-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, tBGbASLkNk0jjN3c9frxIRJ6CyH1kwT+Lb66NzBF/sPuRGvLzRO7PZYcwTDwra4p AHv8F/wLhe4h2Hhl1+2Kjg== 0000897101-94-000152.txt : 19941103 0000897101-94-000152.hdr.sgml : 19941103 ACCESSION NUMBER: 0000897101-94-000152 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19940731 FILED AS OF DATE: 19941028 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DONALDSON CO INC CENTRAL INDEX KEY: 0000029644 STANDARD INDUSTRIAL CLASSIFICATION: 3564 IRS NUMBER: 410222640 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07891 FILM NUMBER: 94555851 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-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 31, 1994 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 (612) 887-3131 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class 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, 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. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of the close of business on September 27, 1994 was $559,158,590. The shares of Common Stock outstanding as of September 27, 1994 were 26,510,661. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1994 Annual Report to Shareholders of the registrant: Parts I and II. Portions of the Proxy Statement for the 1994 annual shareholders meeting: Part III. 1 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 worldwide manufacturer of air cleaners, liquid filters and exhaust products and accessories for heavy duty mobile equipment; in-plant air cleaning systems; air intake systems and exhaust products for industrial gas turbines; and specialized filters for diverse applications. The Company has one industry segment which consists of the design, manufacture and sale of products to filter air, sound and liquid. The Company's principal products are primarily sold through a direct sales force. The table below shows the percentage of total sales contributed by the principal classes of similar products for each of the last three fiscal years: Year Ended July 31 1994 1993 1992 ---- ---- ---- Air cleaners, filtration devices and accessories 67% 68% 71% Acoustical Products 11% 11% 9% Other 22% 21% 20% 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 The Company owns various patents which it considers in the aggregate to constitute a valuable asset. However, it does not regard the validity of any one patent as being of material importance. 2 SEASONALITY The Company's business is not considered to be seasonal. MAJOR CUSTOMER Approximately 12% of the Company's 1994 sales were made to Caterpillar Inc. and subsidiaries ("Caterpillar"). Caterpillar has been a customer of the Company for many years and they purchase several models and types of products for a variety of applications. Sales to the U.S. Government do not constitute a material portion of the Company's business. BACKLOG At August 31, 1994, the backlog of orders expected to be delivered within 90 days was $111,147,000. The backlog at August 31, 1993 was $88,953,000. COMPETITION Principal methods of competition are price, service and product performance. The Company estimates it has more than 20 competitors in the sale of filtration products and less than 10 competitors in the sale of acoustical products. Generally the Company does not provide rights to return merchandise or give extended payment terms to customers and believes the industry practices are similar to its own. RESEARCH AND DEVELOPMENT During 1994 the Company spent $10,873,000 on research and development activities relating to the development of new products or improvements of existing products or manufacturing processes. The Company spent $11,364,000 in 1993 and $10,323,000 in 1992 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. 3 EMPLOYEES The Company employed 4,417 persons in worldwide operations as of July 31, 1994. GEOGRAPHIC AREAS Note J of the Notes to Consolidated Financial Statements on page 28 in the 1994 Annual Report to Shareholders contains information regarding the Company's geographic areas and is incorporated herein by reference. Political conditions, tariffs, local tax structures, and currency exchange rate fluctuations contribute to the risks of foreign operations. 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 ten plants in the United States, two in Japan and one each in Australia, Brazil, United Kingdom, Hong Kong, South Africa, Italy, Belgium and Germany. The inside back cover of the 1994 Annual Report to Shareholders lists U.S. plant locations and is incorporated herein by reference. Note J on page 28 of the 1994 Annual Report to Shareholders presents identifiable assets by geographic area and is incorporated herein by reference. Donaldson is a lessee under several long-term leases pursuant to Industrial Revenue Bond financings. 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 There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Company's business. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Company during the fourth quarter of the year ended July 31, 1994. 4 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. First Year Elected or appointed as an Name Age Positions and Offices Held Officer - - ---- --- -------------------------- ---------- William A. Hodder 63 Chairman, Chief Executive 1973 Officer & Director Erland D. Anderson 53 Vice President, Corporate 1978 Technology William M. Cook 41 Vice President, Industrial 1994 Edmund C. Craft 54 Vice President, Engine 1985 Aftermarket James R. Giertz 37 Vice President, Chief 1994 Financial Officer Richard M. Negri 61 Vice President, Corporate 1976 Manufacturing Nickolas Priadka 48 Vice President, Engine OEM 1989 Lowell F. Schwab 46 Vice President, Operations 1994 John R. Schweers 49 Treasurer 1987 John E. Thames 44 Vice President, Human Resources 1989 William G. Van Dyke 49 President, Chief Operating 1979 Officer and Director Thomas A. Windfeldt 45 Vice President, Controller 1985 All of the above-named executive officers have held executive or management positions with Registrant for more than the past five years except Mr. Giertz who was previously Assistant Treasurer Corporate Finance for General Motors Corporation (1992) and Treasurer of various subsidiaries of General Motors Corporation and Mr.Schwab who was previously Vice President and General Manager of the Machinery Division of Washington Scientific, Inc. 5 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information in the sections "NYSE Listing," and "Quarterly Financial Information (Unaudited)" on page 32, and restrictions on payment of dividends in Note D, page 24 of the 1994 Annual Report to Shareholders is incorporated herein by reference. As of September 27, 1994, there were approximately 1,500 shareholders of record of Common Stock. The high and low sales prices for registrant's common stock for each full quarterly period during fiscal 1993 and 1994 are as follows: First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1993 $14-19 $17-19 1/4 $16 5/8-20 1/8 $17-19 1/8 1994 $18 1/4-21 5/8 $20-23 3/4 $21 7/8-25 1/4 $20-26 1/8 Item 6. SELECTED FINANCIAL DATA The information for the years 1990 through 1994 on pages 12 and 13 of the 1994 Annual Report to Shareholders is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The textual information commencing with "Capital Structure" in the section "Management's Discussion and Analysis" on pages 14 through 18 of the 1994 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 19 through 28, and the Quarterly Financial Information (Unaudited) on page 32 of the 1994 Annual Report to Shareholders is incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 pages 3 and 4 and under the heading "Compliance With Section 16 (a) of the Securities Exchange Act of 1934" on page 10 of the Company's definitive proxy statement dated October 14, 1994 is incorporated herein by reference. Information about the executive officers of the Company is set forth in Part I of this report. 6 Item 11. EXECUTIVE COMPENSATION The information under "Director Compensation" on page 4 and in the section "Executive Compensation" on pages 5 through 9, the "Pension Plan Table" on page 10 and under the captions "Resignation Agreement" and "Change-in-Control Arrangements" on page 11 of the Company's definitive proxy statement dated October 14, 1994, is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information in the section "Security Ownership" on pages 1 and 2 of the Company's definitive proxy statement dated October 14, 1994, is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information in the section "Resignation Agreement" on page 10 of the Company's definitive proxy statement, dated October 14, 1994, is incorporated herein by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed with this report: (1) Financial Statements - Consolidated Statements of Financial Position--July 31, 1994 and 1993 (incorporated by reference from page 20 of the 1994 Annual Report to Shareholders) Consolidated Statements of Earnings--years ended July 31, 1994, 1993 and 1992 (incorporated by reference from page 19 of the 1994 Annual Report to Shareholders) Consolidated Statements of Cash Flows--years ended July 31, 1994, 1993 and 1992 (incorporated by reference from page 21 of the 1994 Annual Report to Shareholders) Consolidated Statements of Changes in Shareholders' Equity-years ended July 31, 1994, 1993 and 1992 (incorporated by reference from page 22 of the 1994 Annual Report to Shareholders) Notes to Consolidated Financial Statements (incorporated by reference from pages 23 through 28 of the 1994 Annual Report to Shareholders) Report of Independent Auditors (incorporated by reference from page 29 of the 1994 Annual Report to Shareholders). 7 (2) Financial Statement Schedules - Schedule II Amounts receivable from related parties and underwriters, promoters, and employees other than related parties Schedule V Property, plant and equipment Schedule VI Accumulated depreciation, depletion and amortization of property, plant and equipment Schedule VIII Valuation and qualifying accounts Schedule IX Short-term borrowings Schedule X Supplementary income statement information All other schedules 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 No reports on Form 8-K were filed for the three months ended July 31, 1994. 8 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 28, 1994 By /s/ Raymond F. Vodovnik Raymond F. Vodovnik Vice President, Legal 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 A. Hodder Chairman, Chief Executive William A. Hodder Officer and Director /s/ Thomas A. Windfeldt Vice President, Controller Thomas A. Windfeldt /s/ James R. Giertz Vice President, Chief Financial James R. Giertz Officer *William G. Van Dyke President, Chief Operating William G. Van Dyke Officer and Director *A. Gary Ames Director A. Gary Ames *Michael R. Bonsignore Director Michael R. Bonsignore *Jack W. Eugster Director Jack W. Eugster *Kendrick B. Melrose Director Kendrick B. Melrose *S. Walter Richey Director S. Walter Richey *Stephen W. Sanger Director Stephen W. Sanger *C. Angus Wurtele Director C. Angus Wurtele *By /s/Raymond F. Vodovnik Date: October 28, 1994 Raymond F. Vodovnik * As attorney-in-fact 9 SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES DONALDSON COMPANY, INC. AND SUBSIDIARIES
COL. A COL. B COL. C COL. D COL. E - - ---------------------------------------------------------------------------------------------------- Balance at Beginning Balance at end of period Name of Debtor of Period Additions Deductions Current Not Current - - ---------------------------------------------------------------------------------------------------- Year ended July 31, 1994: John C. Read Executive Vice President, Engine $200,000 $ - $(200,000) $ - $ - (1) ======= ======== ========= ======== ======== Year ended July 31, 1993: John C. Read, Executive Vice President, Engine $200,000 $ - $ - $ - $200,000 (1) ======== ======== ========= ======== ======== Year ended July 31, 1992: John C. Read Executive Vice President, Engine $200,000 $ - $ - $ - $200,000 (1) ======== ======== ========= ======== ========
(1) The loan was fully secured by a mortgage on Mr. Read's residence in favor of the Company. The note accrued interest at the rate of 9.1% per annum. On August 8, 1994, Mr. Read resigned from the Company. The Company agreed to forgive the outstanding note as part of his Resignation Agreement. 10 SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars)
COL. A COL. B COL. C COL. D COL. E COL. F - - ------------------------------------------------------------------------------------------------------------- Balance at Other Changes- Balance at Beginning Additions Add (Deduct)- End of Classification of Period at Cost Retirements Describe Period - - ------------------------------------------------------------------------------------------------------------- Year ended July 31, 1994: Land $ 5,962 $ 162 $ - $ 174 (B) $ 6,298 Buildings 74,742 5,252 (72) 1,761 (B) 81,683 Machinery and equipment 148,790 21,353 (3,101) 376(A,B) 166,666 Construction in progress 4,353 - - (77) 4,276 -------- ------- ------- ------ ------- $233,847 $26,767(C) $ (3,173) $1,482 $258,923 ======== ======= ======== ====== ======== Year ended July 31, 1993: Land $ 5,503 $ 484 $ (6) $ (19)(B) $ 5,962 Buildings 71,679 2,728 (255) 590 (B) 74,742 Machinery and equipment 132,989 17,691 (2,372) 482 (B) 148,790 Construction in progress 3,791 - - 562 4,353 -------- ------- ------- ------ ------- $213,962 $20,903(D) $(2,633) $1,615 $233,847 ======== ======= ======= ====== ======== Year ended July 31, 1992: Land $ 4,671 $ 451 $ (4) $ 385 (B) $ 5,503 Buildings 61,710 5,719 (28) 4,278 (B) 71,679 Machinery and equipment 114,302 15,951 (4,133) 6,869 (B) 132,989 Construction in progress 6,968 - - (3,177) 3,791 -------- ------- ------- ------ ------- $187,651 $22,121(E) $ (4,165) $8,355 $213,962 ======== ======= ======== ====== ========
See notes on following page. 11 SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT--Continued DONALDSON COMPANY, INC. AND SUBSIDIARIES Note A--Includes $3,200 related to a write down of certain Brazilian assets. Note B--Amounts represent the effect of changes in foreign currency exchange rates on property and equipment. Foreign currency translation methods are disclosed in Note A to the consolidated financial statements. Note C--Includes $1,828 relating to the acquisition of property, plant and equipment of a high purity products materials supplier. Note D--Includes $5,898 relating to the acquisition of property, plant and equipment of Filtrobras-Roma Filtros Automotivos Ltda. and ENV Services, Inc. Note E--Includes $6,583 relating to the acquisition of property, plant and equipment of Gimetal N.V. and FBO s.r.l. 12 SCHEDULE VI--ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars)
