 31, 2006:                            
Net sales       $ 263,926     $ 182,493           $ 446,419  
Earnings before income taxes         38,819       16,173       (2,659 )     52,333  
Assets         472,300       441,729       247,358       1,161,387  
Three Months Ended October 31, 2005:                            
Net sales       $ 238,424     $ 164,972           $ 403,396  
Earnings before income taxes         31,174       15,084       (2,360 )     43,898  
Assets         425,062       430,994       196,926       1,052,982  

Sales to one customer accounted for 12 percent of net sales for the three months ended October 31, 2006 and 2005, respectively. There were no customers over 10 percent of gross accounts receivable as of October 31, 2006 and 2005.

Note G – Goodwill and Other Intangible Assets

The Company’s most recent annual impairment test for goodwill was completed during the third quarter of fiscal 2006. The results of this test showed that the fair values of the reporting units to which goodwill is assigned were higher than the book values of the respective reporting units, resulting in no goodwill impairment. The Company has allocated goodwill to its Industrial Products and Engine Products segments. Following is a reconciliation of goodwill for the three months ending October 31, 2006:

    Industrial
Products
    Engine
Products
    Total
Goodwill
 
     
    (Thousands of dollars)    
Balance as of August 1, 2006       $ 102,927     $ 7,682     $ 110,609  
Acquisition activity         137             137  
Foreign exchange translation         182       (1 )     181  
     
Balance as of October 31, 2006       $ 103,246     $ 7,681     $ 110,927  
     

As of October 31, 2006, other intangible assets were $21.7 million, a $0.4 million decrease from the balance of $22.1 million at July 31, 2006. The decrease in other intangible assets is due to amortization partially offset by foreign currency translation.



7



Note H – Guarantees

The Company and its partner, Caterpillar, Inc., in an unconsolidated joint venture, Advanced Filtration Systems Inc., guarantee certain debt of the joint venture. As of October 31, 2006, the joint venture did not have any outstanding debt.

The Company estimates warranty costs using standard quantitative measures based on historical warranty claim experience and evaluation of specific customer warranty issues. Following is a reconciliation of warranty reserves for the three months ended October 31, 2006 and 2005 (thousands of dollars):

    October 31,
2006
    October 31,
2005
 
   
Beginning balance       $ 8,789     $ 7,841  
Accruals for warranties (including changes in estimates)         2,994       481  
Less settlements made during the period         (2,716 )     (468 )
   
Ending balance       $ 9,067     $ 7,854  
   

At October 31, 2006, the Company had a contingent liability for standby letters of credit totaling $16.5 million that have been issued and are outstanding. The letters of credit guarantee payment to beneficial third parties in the event the Company is in breach of specified contract terms as detailed in each letter of credit. At October 31, 2006, there were no amounts drawn upon these letters of credit.

Note I – Employee Benefit Plans

The Company and certain of its subsidiaries have defined benefit pension plans for many of its hourly and salaried employees. The domestic plans include plans that provide defined benefits as well as a plan for salaried workers that provides defined benefits pursuant to a cash balance feature whereby a participant accumulates a benefit comprised of a percentage of current salary that 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.

Net periodic pension costs for the Company’s pension plans include the following components (thousands of dollars):

    Three Months Ended
October 31,
   
 
    2006     2005  
   
Service cost       $ 3,778     $ 3,723  
Interest cost         3,541       3,585  
Expected return on assets         (5,123 )     (4,948 )
Transition amount amortization         180       291  
Prior service cost amortization         88       66  
Actuarial loss amortization         285       449  
Curtailment loss               686  
   
Total periodic benefit cost       $ 2,749     $ 3,852  
   

The Company’s general funding policy for its pension plans is to make at least the minimum contributions as required by applicable regulations. Additionally, the Company may elect to make additional contributions up to the maximum deductible contribution. For the three months ended October 31, 2006, the Company has made $1.3 million in contributions to its pension plans. The Company may elect to contribute up to $28.6 million to its U.S. pension plans and estimates that it will contribute up to $8.1 million to its non-U.S. pension plans in fiscal 2007.

Note J – Commitments and Contingencies

The Company is not currently subject to pending litigation other than litigation which arises out of and is incidental to the conduct of the Company’s business. All such matters are subject to many uncertainties and outcomes that are not predictable with assurance. The Company does not believe that



8



any of such proceedings are likely to result in a material adverse effect on the Company’s consolidated financial position or results of operation.

