UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
xAnnual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended July 31, 20072009 or
oTransition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the transition period from __________ to __________
Commission File Number: 1-7891
DONALDSON COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware | 41-0222640 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1400 West 94th Street, Minneapolis, Minnesota | 55431 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (952) 887-3131
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange | |||
Common Stock, $5 Par Value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yesx Noo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso Nox
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such short period that the registrant was required to submit and post such files) Yeso Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filerfiler” and large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerx | Accelerated filero | |
Non-accelerated filero (Do not check if a smaller reporting company) | Smaller reporting companyo |
Large accelerated filerx Accelerated filero Non-accelerated filero
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Nox
As of January 31, 2007,2009, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant was $2,764,315,979$2,375,100,091 (based on the closing price of $35.22$31.12 as reported on the New York Stock Exchange as of that date).
As of August 31, 2007,2009, there were approximately 79,173,62277,279,071 shares of the registrant’s common stock outstanding.
Documents Incorporated by Reference
Portions of the registrant’s Proxy Statement for its 20072009 annual meeting of shareholdersstockholders (the “2009 Proxy Statement”) are incorporated by reference in Part III, as specifically set forth in Part III.
ANNUAL REPORT ON FORM 10-K
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Consent of Independent Registered Public Accounting Firm | 63 | |||
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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 filtration systems and replacement parts. The Company’s product mix includes air and liquid filtersfiltration systems and exhaust and emission control products for mobile equipment; in-plant air cleaning systems; compressed air purification systems; air intake systems for industrial gas turbines and specialized filters for such diverse applications as computer disk drives and semi-conductor processing.products. Products are manufactured at more than 3540 plants around the world and through three of our joint ventures. The Company has two reporting segments engaged in the design, manufacture and sale of systems to filter air and liquid and other complementary products. The two segments aresegments: Engine Products and Industrial Products. Products in the Engine Products segment consist of air intakefiltration systems, exhaust and emissions systems, liquid filtration systems and replacement parts. The Engine Products segment sells to original equipment manufacturers (“OEM”OEMs”) in the construction, mining, agriculture, aerospace, defense, and transportationtruck markets and to independent distributors, OEM dealer networks, private label accounts and large equipment fleets. Products in the Industrial Products segment consist of dust, fume and mist collectors, compressed air purification systems, liquid filters and parts, static and pulse-cleanfiltration systems, air filter systems for gas turbines, and specialized air filtration systems for diverse applications including computer hard disk drives. The Industrial Products segment sells to various industrial end-users, OEMs of gas-fired turbines and OEMs and end-users requiring highly purifiedclean air.
The table below shows the percentage of total net sales contributed by the principal classes of similar products for each of the last three fiscal years:
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2007 | 2006 | 2005 |
| Year Ended July 31 |
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Engine Products segment |
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Off-road Equipment Products (including defense products) | 18 | % | 18 | % | 18 | % | |||||||||||||||||||
Truck Products | 9 | % | 11 | % | 11 | % | |||||||||||||||||||
Aftermarket Products (including replacement part sales to our OEMs) | 30 | % | 29 | % | 29 | % | |||||||||||||||||||
Off-Road Equipment Products (including Aerospace and Defense products) |
| 20 | % |
| 20 | % |
| 18 | % | ||||||||||||||||
On-Road Products |
| 4 | % |
| 6 | % |
| 9 | % | ||||||||||||||||
Aftermarket Products (including replacement part sales to the Company’s OEM’s) |
| 30 | % |
| 29 | % |
| 30 | % | ||||||||||||||||
Industrial Products segment |
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Industrial Filtration Solutions Products | 27 | % | 26 | % | 27 | % |
| 27 | % |
| 27 | % |
| 27 | % | ||||||||||
Gas Turbine Systems Products | 8 | % | 8 | % | 7 | % |
| 11 | % |
| 10 | % |
| 8 | % | ||||||||||
Special Applications Products | 8 | % | 8 | % | 8 | % |
| 8 | % |
| 8 | % |
| 8 | % |
Financial information about segment operations appears in Note J in the Notes to Consolidated Financial Statements on page 47.51.
The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports, available free of charge through its website, at www.donaldson.com, as soon as reasonably practicable after it electronically files such material with (or furnishes such material to) the Securities and Exchange Commission. Also available on the Company’s website are corporate governance documents, including the Company’s code of business conduct and ethics, corporate governance guidelines, Audit Committee charter, Human Resources Committee charter, and Corporate Governance Committee charter. These documents are available in print, free of charge to any shareholder who requests them. The information contained on the Company’s website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered to be part of this Form 10-K.
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In general, the Company’s Engine Products and Industrial Products segments are not considered to be seasonal. However, a number of ourthe Company’s end markets are dependent on the construction, agricultural and agriculturalpower generation industries, which are generally stronger in the second half of ourthe Company’s fiscal year.
Principal methods of competition in both the Engine Products and Industrial Products segments are technology, price, geographic coverage, service and product performance. The Company competes in a number of highly competitive filtration markets in both the Engine Products and Industrial Products segments. The Company believes it is a market leader inwith many of its primary product lines. The Company believes within the Engine Products segment it is a market leader in its Off-Road Equipment and On-Road Products lines for OEMs and is a significant participant in the aftermarket for replacement filters. The Engine Products segment’s principal competitors include several large global competitors and regional competitors, especially in the Engine Aftermarket Products business. The Industrial Products segment’s principal competitors vary from country to country and include several large regional orand global competitors and a significant number of smallsmaller competitors who compete in a limitedspecific geographical region or in a limited number of product applications. The Company believes within the Engine Products segment it is a market leader in its Off-road Equipment and Truck Products lines for OEMs and is a significant participant in the aftermarket for replacement filters and hard parts. The Engine Products segment’s principal competitors vary from country to country and include several large regional or global competitors, and small regional competitors, especially in the Engine Aftermarket Products business.
The principal raw materials that we usethe Company uses are steel, filter media and filter media. We purchaseplastics. The Company purchases a variety of types of steel for various applications. During fiscal 2007 commoditysteel. Commodity prices were relatively stable after experiencing increases in fiscal 2006 primarily related tohigh during the costfirst half of steel.the year, but decreased during the second half such that the full year was comparable with Fiscal 2008. The Company experienced no significant or unusualsupply problems in the purchase of its raw materials or commodities.materials. The Company typically has more than one sourcemultiple sources of supply for the raw materials essential to its business. The Company is not required to carry significant amounts of raw material inventory to meet rapid delivery demands or secure supplier allotments. However, the Company does stock finished goods inventory at its regional distribution centers around the world in order to meet anticipated Customer demand.
The Company owns various patents and trademarks, which it considers in the aggregate to constitute a valuable asset, including patents and trademarks for products and filtration systems sold under the Ultra-Web®, PowerCore®, and Donaldson® trademarks. However, it does not regard the validity of any one patent or trademark as being of material importance.