COL. A COL. B COL. C COL. D COL. E COL. F - - ---------------------------------------------------------------------------------------------------- Additions Balance at Charged to Other Changes- Balance at Beginning Costs and Add (Deduct)- End of Description of Period Expenses Retirements Describe Period - - ---------------------------------------------------------------------------------------------------- Year ended July 31, 1994: Buildings $ 39,058 $ 2,311 $ (39) $ 1,075 $ 42,405 Machinery and equipment 104,274 13,588 (2,912) 2,009 116,959 -------- ------- ------- -------- --------- $143,332 $15,899 $(2,951) $ 3,084(A) $ 159,364 ======== ======= ======= ======== ========= Year ended July 31, 1993: Buildings $ 35,838 $ 2,439 $ (242) $ 1,023 $ 39,058 Machinery and equipment 93,225 12,006 (2,051) 1,094 104,274 -------- ------- ------- -------- --------- $129,063 $14,445 $(2,293) $ 2,117(A) $ 143,332 ======== ======= ======= ======== ========= Year ended July 31, 1992: Buildings $ 32,110 $ 2,277 $ (25) $ 1,476 $ 35,838 Machinery and equipment 82,678 11,477 (3,866) 2,936 93,225 -------- ------- ------- -------- --------- $114,788 $13,754 $(3,891) $ 4,412(A) $ 129,063 ======== ======= ======= ======== =========
Note A--Amounts represent the effect of changes in foreign currency exchange rates on property, plant and equipment. Foreign currency translation methods are disclosed in Note A to the consolidated financial statements. 13 SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars)
COL. A COL. B COL. C COL. D COL. E - - ------------------------------------------------------------------------------------------------- Additions Balance at Charged to Balance at Beginning Costs and Charged to End of Description of Period Expenses Other Accounts Deductions Period - - ---------------------------------------------------------------------------------------------------- Year ended July 31, 1994: Allowance for doubtful accounts deducted from accounts receivable $2,802 $ 949 $ 28 (A) $ (336)(B) $3,443 ====== ===== ===== ======= ====== Year ended July 31, 1993: Allowance for doubtful accounts deducted from accounts receivable $2,594 $ 409 $(185)(A) $ (16)(B) $2,802 ====== ===== ===== ====== ====== Year ended July 31, 1992: Allowance for doubtful accounts deducted from accounts receivable $2,328 $ 571 $ 166 (A) $ (471)(B) $2,594 ====== ===== ===== ====== ======
Note A--Foreign currency translation losses (gains) recorded directly to retained earnings. Note B--Bad debts charged to allowance, net of recoveries. 14 SCHEDULE IX--SHORT-TERM BORROWINGS DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars)
COL. A COL. B COL. C COL. D COL. E COL. F - - ---------------------------------------------------------------------------------------------------- Maximum Average Weighted Weighted Amount Amount Average Balance Average Outstanding Outstanding Interest Rate Category of Aggregate at End Interest During During the During the Short-term Borrowings of Period Rate the Period Period (A) Period (B) - - ----------------------------------------------------------------------------------------------------- Notes payable to banks: Year ended July 31, 1994 $14,073 6.6% $15,218 $8,720 8.1% Year ended July 31, 1993 $4,238 10.3% $ 6,906 $3,906 8.6% Year ended July 31, 1992 $6,359 7.8% $ 6,359 $2,553 14.9%
Note A--The average amount outstanding during the period was computed by dividing the total of month-end outstanding principal balances by twelve. Note B--The weighted average interest rate during the period was computed by dividing the actual interest expense by average month end short-term debt outstanding. 15 SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars) COL. A COL. B Charged to Item Costs and Expenses - - ------------------------- ------------------ Year ended July 31, 1994 Maintenance and repairs $5,935 ====== Year ended July 31, 1993 Maintenance and repairs $5,575 ====== Year ended July 31, 1992 Maintenance and repairs $4,832 ====== Amounts for other items are not presented as such amounts are less than 1% of total sales. 16 EXHIBIT INDEX ANNUAL REPORT ON FORM 10-K * 3-a - Certificate of Incorporation of Registrant as currently in effect * 3-B - By-laws of Registrant as currently in effect * 4 - ** * 4-A - Preferred Stock Amended and Restated Rights Agreement (Filed as Exhibit 1 to Form 8-K Report Dated May 19, 1989) * 4-B - Credit Agreement among Donaldson Company, Inc. and certain listed banks dated as of October 8, 1987 (Filed as Exhibit 4-B to 1987 Form 10-K Report) * 4-C - Copy of First Amendment to Preferred Stock Amended and Restated Rights Agreement (Filed as Exhibit 1 to Form 8-K Report Dated September 20, 1991) 10-A - Copy of Resignation Agreement dated August 21, 1994 between Registrant and John C. Read * 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 1980 Master Stock Compensation Plan (Filed as Exhibit 10-D to 1989 Form 10-K Report) * 10-E - Copy of Phantom Stock Plan (Filed as exhibit 10-E to 1991 Form 10-K Report) * 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-F to 1990 Form 10-K Report) * 10-H - Independent Director Retirement and Benefit Plan as amended (Filed as Exhibit 10-H to 1993 Form 10-K Report) 17 * 10-I - Excess Benefit Plan (Filed as Exhibit 10-I to 1989 Form 10-K Report) * 10-J - Copy of Supplementary Executive Retirement Plan (Filed as Exhibit 10-J to 1991 Form 10-K Report) * 10-K - 1991 Master Stock Compensation Plan as amended (Filed as Exhibit 10-K to 1993 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 1993 Form 10-K Report) 11 - Statement re computation of per share earnings 13 - Portions of Registrant's Annual Report to Shareholders for the year ended July 31, 1994 21 - Subsidiaries ("Wholly Owned Subsidiaries" and "Joint Ventures" on the inside back cover of Donaldson's 1994 Annual Report is incorporated by reference) 23 - Consent of Independent Auditors 24 - Powers of Attorney 27 - Financial Data Schedule 99 - Annual Report of Employees' Retirement Savings Plan on Form 11-K for year ended July 31, 1994 * Exhibit has heretofore been filed with the Securities and Exchange Comission 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. Note: Exhibits have been furnished only to the Securities and Exchange Commission. Copies will be furnished to individuals upon request and payment of $15 representing Registrant's reasonable expense in furnishing such exhibits. EX-10.A 2 EXHIBIT 10-A CONFIDENTIAL RESIGNATION AGREEMENT This Resignation Agreement is made by and between Donaldson Company, Inc., a Minnesota corporation (the "Company"), and John C. Read, an individual resident of Minnesota ("Read"). WHEREAS, Read and the Company entered into a letter agreement dated February 27, 1990 and an employment agreement dated April 2, 1990; WHEREAS, Read and the Company wish to effect the termination of Read's employment with the Company on the terms and conditions set forth herein; and WHEREAS, Read and the Company mutually desire that, in consideration of the payments and benefits set forth herein, the employment agreement dated April 2, 1990 (and any remaining rights of Read under the letter agreement dated February 27, 1990) be terminated and superseded by this Resignation Agreement; NOW, THEREFORE, Read and the Company agree as follows: 1. Read hereby resigns all officer and other positions with the Company (and each of its subsidiaries), including, but not limited to, Executive Vice President, Engine Group, and terminates his employment with the Company (and each of its subsidiaries), effective as of the close of business on August 8, 1994. The Company accepts Read's resignations and terminations effective as of such date and time. No rights of an employee will accrue to Read after the close of business on August 8, 1994 despite the payments and benefits provided pursuant to paragraph 2 of this Resignation Agreement. 2. In consideration for Read's past services to the Company, Read's agreement to terminate the employment agreement dated April 2, 1990 (and any remaining rights of Read under the letter agreement dated February 27, 1990), the release of any and all claims relating to Read's employment with the Company, the noncompetition, nondisclosure, and nonsolicitation covenants set forth herein, and subject to the terms hereof, the Company shall provide Read with the following payments and benefits, subject to paragraph 7: (a) The Company shall pay Read one year's salary plus 100% of his target incentive bonus opportunity (60% of his base salary at the time of his resignation), which amount equals $470,400, less legally required withholdings and deductions. This amount, together with interest at the applicable federal rate on the unpaid principal balance of such amount, shall be paid in 24 consecutive equal monthly payments. (b) The Company shall forgive in 24 consecutive equal monthly increments the outstanding balance, plus accrued and accruing interest, on the home equity loan it has provided to Read. As of August 1, 1994, this amount is approximately $292,000. (c) Read may continue in the Company's executive tax preparation plan for the 1994 tax year. (d) The Company shall continue to provide Read with group medical insurance and group life insurance at the levels and on the terms currently provided to Read until December 31, 1994. After December 31, 1994, Read may voluntarily elect to continue the group medical insurance, in accordance with the Company's policies for employees, for a period not to exceed 18 months, provided that Read makes full payment for such insurance at COBRA premium rates. It is agreed by the parties that in the event Read becomes employed by any other employer during the 18 month period following December 31, 1994, the Company will not be required to provide Read with access to its group medical insurance effective on the first day of the month following or coinciding with Read's commencement of benefit eligibility with the new employer. In addition, on or before December 31, 1994, the Company will provide Read with information regarding the conversion of the group life insurance to an individual policy. (e) The Company shall make a cash payment to Read for any earned and unused vacation days attributable to calendar year 1994 that are accrued as of the date of Read's resignation from the Company in accordance with the Company's standard policies relating to compensation for earned and unused vacation at the time of employment termination. (f) The Company shall provide Read with outplacement advisory services as arranged by the Company through a professional firm with national connections and a local office. (g) Read shall have the option to purchase the Company automobile currently in his possession from the Company for a price equal to the book value of the automobile. The book value of the automobile is currently $14,860. This option must be exercised within 30 days of the date of Read's resignation from the Company. (h) Additional payments and benefits, if any, under any other employee benefit plans of the Company applicable to Read will be determined and paid only in accordance with the express written provisions of such plans. 3. Read acknowledges that during his employment with the Company, he has been exposed to, or acquired, confidential information as defined in this paragraph. Read understands and agrees that such confidential information has been disclosed to him in confidence and for the sole benefit of the Company. Read agrees that he will: (i) diligently protect the confidentiality of all confidential information; (ii) not disclose or communicate any confidential information to any third party without the consent of the Company; and (iii) not make use of confidential information on his own behalf or on behalf of any third party. When confidential information becomes generally available to the public by means other than Read's acts or omissions, it is no longer subject to this paragraph. Read expressly acknowledges that the undertakings set forth in this paragraph shall survive indefinitely, notwithstanding the expiration or termination of other agreements or duties in this Resignation Agreement. As used in this Resignation Agreement "confidential information" means information not generally known that is proprietary to the Company. This information includes trade secret information about the Company's processes, products and business, such as information relating to research, development, manufacture, purchasing, accounting, engineering, marketing, merchandising, selling, leasing, servicing, customers, finance and business systems and techniques. All information which was disclosed to Read or to which Read obtained access, during the period of his employment, that he had reasonable basis to believe to be confidential information shall be presumed to be confidential information. This applies whether the confidential information was originally identified by Read or by others. 4. Read agrees to promptly return to the Company all records, manuals, books, forms, documents, letters, memoranda, notes, notebooks, reports, data, diagrams, calculations or other materials or copies thereof, which are the property of the Company or which relate in any way to the business, products, practices or techniques of the Company, and all other property of the Company, including, but not limited to, all documents or other materials which in whole or in part contain any confidential information which in any of these cases are in the possession or under the control of Read. 5. A. DEFINITIONS: As used in this Resignation Agreement: (1) "Company" means Donaldson Company, Inc., and any existing or future subsidiaries, owned or controlled, directly or indirectly by such Company. (2) "Conflicting organization" means any person or organization that is engaged in or about to become engaged in, research on or development, production, marketing, leasing, selling or servicing of a conflicting product. (3) "Conflicting product" means any product, method or process, system or service of any person or organization other than the Company that is the same as or similar to a product, method or process, system or service upon which Read worked, or as to which Read acquired confidential information (in either a sales or a non-sales capacity) during the last three years of his employment with the Company. Conflicting products also include those under development and those that compete with or have a usage allied to Company products. B. COVENANT NOT TO COMPETE: (1) For a period of two years after his resignation from the Company, Read will immediately inform the Company of any subsequent employment or association with a new employer. Read will also inform the new employer or associate of the provisions of this paragraph 5, providing the employer or associate with a copy. (2) For a period of two years after his resignation from the Company, Read agrees that he will not, directly or indirectly, either as a proprietor, partner, employee, consultant or agent, do any of the following: (a) sell or solicit orders for any conflic- ting products: (i) to or from a customer or client whom, within the three year period preceding his resignation from the Company, he solicited or serviced orders for the Company or in connection with whom he managed solicitation or servicing for the Company; or (ii) in any territory in which he was working or which he managed for the Company, within the three year period immediately preceding his resignation from the Company; (b) direct, promote or assist in the development, production, or servicing of any conflicting products; and (c) provide services of the type provided to the Company to any conflicting organization in the United States, or in any country in which the Company has a plant for manufacturing a product on which he worked during his employment with the Company, or in which the Company provides a service in which he participated during his employment with the Company. (3) The only exception to the provisions of this paragraph 5 is that Read may accept employment with a conflicting organization whose business is diversified and has separate and distinct divisions, if: (a) his services are provided to a separate and distinct division, which of itself is not a conflicting organization; and (b) prior to his accepting employment with this division, the Company receives separate written assurances satisfactory to the Company from the conflicting organization and from Read that he will not directly or indirectly provide services in connection with any conflicting products. 