Note K – Income Taxes

The income tax rates for the three months ended October 31, 2006 and 2005 were 31.2 percent and 26.7 percent, respectively. The higher tax rate as compared to the prior year is primarily a result of the mix of earnings in our various jurisdictions as well as an amended tax return filing in the prior year which resulted in additional research and development tax credits.

Note L – New Accounting Standards

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). This statement requires recognition of the overfunded or underfunded status of defined benefit postretirement plans as an asset or liability in the statement of financial position and to recognize changes in that funded status in comprehensive income in the year in which the changes occur. SFAS 158 also requires measurement of the funded status of a plan as of the date of the statement of financial position. SFAS 158 is effective for recognition of the funded status of the benefit plans for the Company’s fiscal year 2007 and is effective for the measurement date provisions for the Company’s fiscal year 2009. Based on the Company’s funded status as of July 31, 2006, the adoption of SFAS 158 would decrease total assets by approximately $24 million, increase total liabilities by approximately $2 million, and decrease total shareholders’ equity by approximately $16 million, net of deferred tax. The adoption of SFAS 158 will not affect the Company’s results of operations. The ultimate amounts recorded are dependent on a number of factors, including the discount rate in effect at our next measurement date, the actual rate of return on pension assets for 2007 and the tax effects of the adjustment upon adoption. Changes in those factors as well as the 2007 pension funding could increase or decrease the expected impact of implementing SFAS 158 on the Company’s consolidated financial statements at July 31, 2007.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48). This pronouncement prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the effect of FIN 48 on its consolidated financial statements.











9



Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company is a 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; compressed air purification systems; air intake systems for industrial gas turbines; and specialized filters for such diverse applications as computer disk drives and semiconductor processing. Products are manufactured at more than 35 plants around the world and through three of our 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 and emissions systems, liquid filtration systems and replacement parts. The Engine Products segment sells to original equipment manufacturers (OEMs) in the construction, mining, agriculture and transportation markets and to independent distributors, OEM dealer networks, private label accounts and large equipment fleets. Products in the Industrial Products segment consist of dust, fume and mist collectors, compressed air purification systems, liquid filters and parts, static and pulse-clean air filter systems for gas turbines, and specialized air filtration systems for diverse applications including computer disk drives. The Industrial Products segment sells to various industrial end-users, OEMs of gas-fired turbines and OEMs and end-users requiring highly purified air.

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 and other financial information included elsewhere in this report.

Overview

The Company reported record diluted net earnings per share of $.43 for the first quarter of fiscal 2007, up from $.37 in the first quarter of the prior year. Net income for the quarter was a record $36.0 million, up 11.8 percent from $32.2 million in the first quarter of the prior year. The Company reported record sales in the first quarter of fiscal 2007 of $446.4 million, an increase of 10.7 percent from $403.4 million in the first quarter of the prior year.

Overall, continuing solid sales growth in both the Engine and Industrial Product segments drove the 10.7 percent increase in net sales. Within the Engine Products segment, transportation product sales were up due to high new truck build rates at our OEM customers in North America, Europe and Japan. Increased sales of off-road products were a result of global strength in new construction and mining equipment demand. Worldwide aftermarket sales increased due to equipment utilization rates remaining strong, continued growth by our OEM customers of their replacement parts businesses and the growing amount of equipment in the field with our PowerCore™ filtration systems. Within the Industrial Products segment, our industrial filtration solutions sales increased internationally with healthy global manufacturing investment and utilization conditions. Strength is seen in the international power generation and the oil and gas markets, helping drive solid international sales growth in our gas turbine systems business. Special application product sales were up in North America on the strength of our rebounding membrane business.

The operating margin in the quarter was 12.0 percent, a 1.2 percentage point improvement over the prior year due to a combination of operating leverage with the revenue increase and our ongoing cost containment efforts.

Results of Operations

Sales in the United States increased $13.1 million or 6.7 percent for the first quarter of fiscal 2007 compared to the first quarter of the prior year. Total international sales in U.S. dollars increased $29.9 million or 14.3 percent in the first quarter compared to the prior year. Translated at constant exchange rates, total international sales increased 12.3 percent. For the first quarter of fiscal 2007, Europe reported a sales increase of $22.0 million or 19.8 percent, Asia reported a sales increase of $6.0 million or 7.3 percent and Mexico reported a $2.1 million increase in net sales or 28.6 percent and South Africa was comparable to the prior period.