There were no Customers that accounted for over 10 percent of net sales in Fiscal 2009. Sales to Caterpillar Inc. and its subsidiaries (“Caterpillar”) accounted for 10 percent of net sales in 2007Fiscal 2008 and 12 percent of net sales in both 2006 and 2005.Fiscal 2007. Caterpillar has been a customer of the Company for many years and it purchases many 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. There were no Customers over 10 percent of gross accounts receivable in 2007Fiscal 2009 or 2006.2008.
At August 31, 2007,2009, the backlog of orders expected to be delivered within 90 days was $328,939,000.$259,181,000. All of this backlog is expected to be shipped during Fiscal 2010. The 90-day backlog at August 31, 20062008, was $291,011,000.$415,078,000. Backlog is one of many indicators of business conditions in our market.the Company’s markets. However, it is not always indicative of future results for a number of reasons, including short lead times in our aftermarketthe Company’s replacement parts business and the timing of receipt of orders in many of our original equipmentthe Company’s Engine OEM and industrialIndustrial markets.
During 2007,Fiscal 2009, the Company spent $36,458,000$40,643,000 on research and development activities relatingactivities. Research and development expenses include basic scientific research and the application of scientific advances to the development of new and improved products or improvements of existing products or manufacturing processes.and their uses. The Company spent $33,887,000$43,757,000 in 2006Fiscal 2008 and $32,234,000$36,458,000 in 2005Fiscal 2007 on research and development activities. Substantially all commercial research and development is performed in-house.
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The Company does not anticipate any material effect on its capital expenditures, earnings or competitive position during fiscal 2008Fiscal 2010 due to compliance with government regulations regulating the discharge of materials into the environment or otherwise relating to the protection of the environment.
The Company employed over 12,00010,600 persons in worldwide operations as of August 31, 2007.2009.
Financial information about geographic areas appears in Note J of the Notes to Consolidated Financial Statements on page 47.51.
Item 1A. RISK FACTORSRisk Factors
There are inherent risks and uncertainties associated with our global operations that involve the design, manufacturing and sale of products for highly demanding Customer applications throughout the world. TheThese risks and uncertainties associated with our business could adversely affect our operating performance and financial condition. The following discussion, along with discussions elsewhere in this report, outlines the risks and uncertainties that we believe are the most material to our business. However, these are notIn light of the onlycurrent global economic slowdown, we want to further highlight the risks and uncertainties associated with: world economic factors; the reduction in sales volume and orders due to decreased global demand and Customers aggressively working to reduce their levels of inventory; increased governmental laws and regulations, including the unprecedented financial actions being undertaken by governments around the world; a significant tightening of credit availability; and potential global health outbreaks. We undertake no obligation to publicly update or uncertainties that could affect our business. Therefore, the following is not intended to be a complete discussion of all potential risks or uncertainties.revise any forward-looking statements.
Operating internationally carries risks which could negatively effectaffect our financial performance.
We have sales and manufacturing operations throughout the world, with the heaviest concentrations in North America, Europe and Asia. Our stability, growth and profitability are subject to a number of risks of doing business internationally that could harm our business, including:
• | political and military events, | |
• | legal and regulatory requirements, including import, export and defense regulations, | |
• | tariffs and trade barriers, | |
• | potential difficulties in staffing and managing local operations, | |
• | credit risk of local Customers and distributors, | |
• | difficulties in protecting intellectual property, | |
• | local economic, political and social conditions, specifically in China and Thailand where we have significant investments, | |
• | potential global health outbreaks. |
Maintaining a competitive advantage requires continuing investment with uncertain returns.
We operate in highly competitive markets and have numerous competitors who may already be well established in those markets. We experience price pressures from these competitors in certain product lines and geographic markets. We expect our competitors to continue improving the design and performance of their products and to introduce new products that arecould be competitive in both price and performance. We believe that we have certain technological advantages over our competitors, but maintaining these advantages requires us to continually invest in research and development, sales and marketing and Customer service and support. There is no guarantee that we will be successful in maintaining these advantages. We are currently makingmake investments in emissions technology developmentnew technologies that address increased performance and potential new emission systems products to meet the changing regulatory requirements worldwide.around the globe. There is no guarantee that we will be successful in completing development or achieving sales of these products or that the margins on such products will be acceptable. Our financial performance may be negatively impacted if a competitor’s successful product innovation reaches the market before ours or gains broader market acceptance.
A number Several of our major OEM Customers also manufacture component products for their own use.filtration systems. Although these OEM Customers rely on us and other suppliers for othersome of their component products,
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filtration systems, they sometimes choose to manufacture additional component productsfiltration systems for their own use. There is also a risk that a Customer could acquire one or more of our competitors.
We may be adversely impacted by changes in technology that could reduce or eliminate the demand for our products. We are at risk with respect to:These risks include:
• | breakthroughs in technology which provide a viable alternative to diesel | |
• | reduced demand for disk drive products if |
We participate in highly competitive markets with pricing pressure. If we are not able to compete effectively our margins and results of operations could be adversely affected.
The businesses and product lines in which we participate are very competitive and we risk losing business based on a wide range of factors, including technology, price, delivery, service, product performance and Customer satisfaction.service. Large Customers continue to seek productivity gains and lower prices from their suppliers. We may lose business or negatively impact our margins if we are unable to deliver the best value to our Customers through our technology and innovation and our product cost reduction and lean improvement efforts in manufacturing and throughout the Company.Customers.
Demand for our products relies on economic and industrial conditions worldwide.
Demand for certain of our products tends to be cyclical and respondsrespond to varying levels of construction, agricultural, mining and industrial activity in the United States and in other industrialized nations.
Sales to Caterpillar Inc. and its subsidiaries accounted for slightly less than 10 percent of our net sales in the most recent yearFiscal 2009 and greater than 10 percent of our net sales in the previous three fiscal years.Fiscal 2008. An adverse change in Caterpillar’s financial performance or a material reduction in our sales to itCaterpillar could negatively impact our operating results.
Changes in our product mix impacts our financial performance.
We sell products in various product lines that have varying profit margins. Our financial performance can be impacted positively or negatively depending on the mix of products we sell during a given period as compared to a previous period.
Unavailable or higher cost materials could result in our Customers being dissatisfied.
We obtain raw material, including a significant amount of various gradessteel, filter media and types of steel,plastics, and certain manufacturedother components from third-party suppliers and tend to carry limited raw material inventories. Even a briefAn unanticipated delay in delivery or increases in prices by our suppliers could result in the inability to satisfydeliver on-time and meet the expectations of our Customers on delivery and pricing.Customers. This could negatively affect our financial performance. An increase in commodity prices during a recession or an otherwise challenging business and economic environment could result in lower operating margins.
Difficulties with the Company’s information technology systems could adversely affect the Company’s results.
The Company has many information technology systems that are important to the operation of its businesses. The Company could encounter difficulties in developing new systems or maintaining and upgrading existing systems. Such difficulties could lead to significant expenses due to disruption in business operations and could adversely affect the Company’s results.
Unfavorable fluctuations in foreign currency exchange rates could negatively impact our results of operations and financial position.