6. Read recognizes that the Company's work force constitutes an important and valuable asset of its business. Read agrees that for a period of two years following his execution of this Resignation Agreement he shall not solicit, or assist anyone else in the solicitation of, any of the Company's then current employees to terminate their employment with the Company and/or to become employed by any business enterprise with which Read may then be associated or connected, whether as an owner, employee, partner, agent, investor, consultant, contractor or otherwise. 7. If Read breaches any material obligation imposed under this Resignation Agreement, the Company shall have the right to terminate its obligations under this Resignation Agreement, Read will repay to the Company any cash payments made to him pursuant to paragraph 2 of this Resignation Agreement, and all future obligations of the Company under this Resignation Agreement to Read or to others whose rights may derive from him will cease. 8. Read acknowledges that it would be difficult to compensate the Company for damages for any violation of paragraphs 3, 4, 5 and 6 of this Resignation Agreement. Accordingly, Read specifically agrees that the Company shall be entitled to injunctive relief to enforce the provisions of those paragraphs and that such relief may be granted without the necessity of proving actual damages. This provision with respect to injunctive relief will not, however, diminish the right of the Company to claim and recover damages in addition to injunctive relief. 9. By this Resignation Agreement, Read and the Company intend to settle any and all claims Read has or may have against the Company as the result of its hiring Read, Read's employment with the Company, and the cessation of Read's employment with the Company. For the consideration expressed herein, Read hereby releases and discharges the Company, its officers, directors, shareholders, employees, agents, insurers, representatives, counsel, administrators, successors and/or assigns from any and all claims, demands, actions, liabilities, damages, or rights of any kind, whether known or unknown, arising out of or resulting from the Company's hiring of Read, Read's employment with the Company, and the cessation of Read's employment with the Company. Read further agrees that he will not institute any claim for damages, by charge or otherwise, nor authorize any other party, governmental or otherwise, to institute any claim for damages via administrative or legal proceedings against the Company, its officers, directors, shareholders, employees, agents, insurers, representatives, counsel, administrators, successors and/or assigns for any such claims, including, but not limited to, any claims arising under or based upon the Minnesota Human Rights Act, Minn. Stat. ss.ss. 363.01, et seq.; the Minnesota Age Discrimination Law, Minn. Stat. ss.ss. 181.81, et seq.; Title VII of the Civil Rights Act of 1964, 42 U.S.C. ss.ss. 2000e, et seq.; the Age Discrimination In Employment Act, 29 U.S.C. ss.ss.621, et seq.; the Employee Retirement Income Security Act of 1973, 29 U.S.C. ss.ss. 1101, et seq.; the Rehabilitation Act of 1973, 29 U.S.C. ss.ss. 701, et seq.; or the Americans With Disabilities Act, 42 U.S.C. ss.ss. 12101, et seq.; and any claims based upon common law theories of recovery, including those in contract, quasi contract or tort, arising out of or resulting from the Company hiring of Read, Read's employment with the Company, and the cessation of Read's employment with the Company. Read and the Company agree that, by signing this Resignation Agreement, Read does not waive any claims arising after the execution of this Resignation Agreement. 10. Read has been informed of his right to rescind this Resignation Agreement as far as it extends to potential claims under the Minnesota Human Rights Act, Minn. Stat. ss.ss. 363.01, et seq., by written notice to the Company within 15 calendar days following his execution of this Resignation Agreement. To be effective, such written notice must be delivered either by hand or by mail, to John Thames, Vice President, Human Resources, Donaldson Company, Inc., P. O. Box 1299, Minneapolis, Minnesota 55440-1299, within the 15 day period. If a notice of rescission is delivered by mail, it must be: (i) postmarked within the 15 day period; (ii) properly addressed to John Thames as set forth above; and (iii) sent by certified mail, return receipt requested. It is understood that the Company will have no obligations under this Resignation Agreement in the event such a notice of rescission by Read is timely delivered, and, in the event this Resignation Agreement is rescinded by Read, Read agrees to repay to the Company any cash payments made to him pursuant to paragraph 2 of this Resignation Agreement prior to the date of rescission. 11. Read has been informed of his right to revoke this Resignation Agreement as far as it extends to potential claims under the Age Discrimination In Employment Act, 29 U.S.C. ss.ss. 621, et seq., by informing the Company of his intent to revoke this Resignation Agreement within 7 calendar days following his execution of this Resignation Agreement. This Resignation Agreement shall not become effective or enforceable until the 7 day period has expired. In the event this Resignation Agreement is revoked by Read, Read agrees to repay the Company any cash payments made to him pursuant to paragraph 2 of this Resignation Agreement prior to the date of revocation. 12. Read has been informed that the terms of this Resignation Agreement will be open for acceptance and execution by him for a period of 21 days during which time he may consult with an attorney and consider whether to accept this Resignation Agreement. No payments or benefits pursuant to this Resignation Agreement shall become due until Read has executed this Resignation Agreement. 13. This Resignation Agreement shall not in any way be construed as an admission by the Company that it has acted wrongfully with respect to Read or any other person, or that Read has any right whatsoever against the Company, and the Company specifically disclaims any liability to, or wrongful acts against, Read or any other person, on the part of itself, its directors, its employees, its representatives or its agents. 14. Neither this Resignation Agreement nor any of the rights, interests or benefits of Read hereunder shall be assigned, transferred, pledged, or otherwise disposed of or encumbered by Read, and, to the extent permitted by law, no such rights, interests or benefits shall be subject to attachment, execution or similar process. Any attempted assignment, transfer, pledge, encumbrance or other disposition of this Resignation Agreement or of any such rights, interests or benefits, and any such attachment, execution, levy or similar process, shall be null and void and without effect. This Resignation Agreement shall inure to the benefit of and be enforceable by Read's personal or legal representatives, executives, administrators, successors, heirs and legatees. If Read should die and any amount is payable hereunder, such amount shall be paid in accordance with the terms of this Resignation Agreement to Read's devisee, legatee or other designee or, if there is no such designee, to Read's estate. 15. This Resignation Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns. 16. The terms of this Resignation Agreement (with the exception of the provisions of paragraph 5) shall remain strictly confidential between the parties hereto, except to the extent that disclosure of such terms is required by law, and except that Read may disclose such terms to his spouse, his attorney and his accountant, provided that such persons agree to maintain the confidentiality of such information. 17. This Resignation Agreement contains the entire understanding between the parties with respect to the subject matter of this Resignation Agreement. This Resignation Agreement terminates, replaces and supplants any and all other agreements, whether written or oral, between the parties relating in any way to the hiring or employment of Read by the Company or the termination of such employment, including, but not limited to, the letter agreement dated February 27, 1990 and the employment agreement dated April 2, 1990. Any alterations, variations, modifications or waivers of the provisions of this Resignation Agreement shall be valid only when they have been reduced to writing and duly signed by the parties. The terms of this paragraph shall not be deemed to have been waived by oral agreement, course or performance or by any other means other than a written agreement expressly providing for such waiver. 18. This Resignation Agreement constitutes a contract enforceable against either party and shall be construed and enforced in accordance with the laws of the state of Minnesota, both as to interpretation and performance, without regard to Minnesota's choice of law rules, it being the intent of the parties that the internal laws and forum of the state of Minnesota shall govern any and all disputes arising out of or relating to this Resignation Agreement. By the execution of this Resignation Agreement, the parties hereto consent to the jurisdiction of the state and federal courts of the state of Minnesota, and further consent to service of process by mail for purposes of instituting legal proceedings. 19. Nothing contained in this Resignation Agreement is intended to violate any applicable law, rule or regulation. If any part of this Resignation Agreement is construed to be in violation of a federal, state and/or local law, rule or regulation by the highest court to which the matter is appealed by either party, then that part shall be null and void, but the balance of the provisions of this Resignation Agreement shall remain in full force and effect. 20. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof, or the exercise of any other right or remedy granted hereby or by law. No single or partial waiver of rights or remedies hereunder, nor any course of conduct of the parties, shall be construed as a waiver of rights or remedies by either party (other than as expressly and specifically waived). 21. Read hereby affirms and acknowledges that he has read the foregoing Resignation Agreement and that he has been advised to consult with an attorney prior to signing this Resignation Agreement. Read agrees that the provisions set forth in this Resignation Agreement are written in language understandable to him and further affirms that he understands the meaning of the terms of this Resignation Agreement and their effect. Read represents that he enters into this Resignation Agreement freely and voluntarily. IN WITNESS WHEREOF, the parties have executed this Resignation Agreement by their signatures below. Dated: August 21, 1994 /s/ John C. Read ------------------------ ----------------------- John C. Read Dated: August 29, 1994 DONALDSON COMPANY, INC. By /s/ John E. Thames ----------------------- Its Vice President, Human Resources EX-11 3 EXHIBIT 11 COMPUTATION OF NET EARNINGS PER SHARE DONALDSON COMPANY, INC. AND SUBSIDIARIES (Dollars in Thousands Except Per Share Amounts)
Year Ended July 31 1994 1993 1992 ---- ---- ---- Primary Average shares outstanding 27,026,291 27,582,628 27,497,198 Effect of stock options based on the treasury stock method using average market price 260,338 233,866 469,350 ----------- ----------- ----------- Total 27,286,629 27,816,494 27,966,548 =========== =========== =========== Earnings before accounting change $ 31,949 $ 28,214 $ 25,769 Cumulative effect of accounting change 2,206 -- -- ----------- ----------- ----------- Net Earnings $ 34,155 $ 28,214 $ 25,769 =========== =========== =========== Earnings Per Share: Earnings before accounting $ 1.17 $ 1.01 $ .92 change Cumulative effect of accounting change .08 -- -- ----------- ----------- ----------- Net Earnings Per Share $ 1.25 $ 1.01 $ .92 =========== =========== =========== Fully Diluted Average shares outstanding 27,026,291 27,582,628 27,497,198 Effect of stock options based on the treasury stock method using average market price during the year or ending market price, whichever is higher 287,074 270,834 485,182 ----------- ----------- ----------- Total 27,313,365 27,853,462 27,982,380 =========== =========== =========== Earnings before accounting change $ 31,949 $ 28,214 $ 25,769 Cumulative effect of accounting change 2,206 -- -- ----------- ----------- ----------- Net Earnings $ 34,155 $ 28,214 $ 25,769 =========== =========== =========== Earnings Per Share: Earnings before accounting change $ 1.17 $ 1.01 $ .92 Cumulative effect of accounting change .08 -- -- ----------- ----------- ----------- Net Earnings Per Share $ 1.25 $ 1.01 $ .92 =========== =========== ===========
All share and per share amounts have been adjusted for all stock splits. EX-13 4 PORTIONS OF 1994 ANNUAL REPORT TO SHAREHOLDERS