10



The impact of foreign currency translation during the quarter increased sales by $4.3 million. This was primarily due to the strengthening of the Euro against the U.S. dollar. Worldwide sales for the first quarter of fiscal 2007, excluding the impact of foreign currency translation, increased 9.6 percent from the first quarter of the prior year. The impact of foreign currency translation increased net earnings by $0.8 million for the quarter.

Although net sales excluding foreign currency translation and net earnings excluding foreign currency translation are not measures of financial performance under GAAP, the Company believes they are useful in understanding its financial results. Both measures enable the Company to obtain a more clear understanding of the operating results of its foreign entities without the varying effects that changes in foreign currency exchange rates may have on those results. A shortcoming of these financial measures is that they do not reflect the Company’s actual results under GAAP. Management does not intend these items to be considered in isolation or as a substitute for the related GAAP measures.

Following is a reconciliation to the most comparable GAAP financial measure of this non-GAAP financial measure (thousands of dollars):

    Three Months Ended October 31    
 
    2006     2005  
   
Net sales, excluding foreign currency translation       $ 442,152     $ 403,479  
Foreign currency translation         4,267       (83 )
   
Net sales       $ 446,419     $ 403,396  
   
Net earnings, excluding foreign currency translation       $ 35,221     $ 32,005  
Foreign currency translation         784       193  
   
Net earnings       $ 36,005     $ 32,198  
   

Gross margin for the first quarter of fiscal 2007 was 32.2 percent compared to 32.6 percent for the first quarter in the prior year. The slightly lower gross margin in the current period is due to a temporary shift in product mix this quarter and a slight increase in steel costs. Plant rationalization and start up costs totaled $1.0 million in the first quarter compared to prior year plant rationalization and start up costs of $1.2 million. Operating expenses during the first quarter of fiscal 2007 were $90.2 million, or 20.2 percent of sales, compared to $88.1 million, or 21.8 percent of sales in the prior year period.

Other income for the first quarter of fiscal 2007 totaled $1.5 million, down from $2.9 million in the first quarter of the prior year. The decrease from the prior year is primarily due to foreign exchange losses in the first quarter of the current year whereas exchange gains were recorded in the first quarter of fiscal 2006. Other income for the first quarter of fiscal 2007 consisted of income from unconsolidated affiliates of $1.5 million, interest income of $0.3 million and $0.6 million of other income which was offset by foreign exchange losses of $0.9 million. For the first quarter of fiscal 2007, interest expense was $2.9 million, up from $2.4 million in the first quarter of the prior year, driven primarily by higher interest rates.

The income tax rate of 31.2 percent for the quarter compares to 26.7 percent for the same period in the prior year. We expect our annual tax rate to be between 29 percent and 31 percent although our rate will vary by quarter due to country earnings mix and discrete events. The higher tax rate as compared to the prior year is primarily a result of the mix of earnings in our various jurisdictions as well as an amended tax return filing in the prior year which resulted in additional research and development tax credits. Higher tax jurisdictions such as Japan, Germany and the United States are expected to contribute a higher proportion of our taxable earnings in the current year. The unfavorable timing of the phase-out/phase-in provisions of the United States export credit versus the manufacturing credit and the expiration of the research and development credit are also affecting the rate. The Company undergoes examination by various taxing authorities in the multiple jurisdictions in which it operates. When such taxing authorities’ interpretations differ from those of management, the Company may require that changes in the amount of tax expense or valuation allowance be recognized. The Company maintains reserves against such differences and the effect of such adjustments are recorded at the time of resolution of the applicable examination.



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Operations by Segment

Following is financial information for the Company’s Engine and Industrial Products segments. Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments, interest income and expense and non-operating income and expenses.