We have operations in many countries. Each of our subsidiaries reports its results of operations and financial position in its relevant foreign currency, which is then translated into United StatesU.S. dollars. TheThis translated financial information is included in our consolidated financial statements. The strengthening of the United StatesU.S. dollar in comparison to the foreign currencies of our subsidiaries could have a negative impact on our results of operations orand financial position.
Acquisitions may not necessarily have a positivean impact on our results.
We have made and continue to pursue acquisitions of complementary product lines, technologies and businesses.acquisitions. We cannot guarantee that these acquisitions will have a positive impact on our results. These acquisitions could negatively impact our profitability due to operating and integration inefficiencies, the incurrence of debt, contingent liabilities and amortization expenses related to intangible assets. There are also a number of other risks involved in acquisitions. For example, weWe could lose key existing or
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potential Customers, have difficulties in assimilating the acquired operations, assume unanticipated legal liabilities or lose key employees of the acquired company.employees.
Compliance with environmental laws and regulations can be costly.
We are subject to many environmental laws and regulations in the jurisdictions in which we operate. We routinely incur product development capital and operating costs in order to comply with these laws and regulations. We may be adversely impacted by new or changing environmental laws and regulations that affect both our operations and our ability to develop and sell products that meet our Customers’ product and performance requirements.
Item 1B. UNRESOLVED STAFF COMMENTSUnresolved Staff Comments
None.
The Company’s principal office and research facilities are located in Bloomington, Minnesota, a suburb of Minneapolis, Minnesota. The principal European administrative and engineering offices are located in Leuven, Belgium. The Company also has extensive operations in the Asia-Pacific region.
The Company’s principal plant activities are carried out in the United States and internationally. Following is a summary of the principal plants and other materially important physical properties owned or leased by the Company.
Americas |
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Auburn, Alabama (E) | Kadan, Czech Republic (I) | |
Riverbank, California (I)* | Klasterec, Czech Republic | |
Valencia, California (E)* | Domjean, France (E) | |
Dixon, Illinois | Paris, France (E) | |
Frankfort, Indiana | Dulmen, Germany (E) | |
Cresco, Iowa | Flensburg, Germany (I) | |
Grinnell, Iowa (E) | Haan, Germany (I) | |
Nicholasville, Kentucky | Ostiglia, Italy | |
Bloomington, Minnesota | Barcelona, Spain (I) | |
Chillicothe, Missouri (E) | Hull, United Kingdom | |
St. Charles, Missouri* (E)
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| Leicester, United Kingdom (I) |
Philadelphia, Pennsylvania (I) | Cape Town, South Africa | |
Greeneville, Tennessee | Johannesburg, South Africa* | |
Baldwin, Wisconsin | ||
Stevens Point, Wisconsin | Australia | |
Sao Paulo, Brazil (E)* | Wyong, Australia | |
Athens, Canada (I) | ||
Aguascalientes, Mexico | Asia | |
Monterrey, Mexico | Hong Kong, China* | |
Wuxi, China | ||
Joint Venture Facilities | New Delhi, India | |
Most, Czech Republic (E) | Gunma, Japan | |
Champaign, Illinois (E) | Rayong, Thailand (I) | |
Jakarta, Indonesia | ||
Dammam, Saudi Arabia (I) | Third-Party Logistics Providers | |
Alsip, Illinois | ||
Distribution Centers | Plainfield, Indiana (I) | |
Brugge, Belgium | New Hampton, Iowa | |
Rensselaer, Indiana | Waterloo, Iowa (E) | |
Aguascalientes, Mexico | Greeneville, Tennessee (I) | |
Johannesburg, South Africa | Singapore |
The Company’s properties are utilized for both the Engine and Industrial ProductProducts segments except as indicated with an (E) for Engine or (I) for Industrial. The Company also leases certain of its facilities, primarily under long-term leases. The facilities denoted facilitieswith an asterisk (*) are leased facilities. In Wuxi, China, a portion of the operations are conducted in leased facilities. The Company’sCompany uses third-party logistics providers for some of its product distribution and neither leases nor owns the facilities. The Company considers its properties are considered to be suitable for their present purposes, well-maintained and in good operating condition.
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Item 3. LEGAL PROCEEDINGSLegal Proceedings
In accordance with SFAS No. 5, “Accounting for Contingencies,” (SFAS No. 5), the Company records provisions with respect to identified claims or lawsuits when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and lawsuits are reviewed quarterly and provisions are taken or adjusted to reflect the status of a particular matter. The Company isbelieves the recorded reserves in its consolidated financial statements are adequate in light of the probable and estimable outcomes. Any recorded liabilities were not currently subject to any pending litigation other than litigation which arises out of and is incidentalmaterial to the conductCompany’s financial position, results of the Company’s business. All such matters are subject to many uncertaintiesoperation and outcomes that are not predictable with assurance. Theliquidity and the Company does not considerbelieve that any of such proceedings that arethe currently pending to be likely to result in a material adverse effect on the Company’s consolidatedidentified claims or litigation will materially affect its financial position, or results of operation.operation and liquidity.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSSubmission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of the Company during the quarter ended July 31, 2007.2009.
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 the officer was selected as an executive officer.
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Tod E. Carpenter | Tod E. Carpenter |
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William M. Cook | 54 | Chairman, President and Chief Executive Officer | 1994 | William M. Cook |
| 56 |
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Sandra N. Joppa | 42 | Vice President, Human Resources, Communications and Facilities | 2005 | Sandra N. Joppa |
| 44 |
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Norman C. Linnell | 48 | Vice President, General Counsel and Secretary | 1996 | Norman C. Linnell |
| 50 |
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| 1996 | |||
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Charles J. McMurray | 53 | Senior Vice President, Industrial Products and South Africa | 2003 | Charles J. McMurray |
| 55 |
| Senior Vice President, Industrial Products |
| 2003 | |||
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Mary Lynne Perushek | 49 | Vice President and Chief Information Officer | 2006 | Mary Lynne Perushek |
| 51 |
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| 2006 | |||
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Lowell F. Schwab | 59 | Senior Vice President, Engine Systems and Parts | 1994 | Lowell F. Schwab |
| 61 |
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| 1994 | |||
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David W. Timm | 54 | Vice President, Asia-Pacific | 2007 | David W. Timm |
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William I. Vann | 62 | Vice President, NAFTA Operations and Mexico | 2004 | ||||||||||
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Thomas R. VerHage | 54 | Vice President and Chief Financial Officer | 2004 | Thomas R. VerHage |
| 56 |
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Jay L. Ward | 43 | Vice President, Europe and Middle East | 2006 | Jay L. Ward |
| 45 |
| Senior Vice President, Engine Products |
| 2006 | |||
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Debra L. Wilfong | 52 | Vice President and Chief Technology Officer | 2007 | Debra L. Wilfong |
| 54 |
| Vice President and Chief Technology Officer |
| 2007 |
Mr. Carpenter joined the Company in 1996 and has held various positions, including Gas Turbine Systems General Manager from 2002 to 2004; General Manager, Industrial Filtration Systems (IFS) Sales from 2004 to 2006; General Manager, IFS Americas in 2006; and Vice President, Global IFS from 2006 to 2008. Mr. Carpenter was appointed Vice President, Europe and Middle East in August 2008.