(Thousands of dollars except per share amounts) 1994 1993 1992 1991 1990 ----------- ---------- ----------- ----------- ----------- OPERATING RESULTS Net sales $ 593,503 $ 533,327 $ 482,104 $ 457,692 $ 422,885 Gross margin $ 166,599 152,236 133,574 129,858 121,454 Gross margin percentage 28.1% 28.5% 27.7% 28.4% 28.7% Operating income $ 52,079 45,246 41,249 41,304 44,354 Operating income percentage 8.8% 8.5% 8.6% 9.0% 10.5% Interest expense $ 3,362 2,723 2,681 3,526 3,731 Earnings before income taxes $ 50,193 44,682 41,721 39,385 34,875 Income taxes $ 18,244 16,468 15,952 15,337 13,849 Effective income tax rate 36.3% 36.9% 38.2% 38.9% 39.7% Net earnings $ 31,949(1) 28,214 25,769 24,048 21,026 Return on sales 5.4% 5.3% 5.3% 5.3% 5.0% Return on equity 17.6% 16.9% 17.2% 18.0% 17.8% Return on investment 16.0% 15.0% 14.8% 14.9% 14.2% FINANCIAL POSITION Total assets $ 337,360 300,217 286,348 253,194 245,947 Current assets $ 220,308 196,014 187,360 169,398 168,522 Current liabilities $ 115,757 93,666 89,956 77,537 79,917 Working capital $ 104,551 102,348 97,404 91,861 88,605 Current ratio 1.9 2.1 2.1 2.2 2.1 Current debt $ 16,956 7,595 11,425 6,380 11,384 Long-term debt $ 16,028 18,920 23,482 25,673 28,320 Total debt $ 32,984 26,515 34,907 32,053 39,704 Shareholders' equity $ 189,697 174,008 160,303 138,947 128,787 Capitalization ratio 14.8% 13.2% 17.9% 18.7% 23.6% Property, plant and equipment, net $ 99,559 90,515 84,899 72,863 68,290 Net expenditures on property, plant and equipment $ 24,642 15,005 15,538 16,208 16,055 Depreciation and amortization $ 16,365 14,752 14,047 12,187 10,857 SHAREHOLDER INFORMATION Net earnings per share $ 1.17(1) 1.01 .92 .84 .73 Dividends per share $ .25 .20 .19 .14 .13 Shareholders' equity per share $ 7.16 6.38 5.81 5.01 4.46 Shares outstanding (000s) 26,510 27,282 27,569 27,739 28,864 Common stock price range, per share High $ 26 1/8 20 1/8 15 7/8 13 3/8 11 5/8 Low $ 18 1/4 14 11 5/8 8 1/8 5 5/8
Amounts are adjusted for all stock splits. 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. Capitalization ratio is total debt divided by total debt plus shareholders' equity. (1) Excludes the cumulative effect of an accounting change of $2,206, or $.08 per share, in 1994 and extraordinary credits of $1,384, or $.05 per share, in 1988 and $1,375, or $.04 per share, in 1987. MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL OBJECTIVES Donaldson Company's primary financial objective is to provide shareholders with a superior return on investment through a combination of price appreciation and dividend income. To provide a framework to achieve this objective, management has established the following internal performance goals: * Provide consistent sales and earnings per share growth of at least 12 percent per annum. * Maintain a dividend payout ratio in line with the long-term, sustainable growth of net earnings. * Through effective utilization of resources, earn a return on investment that exceeds the Company's cost of capital. * Maintain a rating of at least "A" on the Company's long-term, senior debt. Compared to these goals, recent performance has been as follows: 1994 1993 5 Years ----- ----- ----- Net Sales 11.3% 10.6% 8.3% Earnings Per Share(1) 15.8% 9.8% 16.7% Return on Investment(1) 16.0% 15.0% 15.0% Dividends Per Share 25.0% 5.3% 15.8% Long-Term Debt Rating A A A (1) Excludes cumulative effect of an accounting change. Sales growth over the last two years has begun to approach the Company's goal. This growth is primarily unit volume driven, since the Company has not been able to significantly raise prices on its products during this period. Acquisitions since 1991 have accounted for about 1 percent of the growth over the past two years. Earnings per share growth has been above goal over the five year period, and return on investment has exceeded the Company's cost of capital, which is currently estimated to be less than 10 percent. 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 to 25 percent of the average earnings per share of the last three years. The current quarterly dividend of 7 cents per share equates to 27 percent of the average of the 1992 through 1994 earnings per share. Effective with the March payment, the Company announced a 27 percent increase in its regular quarterly cash dividend to 7 cents per share. This dividend increase was the fifth since the end of 1989. The dividend has increased 17.2 percent per year during this five year period, slightly in excess of earnings per share growth. CAPITAL STRUCTURE The Company's basic philosophy with regard to leverage is that the proper use of debt enhances shareholder value. Therefore, the Company will utilize debt as long as it does not incur undue financial risk or impair its ability to finance future growth opportunities. To maintain at least an "A" rating on its long-term, senior debt, the Company has a targeted capitalization ratio of 20 to 30 percent. As of July 31, 1994, the Company's capitalization ratio was 14.8 percent compared to 13.2 percent as of July 31, 1993 and 17.9 percent as of July 31, 1992. In 1994, short-term debt increased $9.8 million primarily due to the short-term borrowings in the Company's Belgian Coordination Center. The additional debt was incurred to provide hedging protection for that entity's foreign exchange denominated receivables. Currently, Fitch's maintains "A" ratings for certain of the Company's long-term debt issues and an "F-1" rating for the Company's commercial paper. FINANCIAL RESOURCES The Company has financed most of its growth over the years with internally generated funds. This trend should continue. The Company currently has $10.0 million of domestic confirmed lines of credit. The Company can also borrow domestically under various uncommitted bank lines of credit. Overseas subsidiaries may borrow under various foreign currency denominated bank facilities. As of July 31, 1994, the Company had no outstanding domestic short-term debt. In 1994, the Company borrowed up to $8.0 million. In 1993 and 1992, the Company did not borrow. Overseas subsidiary borrowings were as high as $14.1 million in 1994, $6.9 million in 1993 and $6.4 million in 1992. CASH FLOWS In 1994, the Company's cash position declined $9.2 million compared to a $1.0 million increase in 1993 and a $4.0 million decrease in 1992. Cash flows in 1994 were impacted by a $9.6 million increase in capital expenditures (See Capital Expenditures), a $14.8 million increase in working capital and a $7.4 million increase in the Company's stock repurchase program. These increases were somewhat offset by a $9.1 million increase in the Company's short-term debt (See Capital Structure). Excluding cash, working capital increased $14.8 million in 1994. This compares to a $2.8 million decline in 1993 and a $5.7 million increase in 1992. The increase in 1994 primarily relates to increased accounts receivable and inventories offset by increased accounts payable, accrued employee compensation and accrued diesel particulate trap warranty reserves. The decline in 1993 relates to improved accounts receivable and inventory management; the increase in 1992 primarily reflects the Company's sales activity during the year. In 1994, accounts receivable and inventories increased $15.4 million and $10.0 million, respectively. Days Sales Outstanding (DSO) rose by five days from 65 days to 70 days. The increase in DSO primarily relates to extended terms on gas turbine filtration sales in Europe and on engine product sales in the Far East. Inventory turns improved from 5.6 to 6.6 turns during the year. In 1994, the Company repurchased 835,200 shares of common stock in the open market at a cost of $17.5 million, or an average cost of $20.90 per share. The Company repurchased $10.0 million and $7.6 million of its shares in 1993 and 1992, respectively. In March of this year, the Company's Board of Directors approved an increase in the existing stock repurchase authorization of 600,000 shares to 1,600,000 shares. Since year end, the Company has not been active in the market and still has authorization to repurchase an additional 864,400 shares. CAPITAL EXPENDITURES Net capital expenditures totaled $24.6 million, $15.0 million and $15.5 million in 1994, 1993 and 1992, respectively. The increase in 1994 over the planned expenditures of $19.0 million includes the building of the Rensselaer distribution center and initial purchases related to the implementation of a new integrated business information system. Capital spending in 1995 is planned to be $25.0 million. Significant expenditures include the expansion of the Company's Stevens Point facility, the addition of a new production line at the Cresco facility and continued purchases related to the new integrated business information system. It is anticipated that the total expenditures will be funded from internal cash flow. FOREIGN CURRENCY EXPOSURE To protect the Company's overseas profits from foreign exchange fluctuations, the Company utilizes flexible pricing, local sourcing and, when appropriate, hedging. The Company's hedging policy is to cover all material foreign currency transaction exposures, including sales and purchase commitments. As appropriate, the Company hedges its current year overseas subsidiary dividends and royalty payments. The Company has a policy not to hedge its translation, or balance sheet, exposures. In 1994, the Company's overseas sales and net earnings were negatively impacted by foreign exchange fluctuations, and the Company reported $1.3 million of foreign exchange transaction losses. The losses were almost entirely attributable to the Company's Brazilian operations for which relevant hedging strategies were too expensive. In 1993, the Company's overseas sales and net earnings were favorably impacted by foreign exchange fluctuations. The Company did, however, report foreign exchange transaction losses of $1.8 million. These losses primarily relate to intercompany transactions. For the year, these losses were offset by favorable purchase price variances in Europe and increased factoring fees in the Company's Belgian Coordination Center. FASB ACCOUNTING RULE CHANGE Effective August 1, 1993, the Company adopted Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes" (FAS 109), which requires adoption of a liability approach to account for the effects of income taxes. The cumulative effect of adopting FAS 109 was to increase net earnings by $2.2 million, or 8 cents per share. When the Company adopted FAS 109, it also changed its accounting for taxes on the undistributed earnings of its overseas subsidiaries. Beginning in 1994, the Company no longer accrues U.S. taxes on its overseas undistributed earnings which are deemed to be indefinitely reinvested. Therefore, the Company's effective income tax rate reflects the difference between the effective overseas tax rate compared to the domestic statutory tax rate. Worldwide Sales By Market (In millions) 1994 1993 1992 ---- ---- ---- Construction $140.0 $120.3 $113.4 Transportation 110.9 92.8 78.6 Agriculture 37.0 31.5 28.6 Aftermarket 84.0 75.0 68.8 Defense 13.7 20.2 25.6 Exhaust Filtration 6.0 12.2 3.7 --- ---- --- Engine Products $391.6 $352.0 $318.7 ====== ====== ====== Dust Collection $ 87.5 $ 84.5 $ 75.3 Gas Turbine Systems 67.5 52.3 41.1 High Purity Products 46.9 44.5 47.0 ---- ---- ---- Industrial Products $201.9 $181.3 $163.4 ====== ====== ====== Consolidated Net Sales $593.5 $533.3 $482.1 ====== ====== ====== 1994 COMPARED TO 1993 Consolidated net sales of $593.5 million were up 11 percent from prior year sales of $533.3 million. For the year, both Engine Products and Industrial Products sales were up 11 percent. Domestic sales were up 14 percent, the same as the prior year, with both Engine and Industrial Products up the same percentage. Diesel engine original equipment manufacturers (OEM) sales were up 24 percent, with strong growth in both the construction, industrial, mining and agriculture (CIMA) and transportation markets. Diesel engine aftermarket sales were up l8 percent. Defense sales declined 32 percent but have been flat throughout the year. Exhaust filtration sales reflect the final shipments of diesel particulate traps in the first half of the year. Industrial Products sales growth was led by gas turbine filtration sales, up 33 percent. Dust collection sales were up 11 percent. Including the additional sales from ENV Services, Inc., high purity products sales were up 6 percent year over year. Overseas sales in 1994 were up 7 percent -- 6 percent in local currencies -- with Engine Products sales up 6 percent and Industrial Products sales up 9 percent. Overseas sales growth was led by a 29 percent increase in gas turbine filtration sales and a 12 percent increase in diesel engine aftermarket sales. High purity products sales were up 4 percent, led by a 14 percent increase in disk drive sales. Due to the continuing economic slowdown in Germany and Japan, dust collection sales were down 11 percent year over year. In the year, the Company wrote down certain of its Brazilian capital assets by $3.2 million. The write down relates to the continuing economic and political uncertainties in Brazil and the resulting losses being incurred by the Company's Brazilian operations. The asset impairment was charged to cost of sales. Total backlogs of $158.4 million were up 21 percent from the prior year end. Strong increases were reported for diesel engine OEM and dust collection businesses, both domestic and overseas. After several years of significant growth, domestic gas turbine systems backlogs declined in 1994. Continuing prior year trends, defense backlogs again declined in 1994. Hard order backlogs, goods scheduled for delivery within 90 days, of $106.1 million were up 20 percent compared to the prior year. For the year, gross margins declined from 28.5 percent in 1993 to 28.1 percent in 1994. However, excluding the Brazilian capital asset write down, which was charged to cost of sales, gross margins improved slightly to 28.6 percent. Margins significantly improved in both domestic diesel engine OEM and aftermarket, with domestic OEM margins up almost 2 percentage points. These increases were offset by a 2 percentage point decline in gas turbine filtration margins, which reflects a significant increase in lower margin first fit production sales. Operating expenses increased $7.5 million year over year, or 7 percent, declining from 20.1 percent of sales in 1993 to 19.3 percent of sales in 1994. For the year, warranty expenses related to the diesel particulate trap increased $1.3 million to $6.2 million. Excluding the trap warranty expenses, operating expenses would have been 18.3 percent of sales in 1994 compared to 19.2 percent in 1993. Interest expense increased in the year, primarily due to increased borrowings by the Company's Belgian Coordination Center (See Capital Structure). Other income of $1.5 million declined $.7 million as the improvement in interest income was more than offset by an increase in other expense in the overseas entities. The increase overseas included retirement-related expenses in Japan and Belgium. With the adoption of FAS 109 in 1994, comparison of the current year effective income tax rate of 36.3 percent to prior years is not relevant (See FASB Accounting Rule Change). The 1994 effective rate is equal to the U.S. statutory rate plus state income taxes less the tax benefit derived from the Company's Foreign Sales Corporation. The effective overseas tax rate approximated the U.S. statutory rate. In 1994, overseas sales totaled 