Segment detail is summarized as follows (thousands of dollars):

    Engine
Products
    Industrial
Products
    Corporate and
Unallocated
    Total
Company
 
       
Three Months Ended October 31, 2006:                            
Net sales       $ 263,926     $ 182,493           $ 446,419  
Earnings before income taxes         38,819       16,173       (2,659 )     52,333  
Assets         472,300       441,729       247,358       1,161,387  
Three Months Ended October 31, 2005:                            
Net sales       $ 238,424     $ 164,972           $ 403,396  
Earnings before income taxes         31,174       15,084       (2,360 )     43,898  
Assets         425,062       430,994       196,926       1,052,982  

Following are net sales by product category within the Engine Products and Industrial Products segment (thousands of dollars):

    Three Months Ended October 31    
 
    2006     2005  
   
Engine Products segment:                
Off-road products       $ 80,010     $ 70,166  
Transportation products         51,155       46,210  
Aftermarket products         132,761       122,048  
   
Total Engine Products Segment       $ 263,926     $ 238,424  
   
Industrial Products segment:                
Industrial filtration solutions products       $ 118,527     $ 105,888  
Gas turbine products         26,049       24,363  
Special applications products         37,917       34,721  
   
Total Industrial Products segment       $ 182,493     $ 164,972  
   
Total Company       $ 446,419     $ 403,396  
   

Engine Products Segment    For the first quarter of fiscal 2007, worldwide sales in the Engine Products segment continued to be strong, reporting year-over-year increases across all product categories. Engine Product sales were a record $263.9 million in the first quarter of fiscal 2007, an increase of 10.7 percent from $238.4 million in the first quarter of the prior year. Total first quarter Engine Product sales in the United States were up 7.6 percent compared to the same period in the prior year and international sales increased by 15.1 percent.

Worldwide sales of off-road products in the first quarter were $80.0 million, an increase of 14.0 percent from $70.2 million in the first quarter of the prior year. Domestic sales in off-road products increased 8.3 percent due to strength in new construction and mining equipment demand. International sales were up 20.6 percent from the first quarter of the prior year with increases in Europe of 23.6 percent and increases in Asia of 13.7 percent. The Company’s off-road business continued to be strong globally as demand remained healthy in the construction and mining end-markets.

Worldwide sales in transportation products in the first quarter of fiscal 2007 were $51.2 million, an increase of 10.7 percent from $46.2 million in the first quarter of the prior year. Transportation product sales increased in the United States, Europe and Asia by 9.3 percent, 8.1 percent and 19.6 percent, respectively, as a result of higher new truck build rates.

Worldwide sales of aftermarket products in the first quarter were $132.8 million, an increase of 8.8 percent from $122.0 million in the first quarter of the prior year. Domestic aftermarket sales grew



12



6.4 percent as equipment utilization rates remained strong. International sales were up 11.8 percent from prior year primarily driven by sales increases in Europe and Mexico of 18.7 percent and 31.5 percent, respectively partially offset by a slight decrease in South Africa.

Industrial Products Segment    For the first quarter of fiscal 2007, worldwide sales in the Industrial Products segment were $182.5 million, an increase of 10.6 percent from $165.0 million in the prior year. Total first quarter sales in the United States and internationally were up 4.4 percent and 13.6 percent compared to the same period in the prior year.

Worldwide sales of industrial filtration solutions products in the quarter were $118.5 million, an increase of 11.9 percent from $105.9 million in the prior year. Domestic sales increased 3.4 percent, reflecting the benefit from the sales of a recent acquisition. International sales increased 17.7 percent over the prior year with sales in Europe, Asia, South Africa and Mexico showing increases of 21.4 percent, 9.6 percent, 17.1 percent and 21.4 percent, respectively.

Worldwide sales of gas turbine products in the first quarter were $26.0 million, an increase of 6.9 percent from sales of $24.4 million in the first quarter of the prior year. International sales in gas turbine products increased 16.2 percent. Domestic gas turbine sales decreased 15.5 percent.

Worldwide sales of special application products in the quarter were $37.9 million, an increase of 9.2 percent from $34.7 million in the prior year. Domestic special application product sales increased 55.3 percent. International sales in special application products increased 3.9 percent over the prior year, with increases in Europe and Asia of 12.6 percent and 2.7 percent, respectively, due primarily to strong demand for computer hard drives and other consumer electronics.

Liquidity and Capital Resources

The Company generated $17.3 million of cash and cash equivalents from operations during the first three months of fiscal 2007. Operating cash flows decreased by $13.4 million from the same period in the prior year primarily due to an increase in inventory levels. Operating cash flows and cash on hand were used to support $18.0 million in capital additions, the repurchase of 0.1 million outstanding shares of the Company’s common stock for $3.7 million, the payment of $5.2 million in debt and the payment of $7.3 million in dividends. For additional information regarding share repurchases see Part II Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds.”