Mr. Cook joined Donaldsonthe Company Inc. in 1980 and has held various positions, including CFO and Senior Vice President, International from 2001 to 2004 and President and CEO from 2004 to 2005. Mr. Cook was appointed Chairman, President and CEO in July 2005.
Ms. Joppa was appointed Vice President, Human Resources and Communications in November 2005 and added responsibility for Facilities in May 2007.2005. Prior to that time Ms. Joppa held various positions at General Mills, a consumer food products company, from 1989 to 2005, including service as Director of Human Resources for several different operating divisions from 1999 to 2005.
Mr. Linnell joined Donaldsonthe Company Inc. in 1996 as General Counsel and Secretary and was appointed Vice President, General Counsel and Secretary in 2000.
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Mr. McMurray joined Donaldsonthe Company Inc. in 1980 and has held various positions, including Director, Global Information Technology from 2001 to 2003; Vice President, Human Resources & Communication, Information Technology and Logistics from 2004 to 2005; and Vice President, Information Technology, Europe, South Africa and Mexico from 2005 to 2006. Mr. McMurray became Senior Vice President, Industrial Products, Technology, and South Africa in September 2006 and transferred responsibility for Information Technology upon the hiring of Ms. Perushek in November 2006.
Ms. Perushek was appointed Vice President and Chief Information Officer in November 2006. Prior to that time, Ms. Perushek was Vice President of Global Information Technology at H.B. Fuller Company, a worldwide manufacturer of adhesive products, from 2005 to 2006 and Chief Information Officer for Young America Corporation, a marketing company, from 1999 to 2004.
Mr. Schwab joined Donaldsonthe Company Inc. in 1977 and has held various positions, including Senior Vice President, Operations from 1994 to 2004 and was promoted to Senior Vice President, Engine Systems and PartsProducts from 2004 to 2008. Mr. Schwab was appointed Senior Vice President, Global Operations, in 2004.August 2008.
Mr. Timm joined Donaldsonthe Company Inc. in 1983 and has held various positions, including General Manager, Disk Drive from 1995 to 2004; General Manager, Disk Drive and New Business Development from 2004 to 2005;2005 and General Manager, Gas Turbine Systems Products from 2005 to 2006. Mr. Timm was appointed Vice President, Asia-Pacific in March 2007.December 2006.
Mr. Vann joined Donaldson Company, Inc. in 1967 and has held various positions, including General ManagerTable of Industrial Air Filtration from 2000 to 2004; Vice President, NAFTA Operations in 2005; and Vice President, NAFTA Operations and Mexico since 2006.Contents
Mr. VerHage was appointed Vice President and Chief Financial Officer in March 2004. Prior to that time, Mr. VerHage was a partner for Deloitte & Touche, LLP, an international accounting firm, from 2002 to 2004.
Mr. Ward joined Donaldsonthe Company Inc. in 1998 and has held various positions, including Director, Operations from 2001 to 2003; Director, Product and Business Development, Industrial Filtration SolutionsIFS Group from 2003 to 2004; and Managing Director, Europe from 2004 to 2006. Mr. Ward was appointed2006; and Vice President, Europe and Middle East from 2006 to 2008. Mr. Ward was appointed Senior Vice President, Engine Products in December 2006.August 2008.
Ms. Wilfong was appointed Vice President and Chief Technology Officer in May 2007. Prior to that time, Ms. Wilfong held various director positions in research and development at 3M Company, an international consumer products company, from 2000 to 2007, most recently as Director, Research and Development for the 3M Automotive Division from 2006 to 2007.
Effective August 3, 2007, Mr Geert Henk Touw retired as Senior Vice President, Asia-Pacific.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The common shares of the Company are traded on the New York Stock Exchange under the symbol DCI. The amount and frequency of all cash dividends declared on the Company’s common stock for 2007Fiscal 2009 and 20062008 appear in Note LN of the Notes to Consolidated Financial Statements on page 51.55. As of September 21, 2007,23, 2009, there were 1,8362,109 shareholders of record of common stock.
The low and high sales prices for the Company’s common stock for each full quarterly period during 2007Fiscal 2009 and 20062008 were as follows:
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||
Fiscal 2008 | $ | $ | $ | $ | ||||
Fiscal 2009 | $28.04 — 49.00 | $23.40 — 36.29 | $21.82 — 34.37 | $31.00 — 38.93 |
7
The following table sets forth information in connection with purchases made by, or on behalf of, the Company or any affiliated purchaser of the Company, of shares of the Company’s common stock during the quarterly period ended July 31, 2007.2009.
Period | Total Number of Shares Purchased(1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
May 1-May 31, 2007 | — | — | — | 4,402,200 | ||||||||||||||
June 1-June 30, 2007 | 204,400 | $ | 35.15 | 204,400 | 4,197,800 | |||||||||||||
July 1-July 31, 2007 | 219,989 | $ | 35.59 | 219,800 | 3,978,000 | |||||||||||||
Total | 424,389 | $ | 35.38 | 424,200 | 3,978,000 | |||||||||||||
|
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|
|
Period |
| Total Number of |
| Average Price |
| Total Number of |
| Maximum Number |
| |||||
May 1-May 31, 2009 |
|
| — |
|
| — |
|
| — |
|
| 930,210 |
| |
June 1-June 30, 2009 |
|
| 18,972 |
| $ | 36.12 |
|
| — |
|
| 930,210 |
| |
July 1-July 31, 2009 |
|
| — |
|
| — |
|
| — |
|
| 930,210 |
| |
Total |
|
| 18,972 |
| $ | 36.12 |
|
| — |
|
| 930,210 |
|
(1) | On March 31, 2006, the Company announced that the Board of Directors authorized the repurchase of up to 8.0 million shares of common stock. This repurchase authorization, which is effective until terminated by the Board of Directors, replaced the existing authority that was authorized on January 17, 2003. There were no repurchases of common stock made outside of the Company’s current repurchase authorization during the quarter ended July 31, |
The graphsgraph below comparecompares the cumulative total stockholder return on the Company’s Common Stock for the last five fiscal years with the cumulative total return of the Standard & Poor’s 500 Stock Index and the Standard & Poor’s Index of Industrial Machinery Companies. The graph and table assume the investment of $100 in each of Donaldson’sthe Company’s Common Stock and the specified indexes at the beginning of the applicable period, and assume the reinvestment of all dividends.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Donaldson Company, Inc., The S&P 500 Index
And The S&P Industrial Machinery Index
Year ended July 31, | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2007 | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Donaldson Company, Inc. | $ | 227.06 | $ | 203.15 | $ | 199.28 | $ | 161.65 | $ | 146.84 | $ | 100.00 | |||||||||||||||
S&P 500 | 174.78 | 150.50 | 142.81 | 125.22 | 110.64 | 100.00 | |||||||||||||||||||||
S&P Industrial Machinery | 223.02 | 172.58 | 164.80 | 152.07 | 117.32 | 100.00 |
8
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| Year ended July 31, |
| ||||||||||||||||
|
| 2009 |
| 2008 |
| 2007 |
| 2006 |
| 2005 |
| 2004 |
| ||||||
Donaldson Company, Inc. |