34 percent of consolidated net sales, slightly down from 36 percent the prior year. Overseas operating income totaled 50 percent of consolidated operating income, up slightly from 47 percent the prior year. 1994 overseas results were impacted by $1.7 million of operating losses in Brazil, while domestic results were negatively impacted by the recognition of additional accrued warranty expense related to the diesel particulate trap. 1993 COMPARED TO 1992 Consolidated net sales of $533.3 million were up 11 percent from the prior year's sales of $482.1 million. For the year, Engine Product sales were up 10 percent and Industrial Products sales were up 11 percent. Domestic sales were up 14 percent with Engine Products sales up 13 percent. The Company's sales to diesel engine OEMs rose 16 percent, led by a 27 percent increase in the transportation market. Defense sales were down 21 percent as defense procurements have continued to decline since Desert Storm and subsequent reductions in the defense budget. Industrial Products sales increased 17 percent. Gas turbine filtration sales were up 26 percent and dust collection sales were up 16 percent. Excluding acquisitions, high purity products sales were flat year over year. Overseas sales were up 5 percent in the year -- 2 percent in local currencies - - -- with Engine Products sales up 6 percent and Industrial Product sales up 2 percent. Gas turbine filtration sales increased 28 percent, diesel engine aftermarket sales 13 percent, dust collection sales 5 percent and diesel engine OEM sales 4 percent. High purity products sales declined 28 percent as disk drive filter sales declined almost 40 percent year over year. In September 1993, the Company announced it was no longer accepting new orders for diesel particulate traps. The Company will meet all current order commitments and warranty obligations. Total backlogs of $130.9 million were up 1 percent from the prior year. Gas turbine filtration backlogs were up significantly with strong order flows both domestically and overseas. Defense and diesel engine OEM backlogs were down year over year. Hard-order backlogs of $88.2 million were down 1 percent compared to the prior year. For the year, gross margins improved to 28.5 percent in 1993 from 27.7 percent in 1992. Year over year, Industrial Products gross margins improved 1.6 percentage points as high purity products margins improved 4.3 percentage points and gas turbine filtration margins improved 1.6 percentage points. Engine Products margins declined .4 percentage points. Increases in defense and exhaust filtration gross margins did not offset a 2.9 percentage point decline in aftermarket margins as the Company reported significantly lower diesel engine aftermarket gross margins overseas. Operating expenses increased $14.7 million year over year, or 16 percent, increasing from 19.2 percent of sales in 1992 to 20.1 percent of sales in 1993. The increases were primarily related to increased marketing and warranty expenses for the diesel particulate trap. For the year, trap warranty expenses of $4.8 million were $2.8 million more than in 1992. Excluding the warranty expenses, operating expenses would have been 19.2 percent of sales in 1993 and 18.7 percent of sales in 1992. Other income declined to $2.2 million in 1993 from $3.2 million in 1992. Profitability improvement at AFSI was offset by foreign exchange losses and lower interest income due to declining interest rates. Interest expense was unchanged year over year. The Company's effective income tax rate declined from 38.2 percent in 1992 to 36.9 percent in 1993. The decline related to continued profit improvement at AFSI, whose income is basically untaxed due to tax loss carryforwards, and reduced profitability in Germany and Japan, the Company's two highest tax rate subsidiaries. In 1993, overseas sales totaled 36 percent of consolidated net sales, slightly down from 38 percent the prior year. Overseas operating income totaled 47 percent of consolidated operating income, down significantly from 58 percent the prior year. Results in 1993 were impacted by recessions in Europe and Japan and $1.9 million of operating losses reported in Brazil. Consolidated Statements of Earnings Donaldson Company, Inc. and Subsidiaries
Year ended July 31 (Thousands of dollars except per share amounts) 1994 1993 1992 ----------- ----------- ----------- Net sales $ 593,503 $ 533,327 $ 482,104 Cost of sales 426,904 381,091 348,530 ------- ------- ------- Gross Margin 166,599 152,236 133,574 Selling, general and administrative 103,647 95,626 82,002 Research and development 10,873 11,364 10,323 Interest expense 3,362 2,723 2,681 Other (income) (1,476) (2,159) (3,153) ------ ------ ------ Total Expenses 116,406 107,554 91,853 ------- ------- ------ Earnings Before Income Taxes 50,193 44,682 41,721 Income taxes 18,244 16,468 15,952 ------ ------ ------ Earnings Before Cumulative Effect of Accounting Change 31,949 28,214 25,769 Cumulative effect of accounting change 2,206 -- -- ------ ------ ------ Net Earnings $ 34,155 $ 28,214 $ 25,769 =========== =========== =========== Earnings per share Earnings before cumulative effect of accounting change $ 1.17 $ 1.01 $ .92 Cumulative effect of accounting change .08 -- -- ------ ------ ------ Net Earnings Per Share $ 1.25 $ 1.01 $ .92 =========== =========== ===========
See notes to consolidated financial statements. Consolidated Statements of Financial Position Donaldson Company, Inc. and Subsidiaries
July 31 (Thousands of dollars) 1994 1993 ----------- ----------- Assets Current Assets Cash and cash equivalents $ 22,945 $ 32,110 Accounts receivable, net 122,167 103,320 Inventories Materials 27,430 23,248 Work in process 8,521 7,615 Finished products 24,294 18,062 ------ ------ Total Inventories 60,245 48,925 Prepaids and other 14,951 11,659 ------ ------ Total Current Assets 220,308 196,014 Property, Plant and Equipment Land 6,298 5,962 Buildings 81,683 74,742 Machinery and equipment 166,666 148,790 Construction in progress 4,276 4,353 ----- ----- Property, Plant and Equipment, at Cost 258,923 233,847 Less accumulated depreciation 159,364 143,332 ------- ------- Property, Plant and Equipment, Net 99,559 90,515 Other Assets 17,493 13,688 ------ ------ Total Assets $ 337,360 $ 300,217 =========== =========== Liabilities and Shareholders' Equity Current Liabilities Short-term debt $ 14,073 $ 4,238 Current maturities of long-term debt 2,883 3,357 Trade accounts payable 44,541 38,235 Accrued employee compensation and related taxes 19,755 16,799 Income taxes payable 3,195 4,983 Other current liabilities 31,310 26,054 ------ ------ Total Current Liabilities 115,757 93,666 Long-Term Debt 16,028 18,920 Deferred Income Taxes 2,248 2,060 Other Long-Term Liabilities 13,630 11,563 Shareholders' Equity Preferred stock, $1.00 par value, 1,000,000 shares authorized, no shares issued -- -- Common stock, $5.00 par value, 40,000,000 shares authorized, 27,063,407 and 13,927,274 issued in 1994 and 1993 135,317 69,636 Capital surplus -- 1,284 Retained earnings 65,654 117,293 Cumulative translation adjustments 8,244 5,646 Treasury common stock--552,951 and 286,205 shares in 1994 and 1993, at cost (11,853) (9,876) Receivable from ESOP (7,665) (9,975) ------ ------ Total Shareholders' Equity 189,697 174,008 ------- ------- Total Liabilities and Shareholders' Equity $ 337,360 $ 300,217 =========== ===========
See notes to consolidated financial statements. Consolidated Statements of Cash Flows Donaldson Company, Inc. and Subsidiaries
Year ended July 31 (Thousands of dollars) 1994 1993 1992 Operating Activities Net earnings $ 34,155 $ 28,214 $ 25,769 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 16,365 14,752 14,047 Cumulative effect of accounting change (2,206) -- -- Brazilian asset write down 3,200 -- -- Equity in earnings of affiliates (3,743) (3,498) (1,880) Deferred taxes (2,844) 657 (446) Other 1,235 (309) (770) Changes in operating assets and liabilities Accounts receivable (15,380) (2,687) (7,249) Inventories (10,029) (4,337) (3,391) Prepaids and other current assets (1,315) (1,365) 2,524 Accounts payable, accruals and income taxes payable 11,945 11,155 2,425 ------ ------ ----- Net Cash Provided by Operating Activities 31,383 42,582 31,029 Investing Activities Net expenditures on property, plant and equipment (24,642) (15,005) (15,538) Acquisitions and investments in affiliates (6,437) (10,451) (6,607) Proceeds from disposition of Envirco -- 2,782 -- Dividends from affiliate 3,550 4,250 -- ------ ------ ----- Net Cash Used in Investing Activities (27,529) (18,424) (22,145) Financing Activities Repayment of long-term debt (3,416) (5,681) (2,829) Net change in short-term debt 9,098 (1,766) 1,033 Payment received from ESOP 2,310 2,100 1,995 Purchase of common stock (17,471) (10,044) (7,635) Dividends paid (6,745) (5,666) (5,230) Exercise of stock options (148) (3,143) (1,631) ---- ------ ------ Net Cash Used in Financing Activities (16,372) (24,200) (14,297) Effect of exchange rate changes on cash 3,353 1,056 1,416 ----- ----- ----- (Decrease) Increase in Cash and Cash Equivalents (9,165) 1,014 (3,997) Cash and cash equivalents at beginning of year 32,110 31,096 35,093 ------ ------ ------ Cash and Cash Equivalents at End of Year $ 22,945 $ 32,110 $ 31,096 =========== =========== ===========
See notes to consolidated financial statements. Consolidated Statements of Changes in Shareholders' Equity Donaldson Company, Inc. and Subsidiaries
Cumulative Treasury Total (Thousands of dollars Common Capital Retained Translation Common Receivable Shareholders' except per share amounts) Stock Surplus Earnings Adjustments Stock from ESOP Equity Balance July 31, 1991 $ 48,205 $ 1,849 $ 114,547 $ 1,114 $ (12,698) $ (14,070) $ 138,947 --------- --------- --------- --------- --------- --------- --------- Treasury stock acquired (7,635) (7,635) Stock options exercised 281 (416) (3,779) 2,283 (1,631) Payment received from ESOP 1,995 1,995 Performance awards (1,285) 223 1,106 44 Tax reduction--employee plans 2,349 2,349 Net earnings 25,769 25,769 Translation adjustments 5,709 5,709 Three-for-two stock split 20,436 (674) (36,720) 16,944 (14) Dividends paid--$.19 per share (5,230) (5,230) --------- --------- --------- --------- --------- --------- --------- Balance July 31, 1992 68,922 1,823 94,810 6,823 -- (12,075) 160,303 --------- --------- --------- --------- --------- --------- --------- Treasury stock acquired (10,044) (10,044) Stock options exercised 714 (3,951) (67) 161 (3,143) Payment received from ESOP 2,100 2,100 Performance awards 2 7 9 Tax reduction--employee plans 3,412 3,412 Net earnings 28,214 28,214 Translation adjustments (1,177) (1,177) Dividends paid--$.20 per share (5,666) (5,666) --------- --------- --------- --------- --------- --------- --------- Balance July 31, 1993 69,636 1,284 117,293 5,646 (9,876) (9,975) 174,008 --------- --------- --------- --------- --------- --------- --------- Treasury stock acquired (17,471) (17,471) Stock options exercised 10 176 (1,429) 1,095 (148) Payment received from ESOP 2,310 2,310 Performance awards 28 2 14 44 Tax reduction--employee plans 946 946 Net earnings 34,155 34,155 Translation adjustments 2,598 2,598 Two-for-one stock split 65,671 (2,434) (77,622) 14,385 -- Dividends paid--$.25 per share (6,745) (6,745) --------- --------- --------- --------- --------- --------- --------- Balance July 31, 1994 $ 135,317 $ -- $ 65,654 $ 8,244 $ (11,853) $ (7,665) $ 189,697 === ==== ========= ========= ========= ========= ========= ========= =========
See notes to consolidated financial statements. NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of Donaldson Company, Inc. and all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The accounts of overseas subsidiaries are included for fiscal years ended June 30. Certain amounts in prior periods have been reclassified to conform to the current presentation. Foreign Currency Translation: Foreign assets and liabilities are generally translated using the year-end rates of exchange. Results of operations are translated using the average rates prevailing throughout the period. Translation gains or losses, net of applicable deferred taxes, are accumulated as a separate component of shareholders' equity. Foreign currency transaction (losses)/gains of $(1,337,000), $(1,790,000) and $918,000, in 1994, 1993 and 1992, respectively, are included in earnings before income taxes. Cash Equivalents: The Company considers all highly liquid investments with a maturity of 90 days 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, determined by the last-in, first-out (LIFO) method, except for certain of the Company's overseas subsidiaries which use the first-in, first-out (FIFO) method. Inventories valued at LIFO were 60 and 63 percent of total inventories at July 31, 1994 and 1993, respectively. The current cost of inventories valued under the LIFO method exceeded their LIFO carrying values by $18,635,000 and $18,172,000 at July 31, 1994 and 1993, respectively. Property, Plant and Equipment: Property, plant and equipment is stated at cost. Depreciation is computed principally by use of declining balance methods on facilities and equipment acquired on or prior to July 31, 1992. For financial reporting purposes, the Company adopted the straight line depreciation method for all property acquired after July 31, 1992. The effect of the change was not material to the 1993 financial results. Depreciation expense includes the amortization of capital lease assets. The estimated useful lives of property, plant and equipment are as follows: Buildings 10 to 40 years Machinery and Equipment 3 to 10 years Income Taxes: Income taxes are provided based on earnings reported for financial statement purposes. The provision for income taxes differs from the amounts currently payable because of temporary differences in the recognition of certain assets and liabilities for financial reporting and tax reporting purposes. Deferred taxes are recorded based on enacted tax laws and tax rates. Changes in enacted tax rates are reflected in the income tax provision as they occur. Effective August 1, 1993, the Company adopted Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes" (FAS 109). As permitted under the new Statement, prior years' financial statements have not been restated. Income taxes in 1993 and 1992 were computed using the deferred method. Net Earnings Per Share: Net earnings per common share is based on the weighted average number of common shares and share equivalents outstanding during the respective years. Treasury Common Stock: Repurchased Common Stock is stated at cost and is presented as a separate reduction of shareholders' equity. NOTE B ACQUISITIONS AND INVESTMENTS During 1994, the Company increased its investment in Donaldson Micro Pore Mexico, S.A. de C.V. from 40 percent to 50 percent, obtained a 40 percent interest in an Australian dust collection distributor, invested in a gas turbine system joint venture