At the end of the first quarter, the Company held $50.3 million in cash and cash equivalents, up from $45.5 million at July 31, 2006. Short-term debt totaled $83.2 million, up from $73.4 million at July 31, 2006. The amount of unused lines of credit as of October 31, 2006 was approximately $195.5 million. Long-term debt of $96.3 million at October 31, 2006 decreased from $100.5 million at July 31, 2006 and represented 14.2 percent of total long-term capital, defined as long-term debt plus total shareholders’ equity, compared to 15.5 percent at July 31, 2006. During the remainder of fiscal 2007, the Company may elect to contribute up to $28.6 million to its U.S. pension plans and estimates that it will contribute up to $8.1 million to its non-U.S. pension plans.

The following table summarizes the Company’s contractual obligations as of October 31, 2006 (in thousands):

Contractual Obligations     Payments Due by Period    
   
    Total     Less than
1 year
    1 – 3
years
    3 – 5
Years
    More than
5 years
 
         
Long-term debt obligations       $ 100,360     $ 5,313     $ 38,206     $ 5,847     $ 50,994  
Capital lease obligations         1,997       701       960       128       208  
Interest on long-term obligations         22,894       5,540       7,932       4,733       4,689  
Operating lease obligations         11,575       6,186       5,115       274        
Purchase obligations(1)         129,116       119,950       7,638             1,528  
Deferred compensation and other(2)         10,488       1,579       3,068       918       4,923  
         
Total       $ 276,430     $ 139,269     $ 62,919     $ 11,900     $ 62,342  
         

(1) Purchase obligations consist primarily of inventory, tooling, contract employment services and capital expenditures. The Company’s purchase orders for inventory are based on expected customer demand, and quantities and dollar volumes are subject to change.


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(2) Deferred compensation and other consists primarily of salary and bonus deferrals elected by certain executives under the Company’s deferred compensation plan. Deferred compensation balances earn interest based on a treasury bond rate as defined by the plan, and are payable at the election of the participants.

At October 31, 2006, the Company had a contingent liability for standby letters of credit totaling $16.5 million that have been issued and are outstanding. The letters of credit guarantee payment to beneficial third parties in the event the Company is in breach of specified contract terms as detailed in each letter of credit. At October 31, 2006, there are no amounts drawn upon these letters of credit.

The Company has a five-year, unsecured, multi-currency revolving facility with a group of banks under which the Company may borrow up to $150.0 million. As of October 31, 2006, there were no borrowings under these facilities. This facility expires on September 2, 2009.

Certain note agreements contain debt covenants related to working capital levels and limitations on indebtedness. Further, the Company may be restricted from paying dividends or repurchasing common stock if its tangible net worth (as defined) does not exceed certain minimum levels. As of October 31, 2006, the Company was in compliance with these debt covenants.

The Company believes that the combination of present capital resources, internally generated funds and unused financing sources are adequate to meet cash requirements for the next twelve-month period.

The Company does not have any off-balance sheet arrangements, with the exception of the guarantee of 50 percent of certain debt of its joint venture, Advanced Filtration Systems, Inc. as further discussed in Note H of the Company’s Notes to Condensed Consolidated Financial Statements.

Critical Accounting Policies

There have been no material changes to the Company’s critical accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended July 31, 2006.

Outlook

Overall, the Company expects mid-single digit sales growth for the Engine Products segment in fiscal 2007, which includes the impact of the NAFTA new truck production decline. The Company expects North American heavy-duty new truck build rates to remain at their current high levels through December as truck manufacturers are near capacity. Due to the 2007 emissions regulations, the Company expects build rates to decrease in calendar 2007 resulting in an estimated $30 to $35 million decrease in sales during the second half of fiscal 2007 as compared to the second half of fiscal 2006. Strong international conditions are expected to continue in the production of new construction and mining equipment by our customers. While residential construction in the United States has recently softened, North American non-residential and public construction markets are expected to remain healthy. Both North American and international aftermarket sales are expected to continue growing as a result of strong equipment utilization, continued growth by our OEM customers of their replacement parts businesses, and the growing amount of equipment with our PowerCore™ filtration systems driving replacement filter sales growth.