| $ | 150.18 |
| $ | 175.88 |
| $ | 140.46 |
| $ | 125.67 |
| $ | 123.27 |
| $ | 100.00 |
|
S&P 500 |
|
| 99.33 |
|
| 124.10 |
|
| 139.58 |
|
| 120.19 |
|
| 114.05 |
|
| 100.00 |
|
S&P Industrial Machinery |
|
| 102.93 |
|
| 133.98 |
|
| 146.65 |
|
| 113.48 |
|
| 108.37 |
|
| 100.00 |
|
Item 6. SELECTED FINANCIAL DATASelected Financial Data
The following table sets fourth selected financial data for each of the fiscal years in the five-year period ended July 31, 20072009 (in millions, except per share data):
Year ended July 31, | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2007 | 2006 | 2005 | 2004 | 2003 | |||||||||||||||||||
Net Sales | $ | 1,918.8 | $ | 1,694.3 | $ | 1,595.7 | $ | 1,415.0 | $ | 1,218.3 | |||||||||||||
Income from continuing operations | 150.7 | 132.3 | 110.6 | 106.3 | 95.3 | ||||||||||||||||||
Diluted earnings per share | 1.83 | 1.55 | 1.27 | 1.18 | 1.05 | ||||||||||||||||||
Total assets | 1,319.0 | 1,124.1 | 1,111.8 | 1,001.6 | 882.0 | ||||||||||||||||||
Long-term obligations | 129.0 | 100.5 | 103.3 | 70.9 | 105.2 | ||||||||||||||||||
Cash dividends declared per share | 0.370 | 0.410 | 0.180 | 0.213 | 0.180 | ||||||||||||||||||
Cash dividends paid per share | 0.360 | 0.320 | 0.235 | 0.205 | 0.175 |
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|
|
| Year ended July 31, |
| |||||||||||||
|
| 2009 |
| 2008 |
| 2007 |
| 2006 |
| 2005 |
| |||||
Net sales |
| $ | 1,868.6 |
| $ | 2,232.5 |
| $ | 1,918.8 |
| $ | 1,694.3 |
| $ | 1,595.7 |
|
Income from continuing operations |
|
| 131.9 |
|
| 172.0 |
|
| 150.7 |
|
| 132.3 |
|
| 110.6 |
|
Diluted earnings per share |
|
| 1.67 |
|
| 2.12 |
|
| 1.83 |
|
| 1.55 |
|
| 1.27 |
|
Total assets |
|
| 1,334.0 |
|
| 1,548.6 |
|
| 1,319.0 |
|
| 1,124.1 |
|
| 1,111.8 |
|
Long-term obligations |
|
| 253.7 |
|
| 176.5 |
|
| 129.0 |
|
| 100.5 |
|
| 103.3 |
|
Cash dividends declared per share |
|
| 0.460 |
|
| 0.430 |
|
| 0.370 |
|
| 0.410 |
|
| 0.180 |
|
Cash dividends paid per share |
|
| 0.455 |
|
| 0.420 |
|
| 0.360 |
|
| 0.320 |
|
| 0.235 |
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
Results of Operation
The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto and other financial information included elsewhere in this report.
Executive Table of Contents
Overview
The Company manufactures and distributes filtration systems and replacement parts. The Company’s core strengths are leading filtration technology, strong Customer relationships and global presence. The Company operates through two reporting segments, Engine Products and Industrial Products, and has a product mix including air and liquid filters and exhaust and emission control products. As a worldwide business, the Company’s results of operations are affected by conditions in the global industrial and economic factors. Theenvironment. Under normal economic conditions, the Company’s diversity between its original equipment and replacement parts Customers, its diesel engine and industrial end markets, and its North American and international end markets has helped to limit the impact of weakness in any one of these factors and marketsproduct line, market or geography on the consolidated results of the Company. The continued strong demand in most ofHowever, the global recession had a dramatic negative impact on the Company’s end markets combined with strong international growthresults in both our Engine ProductFiscal 2009 as nearly every product group and Industrial Product segments drove record earnings in fiscal 2007.geographic area was impacted.
The Company reported record sales in 2007Fiscal 2009 of $1.919 billion, up 13.3$1,868.6 million, down 16.3 percent from $1.694 billion$2,233.5 million in the prior year. The Company’s results were positivelynegatively impacted by foreign currency translation for the year.translation. The impact of foreign currency translation during the year increaseddecreased sales by $47.2$76.8 million. Excluding the current year impact of foreign currency translation, worldwide sales increased 10.5decreased 12.9 percent during the year.
Although net sales excluding foreign currency translation is not a measure of financial performance under GAAP, the Company believes it is useful in understanding its financial results and provides a comparable measure for understanding the operating results of the Company’s foreign entitiesCompany between different fiscal periods excluding the impact of foreign currency translation. FollowingThe following is a reconciliation to the most comparable GAAP financial measure of this non-GAAP financial measure (in millions):
July 31, 2007 | July 31, 2006 |
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|
| |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| July 31, |
| July 31, |
| |||||||||||||
Net sales, excluding foreign currency translation | $ | 1,871.6 | $ | 1,719.6 |
| $ | 1,945.4 |
| $ | 2,110.0 |
| ||||||
Current year foreign currency translation impact | 47.2 | (25.3 | ) | ||||||||||||||
Foreign currency translation impact |
|
| (76.8 | ) |
| 122.5 | |||||||||||
Net sales | $ | 1,918.8 | $ | 1,694.3 |
| $ | 1,868.6 | $ | 2,232.5 | ||||||||
Gross margin of 31.5 percent was down from the gross margin of 32.9 percent in the prior year. A number of factors combined to lower the gross margin for the year, including higher than expected global distribution costs due to increased Customer demand, some lower margin Gas Turbine System and Industrial Filtration Solutions sales as well as some process inefficiencies. Gross margin was
9
negatively impacted by higher than expected distribution costs associated with implementing the investments made to increase the Company’s distribution capacity and capabilities.
Although not as large as the impact on net sales, the Company’s net earnings were also positivelynegatively impacted by foreign currency translation for the year.translation. The impact of foreign currency translation during the year increaseddecreased net earnings by $5.1$3.8 million. Excluding the current year impact of foreign currency translation, net earnings increased 10.1 percent during the year.decreased 21.1 percent.
Although net earnings excluding foreign currency translation is not a measure of financial performance under GAAP, the Company believes it is useful in understanding its financial results and provides a comparable measure for understanding the operating results of the Company’s foreign entitiesCompany between different fiscal periods excluding the impact of foreign currency translation. FollowingThe following is a reconciliation to the most comparable GAAP financial measure of this non-GAAP financial measure (in millions):
July 31, 2007 | July 31, 2006 |
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|
|
| |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| July 31, |
| July 31, |
| |||||||||||||
Net earnings, excluding foreign currency translation | $ | 145.6 | $ | 133.1 |
| $ | 135.7 |
| $ | 159.1 |
| ||||||
Current year foreign currency translation impact, net of tax | 5.1 | (0.8 | ) | ||||||||||||||
Foreign currency translation impact, net of tax |
|
| (3.8 | ) |
| 12.9 | |||||||||||
Net earnings | $ | 150.7 | $ | 132.3 |
| $ | 131.9 | $ | 172.0 | ||||||||
The Company reported record diluted earnings per share of $1.83, an 18.1$1.67, a 21.2 percent increasedecrease from $1.55$2.12 in the prior year.