in India, created a dust collection subsidiary in Mexico and completed an acquisition of a high purity products materials supplier located in the United States. During 1993, the Company completed two acquisitions. On September 24, 1992, Donaldson do Brasil, Ltda., acquired all of the common stock of Filtrobras-Roma Filtros Automotivos Ltda. (Roma), a liquid filtration manufacturer located in Sao Paulo, Brazil. On December 28, 1992, the Company purchased all of the common stock of ENV Services, Inc. (ENV), an air quality testing and monitoring service firm located in Philadelphia, Pennsylvania. In connection with the ENV acquisition, the Company also purchased the Envirco Division of Environmental Air Control, Inc. with the intent to sell the business. On February 12, 1993, the divestiture was completed. During 1992, the Company completed two acquisitions. On November 25, 1991, Donaldson Europe, N.V., acquired all of the common stock of Gimetal N.V., a sheet metal vendor located in Gistel, Belgium. On May 19, 1992, Donaldson Italia s.r.l. acquired all of the common stock of FBO s.r.l., a hydraulic filter manufacturer located in Ostiglia, Italy. All acquisitions have been accounted for as purchases and, accordingly, their net assets and operating results are included in the Company's financial statements from the respective dates of acquisition. The pro forma impact of the acquisitions on the Company's results of operations for all years presented was not material. NOTE C SHORT-TERM DEBT The Company has domestic lines of credit at July 31, 1994 of $10,000,000 which provide for borrowing amounts at or below the prime rate. Commitment fees of 20 basis points per annum are payable on the unused amounts. There were no amounts outstanding under these lines of credit at July 31, 1994 or 1993. Overseas subsidiaries may borrow under various uncommitted facilities. As of July 31, 1994 and 1993, borrowings under these facilities were $14,073,000 and $4,238,000, respectively. NOTE D LONG-TERM DEBT Long-term debt consists of the following: (Thousands of dollars) 1994 1993 ---- ---- ESOP promissory note due in increasing annual installments through 1997. Interest rate is either 82 percent of prime or 91 percent of the adjusted CD rate $ 7,665 $ 9,975 6 3/8 percent mortgage due 2002 1,000 1,000 7 percent note due in 2008 500 1,000 11 1/8 percent note due in five annual installments of $670 beginning 2008 3,350 3,350 Other 519 650 --- --- Total Notes 13,034 15,975 Capitalized leases 5,877 6,302 ----- ----- Total 18,911 22,277 Less current maturities 2,883 3,357 ----- ----- Total Long-Term Debt $16,028 $18,920 ======= ======= Annual maturities of long-term debt for the next five years are $2,883 in 1995, $2,988 in 1996, $3,213 in 1997, $516 in 1998 and $492 in 1999. Total interest paid relating to all debt was $2,906,000, $2,577,000 and $2,616,000 in 1994, 1993 and 1992, respectively. Certain note agreements contain debt covenants related to working capital levels and limitation 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. At July 31, 1994, under the most restrictive agreement, tangible net worth exceeded the minimum by $66,790,000. NOTE E CAPITALIZED LEASES The Company leases several production facilities under long-term leases and has the option to purchase the facilities for a nominal cost at the termination of the lease. Included in property, plant and equipment are the following assets held under capital leases: (Thousands of dollars) 1994 1993 ---- ---- Land $ 242 $ 242 Buildings 11,081 11,081 Machinery and equipment 2,356 2,356 ----- ----- Subtotal 13,679 13,679 Less accumulated amortization 7,283 7,034 ----- ----- Total $ 6,396 $6,645 ======= ====== Future minimum lease payments for assets under capital leases at July 31, 1994 are as follows: (Thousands of dollars) 1995 $ 844 1996 838 1997 839 1998 839 1999 790 Thereafter 4,900 ----- Total minimum lease payments 9,050 Less amount representing interest 3,173 ----- Present value of net minimum lease payments 5,877 Less current maturities 347 --- Long-Term Obligation $5,530 ====== NOTE F 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 plans provide benefits based on the employee's years of service and compensation during the years immediately preceding retirement. The overseas plans generally provide similar types of benefits. The Company's general funding policy is to make contributions as required by applicable regulations. The assets are primarily invested in diversified portfolios comprised of equity and debt securities. Cost for the Company's pension plans includes the following components: (Thousands of dollars) 1994 1993 1992 ---- ---- ---- Service cost $ 4,187 $ 3,769 $ 3,371 Interest cost on projected benefit obligation 5,504 5,050 4,624 Actual return on plan assets (3,608) (7,310) (5,160) Net amortization and deferral (3,015) 1,178 (680) ------ ----- ---- Net Periodic Pension Expense $ 3,068 $ 2,687 $ 2,155 ======= ======= ======= The funded status of the Company's pension plans as of July 31, 1994 and 1993, is as follows: (Thousands of dollars) 1994 1993 ---- ---- Plan assets at fair value $ 69,313 $ 65,414 Accumulated benefit obligation: Vested (55,710) (50,262) Nonvested (2,201) (1,976) Provision for future salary increases (15,206) (13,382) ------- ------- Plan assets less than projected benefit obligation (3,804) (206) Unrecognized net loss 5,684 3,718 Unrecognized prior service cost 1,721 3,616 Unrecognized net transition asset (7,133) (11,446) ------ ------- Accrued Pension Liability $ (3,532) $ (4,318) ======== ======== Assumptions used to develop pension data were: 1994 1993 1992 ---- ---- ---- Discount rate 8.0% 8.0% 8.5% Rate of compensation increases 5.5% 5.5% 6.5% Expected long-term rate of return 9.0% 9.0% 9.0% Employee Stock Ownership Plan: In 1987, the Company established an Employee Stock Ownership Plan (ESOP) for eligible U.S. employees. The ESOP borrowed $21 million from the Company to purchase newly issued shares of Common Stock. The loan obligation of the ESOP is considered unearned employee benefit expense and, as such, is recorded as a reduction of the Company's shareholders' equity. The Company's contributions to the ESOP, plus dividends paid on unallocated Common Stock held by the ESOP, are used to repay the loan principal and interest. Both the loan obligation and the unearned benefit expense are reduced by the amount of loan principal repayments made by the ESOP. The ESOP contribution expense totaled $2,020,000, $1,745,000 and $1,590,000 in 1994, 1993 and 1992, respectively. NOTE G 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 1980 Master Stock Compensation Plan allows for the granting of nonqualified stock options and incentive stock options. Both plans allow 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 $57,000, $19,000 and $14,000 in 1994, 1993 and 1992, respectively. Options under both Plans 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. The number and option price of options granted under these plans were as follows: Options Option Price Outstanding Per Share ----------- ---------------- Outstanding at July 31, 1992 1,595,738 $ 4.62 / $14.56 Exercised (922,812) 4.62 / 12.54 Granted 784,786 17.81 / 18.56 ------- ----- ----- Outstanding at July 31, 1993 1,457,712 4.62 / 18.56 Cancelled (750) 12.54 Exercised (212,446) 4.62 / 18.06 Granted 330,330 18.87 / 23.56 ------- ----- ----- Outstanding at July 31, 1994 1,574,846 $ 4.62 / $23.56 ========= ======= ====== At July 31, 1994 and 1993 there were 1,459,910 and 1,319,224 options exercisable, respectively. Shares reserved for future grants at July 31, 1994 were 1,072,144. NOTE H INCOME TAXES Effective August 1, 1993, the Company changed its method of accounting for income taxes to comply with Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes" (FAS 109). The new Statement requires a liability approach for computing income taxes. As permitted under the new Statement, prior years' financial statements have not been restated. The cumulative effect of adopting FAS 109 was to increase net earnings by $2,206,000 ($.08 per share). The components of earnings before income taxes are as follows: (Thousands of dollars) 1994 1993 1992 ---- ---- ---- United States $37,781 $33,474 $25,110 Overseas 12,412 11,208 16,611 ------ ------ ------ Total $50,193 $44,682 $41,721 ======= ======= ======= The components of the provision for income taxes are as follows: (Thousands of dollars) 1994 1993 1992 ---- ---- ---- Current: Federal $12,897 $ 9,271 $ 8,191 State 1,536 1,438 1,267 Overseas 6,655 5,102 6,940 ----- ----- ----- Total Current 21,088 15,811 16,398 ------ ------ ------ Deferred: Federal (2,353) 95 (816) State (202) -- -- Overseas (289) 562 370 ---- --- --- Total Deferred (2,844) 657 (446) ------ --- ---- Total Income Taxes $18,244 $16,468 $15,952 ======= ======= ======= Significant components of deferred tax assets and liabilities at July 31, 1994 are as follows: (Thousands of dollars) Deferred Tax Assets: Compensation and retirement plans $ 5,417 Accrued expenses 5,372 Brazilian asset write down 1,216 Tax loss and tax credit carryforwards 273 Other 5,449 ----- Gross Deferred Tax Assets 17,727 ------ Deferred Tax Liabilities: Depreciation and amortization (4,895) Cumulative translation adjustment (4,440) Other (2,262) ------ Gross Deferred Tax Liabilities (11,597) ------- Net Deferred Tax Assets $ 6,130 ========= The components of the provision for deferred income taxes for 1993 and 1992 are as follows: (Thousands of dollars) 1993 1992 ---- ---- Accrued expenses $ 220 $(693) Depreciation and amortization 1,049 122 Compensation and retirement plans (509) (352) Other (103) 477 ---- --- Deferred Income Tax Expense $ 657 $(446) ====== ===== A reconciliation of the statutory U.S. federal income tax rate to the effective income tax rate is as follows: 1994 1993 1992 ---- ---- ---- Statutory U.S. federal rate 35.0% 34.0% 34.0% State income taxes 2.0 2.1 2.0 Effect of overseas operations (.2) 1.7 3.7 Earnings of affiliates (.7) (2.0) (1.6) Tax credits -- (.4) (.4) Other .2 1.5 .5 -- -- -- Effective Income Tax Rate 36.3% 36.9% 38.2% ==== ==== ==== At July 31, 1994, certain overseas subsidiaries had available net operating loss carryforwards of approximately $662,000, which may be used indefinitely to offset future taxable income. Unremitted earnings of overseas subsidiaries amounted to approximately $51,100,000 at July 31, 1994. Those earnings are intended to be indefinitely reinvested and, accordingly, no income taxes have been provided. If a portion were to be remitted, income tax credits would substantially offset any resulting 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 $20,557,000, $6,875,000, and $16,233,000 in 1994, 1993 and 1992, respectively. NOTE I SHAREHOLDERS' EQUITY On January 21, 1994, the Company's Board of Directors authorized a two-for-one stock split effected in the form of a 100 percent stock dividend, payable April 6, 1994 to shareholders of record March 16. The split resulted in the issuance of 13,134,162 new shares of Common Stock and the reissuance of 396,556 shares of Common Stock held in treasury. On May 20, 1992, the Company's Board of Directors authorized a three-for-two stock split effected in the form of a stock dividend, payable July 10, 1992 to shareholders of record June 19. The split resulted in the issuance of 8,174,294 new shares of Common Stock and the reissuance of 979,644 shares of Common Stock held in treasury. All references in the financial statements to average numbers of shares outstanding and related prices, per share amounts, and Stock Option Plan data have been restated to reflect the splits. Non-voting rights, authorized by the Board of Directors, were distributed as a dividend to stockholders of record as of March 4, 1986 at the rate of one right for each outstanding share of Common Stock. As a result of the two-for-one stock split of the Company's Common Stock, effective May 2, 1988, and the three-for-two and the two-for-one stock splits discussed above, the rights associated with each share of Common Stock have been proportionately adjusted so that each share of Common Stock is now accompanied by one-sixth of a right instead of a full right. Under certain conditions, each full right may be exercised to purchase one one-hundredth of a newly issued share of Series A Junior Participating Preferred Stock at an exercise price of $85. Generally, except for acquisitions of Common Stock pursuant to a tender or exchange offer found to be fair to shareholders by the Company's independent directors, the rights become exercisable if a person or group acquires beneficial ownership of 15 percent or more of the Common Stock or commences a tender or exchange offer the consummation of which would result in such person or group beneficially owning 15 percent or more of the Common Stock. If any person becomes the beneficial owner of 15 percent or more of the Common Stock, or the Company is the surviving corporation in a merger with a 15 percent-or-more stockholder and its Common Stock is not changed, or a 15 percent-or-more stockholder engages in certain self-dealing transactions with the Company, each right not held by such person or related parties will entitle its holder to purchase shares of Company Common Stock having a value of twice the right's then current exercise price. If after a person or group acquires beneficial ownership of 15 percent or more of the Common Stock or the Company is acquired in a merger or business combination, each right may be exercised to purchase common stock of the surviving company having a value of twice the right's then current exercise price. The rights, which expire March 4, 1996, may be redeemed by the Company at 10 cents per right at any time until 15 days following a public announcement that a 15 percent position has been acquired. NOTE J SEGMENT INFORMATION The Company has one business segment which consists of the design, manufacture and sale of filtration products. The table below sets forth information about operations in different geographic areas:
United Other (Thousands of dollars) States Europe Japan Countries Eliminations Consolidated 1994 Sales to customers $391,234 $ 87,945 $70,981 $43,343 $ -- $593,503 Sales between geographic areas 21,839 496 1,911 1,502 (25,748) -- -------- -------- ------- ------- -------- -------- Net Sales $413,073 $ 88,441 $72,892 $44,845 $(25,748) $593,503 ======== ======== ======= ======= ======== ======== Operating Income $ 26,112 $ 11,510 $ 8,175 $ 6,446 $ (164) $ 52,079 ======== ======== ======= ======= ======== ======== Identifiable Assets Accounts receivable, net $ 60,179 $ 26,408 $27,768 $ 7,462 $ 350 $122,167 Other 88,858 84,280 29,173 17,978 (37,793) 182,496 -------- -------- ------- ------- -------- -------- Total identifiable assets $149,037 $110,688 $56,941 $25,440 $(37,443) $304,663 General corporate assets 32,697 -------- -------- ------- ------- -------- -------- Total Assets $337,360 ======== ======== ======= ======= ======== ======== 1993 Sales to customers $342,890 $ 81,305 $64,378 $44,754 $ -- $533,327 Sales between geographic areas 18,909 567 1,453 366 (21,295) -- -------- -------- ------- ------- -------- -------- Net Sales $361,799 $ 81,872 $65,831 $45,120 $(21,295) $533,327 ======== ======== ======= ======= ======== ======== Operating Income $ 23,754 $ 7,659 $ 7,352 $ 6,427 $ 54 $ 45,246 ======== ======== ======= ======= ======== ======== Identifiable Assets Accounts receivable, net $ 45,244 $ 22,878 $24,920 $ 9,969 $ 309 $103,320 Other 77,341 62,646 29,095 19,922 (36,302) 152,702 -------- -------- ------- ------- -------- -------- Total identifiable assets $122,585 $ 85,524 $54,015 $29,891 $(35,993) $256,022 General corporate assets 44,195 -------- -------- ------- ------- -------- -------- Total Assets $300,217 ======== ======== ======= ======= ======== ======== 1992 Sales to customers $300,359 $ 74,959 $65,785 $41,001 $ -- $482,104 Sales between geographic areas 18,430 987 985 447 (20,849) -- -------- -------- ------- ------- -------- -------- Net Sales $318,789 $ 75,946 $66,770 $41,448 $(20,849) $482,104 ======== ======== ======= ======= ======== ======== Operating Income $ 17,151 $ 9,031 $ 7,834 $ 7,245 $ (12) $ 41,249 ======== ======== ======= ======= ======== ======== Identifiable Assets Accounts receivable, net $ 44,296 $ 22,405 $24,320 $ 8,118 $ -- $ 99,139 Other 73,763 62,606 27,266 16,305 (26,692) 153,248 -------- -------- ------- ------- -------- -------- Total identifiable assets $118,059 $ 85,011 $51,586 $24,423 $(26,692) $252,387 General corporate assets 33,961 -------- -------- ------- ------- -------- -------- Total Assets $286,348 ======== ======== ======= ======= ======== ========
Sales between geographic areas are made at cost plus a proportionate share of operating profit. General corporate assets include corporate cash and cash equivalents and buildings and equipment used for corporate purposes. Sales to one customer amounted to $69,107,000, $55,616,000 and $49,337,000 in 1994, 1993 and 1992, respectively. Report of Independent Auditors Shareholders and Board of Directors Donaldson Company, Inc. We have audited the accompanying consolidated statements of financial position of Donaldson Company, Inc. and subsidiaries as of July 31, 1994 and 1993, and the related consolidated statements of earnings, changes in shareholders' equity and cash flows for each of the three years in the period ended July 31, 1994. 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 generally accepted auditing standards. 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 consolidated financial position of Donaldson Company, Inc. and subsidiaries at July 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note H, in 1994 the Company changed its method of accounting for income taxes. /s/ Ernst & Young LLP Minneapolis, Minnesota September 9, 1994 Shareholder Information Donaldson Company, Inc. and Subsidiaries Quarterly Financial Information (Unaudited)
(Thousands of dollars Net Gross Net Earnings Dividends except per share amounts) Sales Margin Earnings Per Share Per Share 1994 First Quarter $142,51 8 $ 40,536 $ 7,561 $ .27 $ .05 9,767(1) .35(1) Second Quarter 135,577 37,904 6,238 .23 .06 Third Quarter 153,930 42,137 9,709 .36 .07 Fourth Quarter 161,478 46,022 8,441 .31 .07 1993 First Quarter $125,678 $ 36,200 $ 6,295 $ .23 $ .05 Second Quarter 125,047 33,532 5,222 .18 .05 Third Quarter 133,411 37,462 7,684 .28 .05 Fourth Quarter 149,191 45,042 9,013 .32 .05
(1) Includes cumulative effect of an accounting change of $2,206 or $.08 per share. All 1994 and 1993 per share amounts have been adjusted for the two-for-one stock split, effected in the form of a 100% stock dividend. 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 Shareholder Services at (800) 468-9716 or (612) 450-4064. DIVIDEND REINVESTMENT PLAN As of July 31, 1994, more than 700 of Donaldson Company's approximately 1,485 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 Shareholder Services, Donaldson Company, Inc., M.S. 101, P.O. Box 1299, Minneapolis, MN 55440. CORPORATE INFORMATION ANNUAL MEETING The annual meeting of shareholders will be held at 10 a.m. on Friday, November 18, in the first floor auditorium of the Lutheran Brotherhood Building, 625 Fourth Avenue South, Minneapolis, Minnesota. You are urged 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, Minnesota 55440. AUDITORS Ernst & Young LLP, Minneapolis, Minnesota GENERAL COUNSEL Dorsey & Whitney, Minneapolis, Minnesota PATENT COUNSEL Merchant, Gould, Smith, Edell, Welter & Schmidt, Minneapolis, Minnesota PUBLIC RELATIONS COUNSEL Padilla Speer Beardsley Inc., Minneapolis, Minnesota TRANSFER AGENT AND REGISTRAR Norwest Bank Minnesota, N.A., South St. Paul, Minnesota WORLD WIDE OPERATIONS ADMINISTRATION Donaldson Company, Inc. Minneapolis, Minnesota U.S. PLANTS Cresco, Iowa Frankfort, Indiana Oelwein, Iowa Chillicothe, Missouri Grinnell, Iowa Stevens Point, Wisconsin Nicholasville, Kentucky Baldwin, Wisconsin Dixon, Illinois Philadelphia, Pennsylvania DISTRIBUTION CENTERS Rensselaer, Indiana Ontario, California Antwerp, Belgium JOINT VENTURES Advanced Filtration Systems Inc., Champaign, Illinois Donaldson Micro Pore Mexico, S.A. de C.V., Aguascalientes, Mexico D.I. Filter Systems Pvt. Ltd., New Delhi, India WHOLLY OWNED SUBSIDIARIES ENV Services, Inc., Philadelphia, Pennsylvania Donaldson Europe, N.V., Leuven, Belgium Donaldson Coordination Center, N.V., Leuven, Belgium Donaldson Gesellschaft m.b.H., Dulmen, Germany Donaldson Filter Components, Ltd., Hull, England Donaldson Torit, B.V., Haarlem, Netherlands Donaldson France, S.A., Bron, France Donaldson Italia s.r.l., Ostiglia, Italy Nippon Donaldson, Ltd., Tokyo, Japan Donaldson Far East Limited, Kowloon, Hong Kong Donaldson Australasia (Pty.) Ltd., Wyong, Australia Donaldson Filtration Systems (Pty.) Ltd., Cape Town, South Africa Donaldson do Brasil, Ltda., Sao Paulo, Brazil EX-23 5 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Donaldson Company, Inc. of our report dated September 9, 1994, included in the 1994 Annual Report to Shareholders of Donaldson Company, Inc. Our audit also included the financial statement schedules of Donaldson Company, Inc. listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the 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 9, 1994, with respect to the consolidated financial statements incorporated herein by reference and our report included in the preceding paragraph with respect to the financial statement schedules of Donaldson Company, Inc. included in this Annual Report on Form 10-K of Donaldson Company, Inc. /s/ Ernst & Young LLP Minneapolis, Minnesota October 25, 1994 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8, No. 2-90488) pertaining to the Donaldson Company, Inc. Employees' Retirement Savings Plan and in the related Prospectus of our report dated October 14, 1994, with respect to the financial statements and schedules of the Donaldson Company, Inc. Employees' Retirement Savings Plan included in this Annual Report (Form 11-K) for the year ended July 31, 1994. /s/ Ernst & Young LLP Minneapolis, Minnesota October 24, 1994 EX-24 6 POWER OF ATTORNEY The undersigned does hereby constitute and appoint William A. Hodder and Raymond F. Vodovnik, and each of them, his attorney-in-fact for the purpose of signing in his name and on his behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report, pursuant to Section 13 or 15(d) of the Securities Act of 1934, of Donaldson Company, Inc. and to deliver on his behalf said report so signed for filing with the Securities and Exchange Commission. Dated: October 17, 1994 /s/ A. Gary Ames ----------------- A. Gary Ames POWER OF ATTORNEY The undersigned does hereby constitute and appoint William A. Hodder and Raymond F. Vodovnik, and each of them, his attorney-in-fact for the purpose of signing in his name and on his behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report, pursuant to Section 13 or 15(d) of the Securities Act of 1934, of Donaldson Company, Inc. and to deliver on his behalf said report so signed for filing with the Securities and Exchange Commission. Dated: October 17, 1994 /s/ Michael R. Bonsignore -------------------------- Michael R. Bonsignore POWER OF ATTORNEY The undersigned does hereby constitute and appoint William A. Hodder and Raymond F. Vodovnik, and each of them, his attorney-in-fact for the purpose of signing in his name and on his behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report, pursuant to Section 13 or 15(d) of the Securities Act of 1934, of Donaldson Company, Inc. and to deliver on his behalf said report so signed for filing with the Securities and Exchange Commission. Dated: October 17, 1994 /s/ Jack Eugster ----------------- Jack Eugster POWER OF ATTORNEY The undersigned does hereby constitute and appoint William A. Hodder and Raymond F. Vodovnik, and each of them, his attorney-in-fact for the purpose of signing in his name and on his behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report, pursuant to Section 13 or 15(d) of the Securities Act of 1934, of Donaldson Company, Inc. and to deliver on his behalf said report so signed for filing with the Securities and Exchange Commission. Dated: October 17, 1994 /s/ Kendrick B. Melrose -------------------------- Kendrick B. Melrose POWER OF ATTORNEY The undersigned does hereby constitute and appoint William A. Hodder and Raymond F. Vodovnik, and each of them, his attorney-in-fact for the purpose of signing in his name and on his behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report, pursuant to Section 13 or 15(d) of the Securities Act of 1934, of Donaldson Company, Inc. and to deliver on his behalf said report so signed for filing with the Securities and Exchange Commission. Dated: October 17, 1994 /s/ S. Walter Richey -------------------- S. Walter Richey POWER OF ATTORNEY The undersigned does hereby constitute and appoint William A. Hodder and Raymond F. Vodovnik, and each of them, his attorney-in-fact for the purpose of signing in his name and on his behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report, pursuant to Section 13 or 15(d) of the Securities Act of 1934, of Donaldson Company, Inc. and to deliver on his behalf said report so signed for filing with the Securities and Exchange Commission. Dated: October 17, 1994 /s/ C. Angus Wurtele --------------------- C. Angus Wurtele POWER OF ATTORNEY The undersigned does hereby constitute and appoint William A. Hodder and Raymond F. Vodovnik, and each of them, his attorney-in-fact for the purpose of signing in his name and on his behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report, pursuant to Section 13 or 15(d) of the Securities Act of 1934, of Donaldson Company, Inc. and to deliver on his behalf said report so signed for filing with the Securities and Exchange Commission. Dated: October 17, 1994 /s/ William G. Van Dyke ----------------------- William G. Van Dyke POWER OF ATTORNEY The undersigned does hereby constitute and appoint William A. Hodder and Raymond F. Vodovnik, and each of them, his attorney-in-fact for the purpose of signing in his name and on his behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report, pursuant to Section 13 or 15(d) of the Securities Act of 1934, of Donaldson Company, Inc. and to deliver on his behalf said report so signed for filing with the Securities and Exchange Commission. Dated: October 17, 1994 /s/ Stephen W. Sanger ---------------------- Stephen W. Sanger EX-27 7
5 1,000 YEAR JUL-31-1994 AUG-01-1993 JUL-31-1994 22,945 0 125,610 3,443 60,245 220,308 258,923 159,364 337,360 115,757 16,028 135,317 0 0 54,380 337,360 593,503 0 426,904 114,520 0 949 3,362 50,193 18,244 31,949 0 0 2,206 34,155 1.25 1.25
EX-99 8 EXHIBIT 99 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 11K ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended July 31, 1994 ----------------------------------------- DONALDSON COMPANY, INC. EMPLOYEES' RETIREMENT SAVINGS PLAN ----------------------------------------- DONALDSON COMPANY, INC. 1400 WEST 94TH STREET MINNEAPOLIS, MINNESOTA 55431 FINANCIAL STATEMENTS DONALDSON COMPANY, INC. EMPLOYEES' RETIREMENT SAVINGS PLAN YEARS ENDED JULY 31, 1994 AND 1993 Donaldson Company, Inc. Employees' Retirement Savings Plan Financial Statements Years ended July 31, 1994 and 1993 Contents Report of Independent Auditors .............................1 Audited Financial Statements Statements of Net Assets Available for Benefits ....................................2 Statements of Changes in Net Assets Available for Benefits .........................4 Notes to Financial Statements ..............................6 Schedule A--Assets Held for Investment ....................12 Schedule B--Transactions or Series of Transactions in Excess of 5% of the Current Value of Plan Assets ................13 Report of Independent Auditors Administrative Committee Donaldson Company, Inc. Employees' Retirement Savings Plan We have audited the accompanying statements of net assets available for benefits of Donaldson Company, Inc. Employees' Retirement Savings Plan as of July, 31, 1994 and 1993, and the related statements of changes in net assets available for benefits for each of the two years in the period ended July 31, 1994. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 net assets available for benefits of the Plan at July 31, 1994 and 1993, and the changes in its net assets available for benefits for each of the two years in the period ended July 31, 1994, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the financial statements taken as a whole. The accompanying supplemental schedules of assets held for investment as of July 31, 1994 and transactions or series of transactions in excess of 5% of the current value of Plan assets for the year then ended are presented for purposes of complying with the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974, and are not a required part of the basic financial statements. The supplemental schedules have been subjected to the auditing procedures applied in our audit of the 1994 financial statements and, in our opinion, are fairly stated in all material respects in relation to the 1994 financial statements taken as a whole. /s/ Ernst & Young LLP October 14, 1994 Donaldson Company, Inc. Employees' Retirement Savings Plan Statements of Net Assets Available for Benefits
July 31, 1994 -------------------------------------------------------------------- Fidelity Equity Fixed Donaldson Income Cash Flow Income Common Stock Fund Fund Fund Fund Total ----------- ----------- ----------- ---------- ----------- Cash $ 27,767 $ 1,069,004 $ 35,396 $ 67,104 $ 1,199,271 Loans to participants -- 1,325,377 -- -- 1,325,377 Investments: Fidelity Equity Income Fund 13,678,993 -- -- -- 13,678,993 Common Stock of Donaldson Company, Inc. -- -- -- 9,387,910 9,387,910 Investment in fixed income funds -- -- 20,337,318 -- 20,337,318 ----------- ----------- ----------- ----------- ----------- 13,678,993 -- 20,337,318 9,387,910 43,404,221 Accrued interest 106 3,422 135 256 3,919 ----------- ----------- ----------- ----------- ----------- Net assets available for benefits $13,706,866 $ 2,397,803 $20,372,849 $ 9,455,270 $45,932,788 =========== =========== =========== =========== ===========