The Company expects low-double digit sales growth in fiscal 2007 for its Industrial Products segment. Industrial filtration solutions sales are expected to continue growing with healthy global manufacturing investment and utilization conditions at our customers. Our full year gas turbine sales should continue rebounding with sales increasing approximately 20 percent over last year. Strength is seen in both the international power generation and the global oil and gas segments we serve. Market conditions for special application products are expected to remain solid primarily due to continued strength in the hard disk drive market.

The Company expects the full year impact from expensing stock options to be $.03 to $.04 per share, with 75 percent of the full year expense ($.02 to $.03 per share) expected in the second quarter due to the timing of our annual option grants. The tax rate is expected to be 29 to 31 percent for the year although the rate will vary by quarter due to country earnings mix and discrete events. The Company expects fiscal 2007 earnings per share to be between $1.72 and $1.82 per diluted share.



14



Forward-Looking Statements

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 forwarding-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 in Item 1A of the Company’s Annual Report on Form 10-K for the year ended July 31, 2006, 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 (PSLRA). In particular the Company desires to take advantage of the protections of the PSLRA in connection with the forward-looking statements made in this Quarterly Report on Form 10-Q.

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 in Item 1A of the Company’s Annual Report on Form 10-K for the year ended July 31, 2006, as well as other factors, could affect the Company’s performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed. That discussion of factors is not intended to be exhaustive, but rather to highlight important risk factors that impact results. 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.

Item  3.   Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in the reported market risk of the Company since July 31, 2006. See further discussion of these market risks in the Company’s Annual Report on Form 10-K for the year ended July 31, 2006.

Item  4.   Controls and Procedures

  (a) Evaluation of Disclosure Controls and Procedures: As of the end of the period covered by this report (the Evaluation Date), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in applicable rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
  (b) Changes in Internal Control over Financial Reporting: No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) identified in connection with such evaluation during the fiscal quarter ended October 31, 2006, has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


15



PART II.   OTHER INFORMATION

Item  1.   Legal Proceedings

The Company is not currently subject to pending litigation other than litigation which arises out of and is incidental to the conduct of the Company’s business. All such matters are subject to many uncertainties and outcomes that are not predictable with assurance. The Company does not consider any of such proceedings that are currently pending to be likely to result in a material adverse effect on the Company’s consolidated financial position or results of operation.

Item  1A.   Risk Factors

There are inherent risks and uncertainties associated with our global operations that involve manufacturing and sale of products for highly demanding customer applications throughout the world. These risks and uncertainties could adversely affect our operating performances or financial condition. The “Risk Factors” section in the Company’s Annual Report on Form 10-K for the year ended July 31, 2006 includes a discussion of these risks and uncertainties. There have been no material changes from the risk factors disclosed in the Company’s Annual Report on form 10-K for the year ended July 31, 2006. Additional risks that the Company currently is unaware of or views as immaterial may also impair the Company’s business or adversely impact its financial results.

Item  2.   Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases of Equity Securities

The following table sets forth information in connection with purchases made by, or on behalf of, the Company or any affiliated purchaser of the Company, of shares of the Company’s common stock during the quarterly period ended October 31, 2006.

Period     Total Number
of Shares
Purchased (1)
    Average Price
Paid per Share
    Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
    Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans
or Programs
 
         
August 1 – August 31, 2006         1,721     $ 32.94             6,162,000 shares  
September 1 – September 30, 2006         182,145     $ 37.57             6,162,000 shares  
October 1 – October 31, 2006         100,121     $ 37.39       99,700       6,062,300 shares  
   
Total         283,987     $ 37.48       99,700       6,062,300 shares  

(1) On March 31, 2006, the Company announced that the Board of Directors authorized the repurchase of up to 8.0 million common shares. This repurchase authorization, which is effective until terminated by the Board of Directors, replaced the existing authority that was authorized on January 17, 2003. There were no repurchases of common stock made outside of the Company’s current repurchase authorization during the quarter ended October 31, 2006. However, the table above includes 184,287 previously owned shares tendered by option holders in payment of the exercise price of options. While not considered repurchases of shares, the Company does at times withhold shares that would otherwise be issued under equity-based awards to cover the withholding taxes due as a result of exercising stock options or payment of equity-based awards.