Included in the results are pre-tax restructuring charges of $17.8 million resulting primarily from workforce reductions of 2,800 since the beginning of the year. Gross margin and operating expenses include $10.1 million and $7.7 million of restructuring expenses, respectively. The Company also realized $43.0 million in cost savings from restructuring actions completed throughout the year.
The effective tax rate for Fiscal 2009 was 18.3 percent compared to 27.2 percent in Fiscal 2008. This decrease is attributable to a number of discrete tax items, partially offset by increased expense from the repatriation of foreign earnings. Absent these items, the underlying tax rate for the Fiscal 2009 has decreased
from Fiscal 2008 by 1.2 points to 30.4 percent. The reinstatement of the U.S. Research and Experimentation credit, changes in current year unrecognized tax benefits, reduced statutory tax rates and the mix of earnings between foreign jurisdictions all contributed to the reduction in the underlying rate.
The Company continued to improve an already strong liquidity position which allowed for continued investment in business and debt reduction while increasing cash reserves and maintaining its dividend. While Fiscal 2009 was significantly impacted by the global recession, there are signs that some of the Company’s end markets have begun to stabilize. While the Company’s future visibility remains limited and it’s too early to call a recovery, the Company believes that the worst of the global economic downturn is behind it in many of its early and mid-cycle end markets, including the heavy truck, construction, special applications and replacement parts markets. This view is factored into the Fiscal 2010 outlook discussed below.
Following is financial information for the Company’s Engine Products and Industrial Products segments. Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments and interest income and expense, non-operating income and expense and expenses not allocated to the business segments in the same period. During the first quarter of 2006, the Company adjusted its basis of measurement for earnings before income taxes such that certain expenses, such as amortization of intangibles, which were previously considered to be Corporate and Unallocated, are now included in the Engine and Industrial Products segment results. The impact of the change in the basis of measurement resulted in approximately $16.0 million of Corporate and Unallocated expenses being charged to the Engine and Industrial Products segments’ aggregate earnings before income taxes in fiscal 2006 as compared to fiscal 2005. This change resulted in approximately $8.0 million of additional expense to each of the Engine and Industrial Products segments during fiscal 2006 when compared to 2005. This adjustment to the basis of measurement of segment earnings did not change the business components included in each of the Company’s reportable segments.expense. See further discussion of segment information in Note J of the Company’s Notes to Consolidated Financial Statements.
Engine Products | Industrial Products | Corporate & Unallocated | Total Company |
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| ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Engine |
| Industrial |
| Corporate & |
| Total |
| ||||||||||||||||||||||||
|
| (thousands of dollars) |
| |||||||||||||||||||||||||||||
2009 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Net sales |
| $ | 1,001,961 |
| $ | 866,668 |
| $ | — |
| $ | 1,868,629 |
| |||||||||||||||||||
Earnings before income taxes |
| 83,797 |
| 89,526 |
| (11,898 | ) |
| 161,425 |
| ||||||||||||||||||||||
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| |||||||||||||||||||||||
2008 |
|
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|
|
|
| |||||||||||||||||||||||
Net sales |
| $ | 1,229,171 |
| $ | 1,003,350 |
| $ | — |
| $ | 2,232,521 |
| |||||||||||||||||||
Earnings before income taxes |
| 158,931 |
| 102,420 |
| (25,188 | ) |
| 236,163 |
| ||||||||||||||||||||||
(thousands of dollars) |
|
|
|
|
|
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| |||||||||||||||||||||||
2007 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Net sales | $ | 1,084,262 | $ | 834,566 | $ | — | $ | 1,918,828 |
| $ | 1,084,262 |
| $ | 834,566 |
| $ | — |
| $ | 1,918,828 |
| |||||||||||
Earnings before income taxes | 140,762 | 80,321 | (16,222 | ) | 204,861 |
| 140,762 |
| 80,321 |
| (16,222 | ) |
| 204,861 |
| |||||||||||||||||
2006 | ||||||||||||||||||||||||||||||||
Net sales | $ | 991,554 | $ | 702,773 | $ | — | $ | 1,694,327 | ||||||||||||||||||||||||
Earnings before income taxes | 135,994 | 65,550 | (12,377 | ) | 189,167 | |||||||||||||||||||||||||||
2005 | ||||||||||||||||||||||||||||||||
Net sales | $ | 923,840 | $ | 671,893 | $ | — | $ | 1,595,733 | ||||||||||||||||||||||||
Earnings before income taxes | 125,454 | 53,709 | (24,430 | ) | 154,733 |
During fiscal 2007,Fiscal 2009, the Company’s Engine Products segment net sales decreased from the prior year as a percent of total net sales at 56.5to 53.6 percent compared to 58.555.1 percent in the prior year. For the Company’s Industrial Products segment, net sales as a percent of total net sales increased to 43.546.4 percent from 41.544.9 percent in the prior year.
Factors within the Company’s reporting segments that contributed to the Company’s results for fiscal 2007Fiscal 2009 included strong business conditions withina significant impact from the Company’s distributors and OEM customers aggressively working down their inventory levels. In the Engine Products segment, the Company experienced weak business conditions in most end markets and regions. Spending in the construction and mining end-markets in the United States, Europe and Asia
10
was down, resulting in a decrease in off-road equipment related sales. This decrease was partially offset by weaker Truckan increase in Aerospace and Defense sales and the benefit of the acquisition of Western Filter Corporation in October 2008. On-road Products sales decreased in the United States, Europe and Asia due to a drop in demand for new trucks, which lowered new truck build rates. Aftermarket sales also decreased due to decreases in equipment utilization in most off-road end markets and decreased freight activity which impacted on-road markets, partially offset by increases in retrofit emissions sales in the United States, Mexico and Canada. Specifically, strength in new construction and mining equipment spurred Off-road Equipment Products sales worldwide. Additionally, equipment utilization rates remained strong driving Aftermarket Products sales growth.States. In the Industrial Products segment, demand increaseswas also weak in Europe and Asia drove sales growth in the Company’sall markets across all regions. Demand for Industrial Filtration Solutions Products.Products was down as a result of the decline in general industrial activity. Also contributing to the decrease in Industrial Filtration Solutions Products sales was the sale of the air dryer business in Maryville, Tennessee, in October 2008, partially offset by the benefit from the acquisition of LMC West, Inc. in February of 2008. Worldwide sales in Gas Turbine Products weakened late in the year and full year sales were higher thanslightly lower as compared to the prior year primarily dueyear. Gas Turbine Products sales are typically large systems and, as a result, the Company’s shipments and revenues fluctuate from quarter to high demand for power generation capacity as well as strength in the oil and gas industry internationally.quarter. Sales of Special Applications Products were strong with continued strongweak due to decreased demand for membrane products.semiconductor fabrications and industrial uses for PTFE membranes and a sudden contraction of the disk drive market that resulted in decreased demand for the Company’s hard disk drive filters.