Donaldson Company, Inc. Employees' Retirement Savings Plan Statements of Net Assets Available for Benefits (continued)
July 31, 1993 ----------------------------------------------------------------- Fidelity Equity Fixed Donaldson Income Cash Flow Income Common Stock Fund Fund Fund Fund Total ----------- ----------- ----------- ----------- ---------- Cash $ 14,914 $ 939,272 $ 40,134 $ 32,987 $ 1,027,307 Loans to participants -- 1,138,107 -- -- 1,138,107 Investments: Fidelity Equity Income Fund 9,527,770 -- -- -- 9,527,770 Common Stock of Donaldson Company, Inc. -- -- -- 5,716,953 5,716,953 Investment in fixed income funds -- -- 21,669,908 -- 21,669,908 ----------- ----------- ----------- ----------- ----------- 9,527,770 -- 21,669,908 5,716,953 36,914,631 Accrued interest 43 2,233 115 95 2,486 ----------- ----------- ----------- ----------- ----------- Net assets available for benefits $ 9,542,727 $ 2,079,612 $21,710,157 $ 5,750,035 $39,082,531 =========== =========== =========== =========== ===========
See accompanying notes. Donaldson Company, Inc. Employees' Retirement Savings Plan Statements of Changes in Net Assets Available for Benefits
Year ended July 31, 1994 --------------------------------------------------------------------------- Fidelity Equity Fixed Donaldson Income Cash Flow Income Common Stock Fund Fund Fund Fund Total ---------- ------------ ---------- ----------- ------------ Additions: Contribution from employees $ -- $ 4,094,610 $ -- $ -- $ 4,094,610 Investment income 815,299 73,988 1,179,413 88,498 2,157,198 Net gain on sales of other investments -- -- 13,491 -- 13,491 ------------ ------------ ------------ ------------ ------------ 815,299 4,168,598 1,192,904 88,498 6,265,299 Deductions: Interfund transfers (net) (3,873,913) 3,946,807 1,701,752 (1,774,647) -- Payments to participants 594,259 (96,400) 827,413 146,404 1,471,676 ------------ ------------ ------------ ------------ ------------ (3,279,653) 3,850,407 2,529,165 (1,628,243) 1,471,676 Unrealized appreciation (depreciation) of investments 69,187 -- (1,047) 1,988,494 2,056,634 ------------ ------------ ------------ ------------ ------------ Net increase (decrease) 4,164,139 318,191 (1,337,308) 3,705,235 6,850,257 Net assets available for benefits: Beginning of year 9,542,727 2,079,612 21,710,157 5,750,035 39,082,531 ------------ ------------ ------------ ------------ ------------ End of year $ 13,706,866 $ 2,397,803 $ 20,372,849 $ 9,455,270 $ 45,932,788 ============ ============ ============ ============ ============ Donaldson Company, Inc. Employees' Retirement Savings Plan Statements of Changes in Net Assets Available for Benefits (continued)
Year ended July 31, 1993 ------------------------------------------------------------------------ Fidelity Equity Fixed Donaldson Income Cash Flow Income Common Stock Fund Fund Fund Fund Total ---------- ------------ --------- ---------- ----------- Additions: Contribution from employees $ -- $ 3,353,464 $ -- $ -- $ 3,353,464 Investment income 283,085 117,980 1,324,335 61,750 1,787,150 Net loss on sales of other investments -- -- (133) -- (133) Other -- -- 4,100 -- 4,100 --------- --------- ---------- --------- ---------- 283,085 3,471,444 1,328,302 61,750 5,144,581 Deductions: Interfund transfers (net) (1,663,604) 3,570,121 (732,487) (1,174,030) -- Payments to participants 253,206 (274,634) 1,651,911 121,785 1,752,268 --------- --------- ---------- --------- ---------- (1,410,398) 3,295,487 919,424 (1,052,245) 1,752,268 Unrealized appreciation (depreciation) of investments 1,237,536 -- (967) 917,610 2,154,179 --------- --------- ---------- --------- ---------- Net increase 2,931,019 175,957 407,911 2,031,605 5,546,492 Net assets available for benefits: Beginning of year 6,611,708 1,903,655 21,302,246 3,718,430 33,536,039 --------- --------- ---------- --------- ---------- End of year $ 9,542,727 $ 2,079,612 $ 21,710,157 $ 5,750,035 $ 39,082,531 ============ ============ ============ ============ ============
See accompanying notes. Donaldson Company, Inc. Employees' Retirement Savings Plan Notes to Financial Statements July 31, 1994 1. SIGNIFICANT ACCOUNTING POLICIES ACCOUNTING METHOD The accounting records of the Plan are maintained on the accrual basis. INVESTMENTS Investments are recorded at current value. Securities which are traded on a national securities exchange are valued at the last reported sales price of the year. The market value of the units of participation in collective investment funds is based on the fair market value of the underlying investments. Investments in the guaranteed investment contracts are valued at contract value. Contract value represents contributions made under the contract, plus interest at the contract rate, less funds withdrawn. The change in the difference between current value and the cost of investments is reflected in the statement of changes in net assets available for benefits as unrealized appreciation (depreciation) of investments. The net gain (loss) on the sale of investments is the difference between the proceeds received and the historical average cost of investments sold. For purposes of complying with the Department of Labor's requirements for preparing Form 5500, the Company determines net gain based on a revalued, rather than historical, cost. EXPENSES Except for investment management fees, which are netted against investment income, Donaldson Company, Inc. (the Plan's sponsor) pays all Plan related expenses including legal, accounting and other services. RECLASSIFICATION Certain amounts from the prior year have been reclassified to conform to the current year presentation. 2. DESCRIPTION OF THE PLAN Effective February 1, 1991, the Donaldson Company, Inc. Salaried Employees' Retirement Savings Plan was amended and renamed the Donaldson Company, Inc. Employees' Retirement Savings Plan (the Plan). Effective February 1, 1991, hourly employees represented by a labor union for collective bargaining purposes are eligible to participate in the Plan under the terms of a collective bargaining agreement and shall not be eligible for any employer discretionary contributions or loans. The Plan is a defined contribution plan sponsored by Donaldson Company, Inc. The Plan allows employee contributions to the Plan through payroll deductions of 1% to 10% of their salary. Employees are 100% vested in their accounts at all times. Amounts contributed to the Plan are invested in one of four investment options. Participants may choose between the following investment alternatives: * FIDELITY EQUITY INCOME FUND: Monies are invested in a mutual fund managed by Fidelity Management & Research Company. The fund invests in a diversified portfolio of common stocks which have above average dividend yields and potential for capital appreciation. * FIXED INCOME FUND: Monies are invested in two separate funds each comprised of highly diversified Guaranteed Investment Contracts and high quality money market investments. One of the funds is managed by IDS Trust Company and the other by US Trust Company. The Fixed Income Fund is designed to be a secure investment that will earn a relatively stable rate of interest. * DONALDSON COMMON STOCK FUND: Monies are invested in the common stock of Donaldson Company, Inc. This investment option is presented to provide participants with the opportunity to invest in the future growth of the Company. The changes in net assets of the Plan are allocated to the individual participants' accounts quarterly as provided for in the Plan Agreement. 2. DESCRIPTION OF THE PLAN (CONTINUED) The Company has the right under the Plan agreement to terminate the Plan. In the event of termination of the Plan, each participant is fully vested and the assets of the Plan shall be distributed to the participants. 3. INVESTMENTS The current value of individual investments that represent 5% or more of the Plan's net assets is as follows:
1994 1993 ------------------------------------------------------ Units or Current Units or Current Shares Value Shares Value ----------- ----------- ----------- ---------- Fidelity Equity Income Fund 416,280.981 $13,678,993 293,613.856 $ 9,527,770 Common Stock of Donaldson Company, Inc. (Sponsor) 383,180 9,387,910 153,992 5,716,953 IDS Trust Collective Income Fund 285,432.293 10,397,156 357,854.799 12,269,052 Capital Trust Company Guaranteed Investment Contract Fund 415,888 9,940,162 417,289 9,400,856
Following is information regarding investments: Year ended July 31 1994 1993 ------------ ----------- Cost of investments: Common Stock of Donaldson Company, Inc. (Sponsor) $ 4,452,196 $ 2,769,735 Fidelity Equity Income Fund 11,874,998 7,792,961 Investment in fixed income funds 20,341,200 21,672,742 ---------- ---------- Total cost 36,668,394 32,235,438 Current value 43,404,221 36,914,631 ---------- ---------- Unrealized appreciation $ 6,735,827 $ 4,679,193 =========== =========== 3. INVESTMENTS (CONTINUED) During the two years ended July 31, 1994, the Plan's investments appreciated (depreciated) in fair value as follows: 1994 1993 ----------- ----------- Common Stock of Donaldson Company, Inc. (Sponsor) $ 1,988,494 $ 917,610 Fidelity Equity Income Fund 69,187 1,237,536 IDS Trust Collective Income Fund (1,047) (967) ----------- ----------- $ 2,056,634 $ 2,154,179 =========== =========== During the two years ended July 31, 1994, the Plan experienced net realized gains and losses on the sale of its investments as follows: Cost Proceeds Net Gain ---------- ---------- ---------- 1994: Other $2,651,174 $2,664,665 $ 13,491 ---------- ---------- ---------- Total $2,651,174 $2,664,665 $ 13,491 ========== ========== ========== 1993: Other $ 960,302 $ 960,169 $ (133) ---------- ---------- ---------- Total $ 960,302 $ 960,169 $ (133) ========== ========== ========== 4. LOANS TO PARTICIPANTS Under the Plan agreement, a salaried participant may borrow up to 50% of their account balance or $50,000, whichever is less. At July 31, 1994 and 1993, $1,325,377 and $1,138,107, respectively, of loans were outstanding at interest rates varying from 7% to 11.5%. 5. INCOME TAX STATUS The Internal Revenue Service issued a favorable determination letter dated November 14, 1991 stating that the Plan, as amended, is qualified under Section 401(a) and is exempt from federal income taxes under Section 501(a) of the Internal Revenue Code. Accordingly, no provision for income taxes has been included in these financial statements. Once qualified, the Plan is required to operate in conformity with the Code and ERISA to maintain its tax-exempt status. The administrator is not aware of any course of action or series of events that have occurred that might adversely affect the Plan's qualified status. 6. TRANSACTIONS WITH PARTIES-IN-INTEREST During the year ended July 31, 1994, the Plan purchased 70,456 shares of Donaldson Company, Inc. Common Stock on the open market for $1,682,463 and sold none. The Plan also received 158,732 shares as a result of a two-for-one stock split. During the year ended July 31, 1993, the Plan purchased 32,690 shares of Donaldson Company, Inc. Common Stock on the open market for $1,129,958 and sold none. The Plan received $85,650 and $57,789 in Common Stock dividends from Donaldson Company, Inc. for the years ended July 31, 1994 and 1993, respectively. 7. RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500 The following is a reconciliation of net assets available for benefits per the financial statements to the Form 5500: July 31 1994 1993 ----------------------------- Net assets available for benefits per the financial statements $ 45,932,788 $ 39,082,531 Amounts allocated to withdrawing participants (293,923) (169,155) ------------ ------------ Net assets available for benefits per Form 5500 $ 45,638,865 $ 38,913,376 ============ ============ 7. RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500 (CONTINUED) Amounts allocated to withdrawing participants by fund option are as follows:
Year ended July 31, 1994 - - ---------------------------------------------------------------------------- Donaldson Fidelity Equity Fixed Common Stock Income Fund Income Funds Fund Total 1993 Total - - ---------------------------------------------------------------------------------------------------- $72,042 $200,072 $21,809 $293,923 $169,155 ======= ======== ======= ======== ========
The following is a reconciliation of benefits paid to participants reported in the financial statements versus the Form 5500: July 31, 1994 ------------ Benefits paid to participants per the financial statements $ 1,471,676 Add amounts allocated to withdrawing participants at July 31, 1994 293,923 Less amounts allocated to withdrawing participants at July 31, 1993 (169,155) -------- Benefits paid to participants per the Form 5500 $ 1,596,444 =========== Donaldson Company, Inc. Employees' Retirement Savings Plan Schedule A--Assets Held for Investment July 31, 1994
IDENTITY OF ISSUE, CURRENT BORROWER OR SIMILAR PARTY DESCRIPTION OF INVESTMENT COST VALUE - - --------------------------------------------------------------------------------------------------------------- Fidelity Equity Income Fund 416,280.981 units of participation $11,874,998 $13,678,993 *Donaldson Company, Inc. 383,180 shares of Common Stock 4,452,196 9,387,910 IDS Trust Collective Income Fund 285,432.293 units of participation 10,401,038 10,397,156 Capital Trust Company Guaranteed Investment Contract Fund 415,888 units of participation 9,940,162 9,940,162 ---------- ---------- TOTAL ASSETS HELD FOR INVESTMENT $36,668,394 $43,404,221 =========== ===========
* Indicates party-in-interest Donaldson Company, Inc. Employees' Retirement Savings Plan Schedule B--Transactions or Series of Transactions in Excess of 5% of the Current Value of Plan Assets Year ended July 31, 1994
CURRENT VALUE OF ASSET ON PURCHASE SELLING COST OF TRANSACTION NET GAIN IDENTITY OF PARTY INVOLVED DESCRIPTION OF ASSET PRICE PRICE ASSET DATE OR (LOSS) - - -------------------------- ----------------------------------------- ----------- ---------- ---------- ------------ ------- CATEGORY (iii)--A SERIES OF TRANSACTIONS IN EXCESS OF 5% OF BEGINNING PLAN ASSETS. Fidelity Investments Fidelity Equity Income Fund Purchased 122,677.125 participating units in 10 transactions $4,082,037 $4,082,037 $4,082,037 IDS Trust Company Collective Income Fund Purchased 20,501.346 participating units in 13 transactions 727,183 727,183 727,183 Sold 73,263.785 participating units in 11 transactions $2,599,314 2,598,031 2,599,314 $1,283
There were no category (i), (ii) or (iv) reportable transactions in fiscal 1994. -----END PRIVACY-ENHANCED MESSAGE-----