Item 6.  Exhibits

*3-A – Restated Certificate of Incorporation of Registrant as currently in effect (Filed as Exhibit 3-A to Form 10-Q Report for the First Quarter ended October 31, 2004)

3-B – Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of Registrant, dated as of March 3, 2006

*3-C – By-laws of Registrant as currently in effect (Filed as Exhibit 3-B to 2003 Form 10-K Report)

*4 – **



16



*4-A – Preferred Stock Amended and Restated Rights Agreement between Registrant and Wells Fargo Bank, N.A., as Rights Agent, dated as of January 27, 2006 (Filed as Exhibit 4.1 to Form 8-K Report filed February 1, 2006)

*10 – Description of performance-based compensation for certain executive officers (Described under Item 1.01 of Form 8-K filed October 5, 2006)

31-A – Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31-B – Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32 – Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Exhibit has previously 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 the Company and its subsidiaries are not filed and in lieu thereof the Company agrees to furnish a copy thereof to the Securities and Exchange Commission upon request.


17



SIGNATURES

Pursuant to the requirements 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: December 1, 2006   By:   /s/   William M. Cook
    William M. Cook
Chairman, President and
Chief Executive Officer
(duly authorized officer)
Date: December 1, 2006   By:   /s/   Thomas R. VerHage
    Thomas R. VerHage
Vice President,
Chief Financial Officer
(principal financial officer)
Date: December 1, 2006   By:   /s/   James F. Shaw
    James F. Shaw
Controller
(principal accounting officer)


18


EX-3.B 2 donaldson064618s1_ex3b.htm CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS Exhibit 3.2 to Donaldson Company, Inc. Form 10-Q for period ended October 31, 2006

Exhibit 3-B

 

CERTIFICATE OF DESIGNATION, PREFERENCES

AND RIGHTS OF SERIES A JUNIOR

PARTICIPATING PREFERRED STOCK

OF

DONALDSON COMPANY, INC.

___________________________________

Pursuant to Section 151 of the

General Corporation Law of the State of Delaware

___________________________________

The undersigned officer of Donaldson Company, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY:

 

That pursuant to the authority conferred upon the Board of Directors by the Restated Certificate of Incorporation of the said Corporation, the said Board of Directors on January 27, 2006, adopted the following resolution creating a series of 120,000 shares of Preferred Stock designated as Series A Junior Participating Preferred Stock:

 

RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of its Restated Certificate of Incorporation, a series of Preferred Stock of the Corporation be and it hereby is created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows:

 

Section 1.         Designation and Amount. The shares of such series shall be designated as “Series A Junior Participating Preferred Stock” and the number of shares constituting such series shall be 120,000.

 

 

Section 2.

Dividends and Distributions.

 

(A)         The holders of shares of Series A Junior Participating Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the last day of March, June, September and December in each year (each such date being referred to herein as a “Quarterly Dividend Payment Date”), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $10.00 or (b) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock





or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $5.00 per share, of the Corporation (the “Common Stock”) since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. In the event the Corporation shall at any time after January 27, 2006 (the “Rights Declaration Date”) (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

(B)         The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in Paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $10.00 per share on the Series A Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date.

(C)         Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof.

Section 3.         Voting Rights. The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights:

 

2





(A)         Subject to the provision for adjustment hereinafter set forth, each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

(B)         Except as otherwise provided herein or by law, the holders of shares of Series A Junior Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation.

(C)          (i) If at any time dividends on any Series A Junior Participating Preferred Stock shall be in arrears in an amount equal to six (6) quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a “default period”) which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Junior Participating Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock (including holders of the Series A Junior Participating Preferred Stock) with dividends in arrears in an amount equal to six (6) quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect two (2) directors.

(ii)      During any default period, such voting right of the holders of Series A Junior Participating Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that such voting right shall not be exercised unless the holders of ten percent (10%) in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of such voting right. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two (2) directors or, if such right is exercised at an annual meeting, to elect two (2) directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect directors in any default period and during the continuance of such period, the number of directors shall

 

3





not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series A Junior Participating Preferred Stock.

(iii)     Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of a special meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the President, a Vice President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this Paragraph (C) (iii) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding. Notwithstanding the provisions of this Paragraph (C)(iii), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the stockholders.

(iv)     In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of directors until the holders of Preferred Stock shall have exercised their right to elect two (2) directors voting as a class, after the exercise of which right (x) the directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in Paragraph (C)(ii) of this Section 3) be filled by vote of a majority of the remaining directors theretofore elected by the holders of the class of stock which elected the director whose office shall have become vacant. References in this Paragraph (C) to directors elected by the holders of a particular class of stock shall include directors elected by such directors to fill vacancies as provided in clause (y) of the foregoing sentence.