Following are net sales by product within both the Engine Products segment and Industrial Products segment:segments:
2007 | 2006 | 2005 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(thousands of dollars) | |||||||||||||||
Engine Products segment: | |||||||||||||||
Off-road Products | $ | 352,065 | $ | 308,175 | $ | 286,230 | |||||||||
Truck Products | 166,370 | 184,303 | 175,048 | ||||||||||||
Aftermarket Products* | 565,827 | 499,076 | 462,562 | ||||||||||||
Total Engine Products segment | 1,084,262 | 991,554 | 923,840 | ||||||||||||
Industrial Products segment: | |||||||||||||||
Industrial Filtration Solutions Products | 515,022 | 440,230 | 424,727 | ||||||||||||
Gas Turbine Products | 158,025 | 121,194 | 112,872 | ||||||||||||
Special Applications Products | 161,519 | 141,349 | 134,294 | ||||||||||||
Total Industrial Products segment | 834,566 | 702,773 | 671,893 | ||||||||||||
Total Company | $ | 1,918,828 | $ | 1,694,327 | $ | 1,595,733 | |||||||||
|
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|
|
|
|
|
|
| 2009 |
| 2008 |
| 2007 |
| |||
|
| (thousands of dollars) |
| |||||||
Engine Products segment: |
|
|
|
|
|
|
|
|
|
|
Off-Road Products* |
| $ | 362,785 |
| $ | 448,681 |
| $ | 352,065 |
|
On-Road Products |
|
| 71,958 |
|
| 123,146 |
|
| 166,370 |
|
Aftermarket Products** |
|
| 567,218 |
|
| 657,344 |
|
| 565,827 |
|
Total Engine Products segment |
|
| 1,001,961 |
|
| 1,229,171 |
|
| 1,084,262 |
|
Industrial Products segment: |
|
|
|
|
|
|
|
|
|
|
Industrial Filtration Solutions Products |
|
| 503,611 |
|
| 600,526 |
|
| 515,022 |
|
Gas Turbine Products |
|
| 206,760 |
|
| 213,138 |
|
| 158,025 |
|
Special Applications Products |
|
| 156,297 |
|
| 189,686 |
|
| 161,519 |
|
Total Industrial Products segment |
| 866,668 | 1,003,350 | 834,566 | ||||||
Total Company |
| $ | 1,868,629 | $ | 2,232,521 | $ | 1,918,828 |
* | Includes Aerospace and Defense products. | |
** | Includes replacement part sales to |
Outlook
While it appears that conditions may have stabilized at many of the Company’s Customers and in many of its end markets, the Company continues to have limited visibility into the future. Consequently, the Company remains cautious in the near-term about forecasting a return to growth.
• | The Company is planning its total Fiscal 2010 sales to be between $1.65 and $1.75 billion, or approximately the pace of the past two quarters. For the full year Fiscal 2010 versus Fiscal 2009, sales are projected to be down 6 to 12 percent. Foreign currency translation is expected to provide a small benefit based on the Company’s planned rates for the Euro of US$1.39 and 98 Yen to the US Dollar for Fiscal 2010. | |
• | The Company did not complete all of its planned restructuring actions by the end of the fourth quarter of Fiscal 2009 and anticipates there could be additional restructuring charges of up to $17 million in Fiscal 2010. Including these costs, the full year Fiscal 2010 operating margin is still expected to be between 9.5 to 10.5 percent. | |
• | The Company expects its full year Fiscal 2010 tax rate to be between 30 and 32 percent. The Company does not anticipate significant discrete tax benefits as occurred in Fiscal 2009. | |
• | The Company expects that cash generated by operating activities will exceed $150 million in Fiscal 2010. Capital spending in Fiscal 2010 is planned at $30.0 million to $40.0 million. The Company will continue to use its cash flow for dividends, potential acquisitions, capital projects and maintenance of its strong liquidity position. |
OutlookEngine Products– The Company expects five to seven percent sales growth in fiscal 2008 for sales in its Engine Products segment. Due to the continued impact of the EPA diesel emissions standards, the Company expects its United States, Mexico and Canada Truck Productsfull year sales to decrease $303 to $40 million in8 percent, inclusive of the first three quartersimpact of 2008 before growth returns in the fourth quarter. Productionforeign currency translation.
• | In its On-Road Products businesses, the Company believes that global build rates for heavy- and medium-duty trucks are stabilizing at the current levels. | |
• | The Company is forecasting slightly lower sales for its Aerospace and Defense Products as the level of Customer demand for defense products is decreasing. | |
• | The Company expects activity in the global construction and mining end markets to remain at their current levels during the first half of Fiscal 2010, and anticipates Customer demand in the farm equipment market outside of North America to continue its current decline. | |
• | The Company’s Aftermarket sales are expected to improve slightly from their current levels as utilization rates for both heavy trucks and off-road equipment are stabilizing. The Company expects |
to benefit from the increasing amount of equipment in the field with PowerCore® technology as well as its other proprietary filtration systems. |
Industrial Products– The Company expects non-residential and public construction marketsforecasts full year Fiscal 2010 sales to benefit from continued infrastructure investment indecrease 11 to 16 percent, inclusive of the United States. Productionimpact of new agriculture equipment by Customers is expected to remain strong globally. Aftermarket Products sales are expected to grow with continued strong equipment utilization in the field, and the increasing amount of equipment with the Company’s PowerCore™ filtration systems.foreign currency translation.
• | Industrial Filtration Solutions sales are projected to decrease 10 to 15 percent for the year due to difficult comparable sales in the first half of Fiscal 2010. The Company expects general manufacturing activity to remain near its current level. | |
• | The Company expects full year sales of its Gas Turbine Products to decrease 21 to 26 percent due the slowdown in demand for large power generation projects. | |
• | Special Applications Products’ sales are projected to be flat to down 5 percent, as conditions appear to have stabilized in the hard disk drive market but may continue to weaken in the short-term in the Company’s membrane products’ industrial end-markets. |
The Company expects eight to ten percent sales growth in fiscal 2008 for its Industrial Products segment. Industrial Filtration Solutions Products sales are expected to grow 10 percent due to continued strong global manufacturing investment and production utilization conditions. The Company expects full-year gas turbine sales growth in the high-single digits over last year’s 30 percent growth, with continued strength in the international power generation and oil and gas market segments. Special Applications Products sales are expected to grow in the mid-single digit percent.
Fiscal 20072009 Compared to Fiscal 20062008
Engine Products SegmentThe Engine Products segment sells to OEMs in the construction, mining, agriculture, aerospace, defense, and transportationtruck markets and to independent distributors, OEM dealer networks, private label accounts and large equipment fleets. Products include air intakefiltration systems, exhaust and emissions systems, liquid filtration systems and replacement filters.