(v)      Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect directors shall cease, (y) the term of any directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of directors shall be such number as may be provided for in the certificate of incorporation or by-laws irrespective of any increase made pursuant to the provisions of Paragraph (C)(ii) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the certificate of incorporation or by-laws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining directors.

 

4





(D)         Except as set forth herein, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.

 

Section 4.

Certain Restrictions.

 

(A)         Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not:

(i)        declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock;

(ii)      declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;

(iii)     redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Junior Participating Preferred Stock; or

(iv)     purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.

(B)         The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under Paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner.

 

5





Section 5.         Reacquired Shares. Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein.

 

 

Section 6.

Liquidation, Dissolution or Winding Up.

 

(A)         Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received an amount equal to $1,000 per share of Series A Junior Participating Preferred Stock plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the “Series A Liquidation Preference”). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the “Common Adjustment”) equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 1,000 (as appropriately adjusted as set forth in subparagraph (C) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the “Adjustment Number”). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Junior Participating Preferred Stock and Common Stock, respectively, holders of Series A Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively.

(B)         In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock.

(C)         In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by

 

6





multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

Section 7.         Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

 

Section 8.         No Redemption. The shares of Series A Junior Participating Preferred Stock shall not be redeemable.

 

Section 9.         Ranking. The Series A Junior Participating Preferred Stock shall rank junior to all other series of the Corporation’s Preferred Stock which may be issued from time to time as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise.

 

Section 10.       Amendment. At any time when any shares of Series A Junior Participating Preferred Stock are outstanding, neither the Restated Certificate of Incorporation of the Corporation nor this Certificate of Designation shall be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class.

 

Section 11.       Fractional Shares. Series A Junior Participating Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder’s fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock.

 

7





                IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation to be executed by its duly authorized officer on this 3rd day of March, 2006.

 

 

 

DONALDSON COMPANY, INC.

 

 

 

 

 

By:

/s/ Norman C. Linnell

 

Name:

Norman C. Linnell

 

Title:

Vice President, General Counsel

and Secretary

 














8

 


EX-31.A 3 donaldson064618s1_ex31a.htm CERTIFICATION OF CEO PURSUANT TO SECTION 302 Exhibit 31A to Donaldson Company, Inc. Form 10-Q for period ended October 31, 2006

Exhibit 31A

Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, William M. Cook, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Donaldson Company, Inc.;
  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
    a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
    b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
    c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
    d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
    a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
    b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 1, 2006

/s/   William M. Cook


William M. Cook
Chief Executive Officer




EX-31.B 4 donaldson064618s1_ex31b.htm CERTIFICATION OF CFO PURSUANT TO SECTION 302 Exhibit 31B to Donaldson Company, Inc. Form 10-Q for period ended October 31, 2006

Exhibit 31B

Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Thomas R. VerHage, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Donaldson Company, Inc.;
  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
    a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
    b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
    c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
    d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
    a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
    b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 1, 2006 

/s/   Thomas R. VerHage


Thomas R. VerHage
Chief Financial Officer




EX-32 5 donaldson064618s1_ex32.htm CERTIFICATIONS OF CEO/CFO PURSUANT TO SECTION 906 Exhibit 32 to Donaldson Company, Inc. Form 10-Q for period ended October 31, 2006

Exhibit 32

Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the following certifications are being made to accompany the Form 10-Q for the quarter ended October 31, 2006 for Donaldson Company, Inc.:

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, William M. Cook, Chief Executive Officer of Donaldson Company, Inc., certify, that:

  1. The Form 10-Q of Donaldson Company, Inc. for the quarter ended October 31, 2006 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Donaldson Company, Inc.

Date: December 1, 2006 

/s/   William M. Cook


William M. Cook
Chief Executive Officer




CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Thomas R. VerHage, Chief Financial Officer of Donaldson Company, Inc., certify, that:

  1. The Form 10-Q of Donaldson Company, Inc. for the quarter ended October 31, 2006 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Donaldson Company, Inc.

Date: December 1, 2006 

/s/   Thomas R. VerHage


Thomas R. VerHage
Chief Financial Officer




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