Sales for the Engine Products segment were $1.084 billion, an increase$1,002.0 million, a decrease of 9.318.5 percent from $991.6$1,229.2 million in the prior year, reflecting increases in the worldwide Off-roadyear. International Engine Products sales decreased 24.3 percent and Aftermarket Products businesses partially offset by decreased Truck Products sales in the United States.
11
TableStates decreased 12.4 percent from the prior year. The impact of Contents
Within theforeign currency decreased sales by $38.9 million, or 3.2 percent. Earnings before income taxes as a percentage of Engine Products segment worldwide sales of Off-road8.4 percent decreased from 12.9 percent in the prior year. The Engine Products segment has been negatively impacted by lower absorption of fixed manufacturing costs due to the drop in sales volumes and increased costs related to restructuring, offset by cost savings as a result of workforce reductions already completed, improved distribution efficiencies as compared to the prior year and the impact of cost control measures including reductions in incentive compensation.
Worldwide sales of Off-Road Products were $352.1$362.8 million, an increasea decrease of 14.219.1 percent from $308.2$448.7 million in the prior year. Sales in the United States showed an increase of 7.6 percentdecreased 7.2 percent. Global mining activity started declining due to decreased commodity prices in the second quarter of Fiscal 2009, and remained weak throughout the remainder of the year. Spending in U.S. residential and non-residential construction markets was down more than 27 percent and 5 percent, respectively, over prior year, resulting in a decrease in the sales of the Company’s products into those markets. Domestic Aerospace and Defense sales benefited from the recent acquisition of Western Filter Corporation, which resulted in $15.4 million of incremental sales over the prior year, and continued improvements in new construction and agricultural equipment demand.strong demand for filters for military equipment. Internationally, sales of Off-roadOff-Road Products were up 21.9down 31.3 percent from the prior year, with sales increasingdecreasing in both Europe and Asia by 24.332.5 percent and 16.929.5 percent, respectively, reflecting strengthrespectively. Sales in the newEuropean construction and mining equipment demand internationally.end market decreased due to a decline in construction activity related to the economic downturn. Sales to the European agricultural end market also decreased. In Asia, sales have declined significantly in Japan in the construction end markets.
Worldwide sales of TruckOn-Road Products were $166.4$72.0 million, a decrease of 9.741.6 percent from $184.3$123.1 million in the prior year. TruckOn-Road Products sales in the United States decreased 14.943.2 percent from the prior year, primarily as a result of the new EPA emissions standards which resulteda 29 percent decrease in lower newClass 8 truck build rates, at our Customers.40 percent decrease in medium duty truck build rates by the Company’s Customers and a reduction in high value product mix over the prior year. International TruckOn-Road Products sales increased 5.3decreased 39.6 percent from the prior year. Strongyear, driven by decreased sales in Europe resulted in an increaseand Asia of 9.951.0 percent from strongerand 32.5 percent, respectively, reflecting the current economic downturn for freight activity and new truck build rates due to economic growth and increased market share.rates.
Worldwide Engine Aftermarket Products sales of $565.8$567.2 million increased 13.4decreased 13.7 percent from $499.1$657.3 million in the prior year. Sales in the United States increased 6.8decreased 9.5 percent over the prior year, while internationaldriven
by inventory adjustments at the Company’s Customers and decreases in utilization rates in the mining, construction and transportation industries, partially offset by increases in retrofit emission sales increased 21.3of $5.2 million. International sales decreased 17.4 percent withfrom the prior year, primarily driven by sales increasingdecreases in Europe and Asia and Mexico by 28.2 percent, 13.7of 26.1 percent and 29.98.0 percent, respectively. Equipment utilization remained high in all regions driving demand for replacement filters. Geographic expansion also contributedrespectively, due to the increases internationally.weak economic conditions.
Industrial Products SegmentThe Industrial Products segment sells to various industrial end-users, OEMs of gas-fired turbines, and OEMs and end-users requiring highly purified air. Products include dust, fume and mist collectors, compressed air purification systems, liquid filters and parts, static and pulse-clean air filter systems, PTFE membrane and laminates, and specialized air filtration systems for diverse applications including computer hard disk drives and PTFE membrane and laminates.drives.
Sales for the Industrial Products segment were $834.6$866.7 million, an increasea decrease of 18.813.6 percent from $702.8$1,003.4 million in the prior year resultingyear. International Industrial Products sales decreased 14.2 percent and sales in the United States decreased 12.3 percent from strongerthe prior year. The impact of foreign currency decreased sales by $37.9 million, or 3.8 percent. Despite the 13.6 percent decrease in sales, earnings before income taxes as a percentage of all products across all regions.
Within the Industrial Products segment worldwidesales of 10.3 percent increased from 10.2 percent in the prior year. The improvement in earnings as a percent of sales over the prior year was driven by better execution on large project shipments, cost savings from restructuring actions and the impact of cost control measures including reductions in incentive compensation expense. These were slightly offset by lower absorption of fixed costs and restructuring costs.
Worldwide sales of Industrial Filtration Solutions Products of $515.0$503.6 million increased 17.0decreased 16.1 percent from $440.2$600.5 million in the prior year. Sales in the United States and Europe Asia, South Africa and Mexico increased 7.2 percent, 24.9 percent, 18.8 percent, 27.7decreased 18.3 percent and 25.521.0 percent, respectively. Demand has been strong worldwide but specificallySales in Asia remained relatively flat as compared to the prior year. The decline in Europe wherewas due to reduced demand for industrial dust collectors and compressed air purification systems which fell with the downturn in general manufacturing investment conditions have been good.activity during the year. Domestic sales decreased from the prior year as a result of this same decline in general industrial activity. The results in the year were also influenced by the sale of the air dryer business in Maryville, Tennessee, on October 31, 2008 and the acquisition of LMC West, Inc. (LMC West) in February of Fiscal 2008. The sale of the air dryer business in Maryville, Tennessee, decreased sales $7.6 million over last year. The acquisition of LMC West contributed to $7.0 million of sales during the twelve months of Fiscal 2009 and $4.7 million during the latter six months of Fiscal 2008.
Worldwide sales of Gas Turbine Products were $158.0$206.8 million, an increasea decrease of 30.43.0 percent from $121.2$213.1 million in the prior yearyear. Gas Turbine Products sales are typically large systems and, as a result, the Company’s shipments and revenues fluctuate from quarter to quarter. Incoming orders declined 58 percent in Fiscal 2009 versus Fiscal 2008, a reflection of the reduced demand for power generation remained strong internationally where thereprojects globally. This trend is a deficit of power generation capacity. High levels of activityexpected to continue in the oil and gas industry generated increased demand for small turbines and replacement filters.Fiscal 2010.
Worldwide sales of Special Applications Products were $161.5$156.3 million, a 14.317.6 percent increasedecrease from $141.3$189.7 million in the prior year. SalesDomestic Special Application Products sales decreased 10.0 percent. International sales of Special Application Products decreased 18.7 percent over the prior year. The primary decreases internationally were in the United States, Europe and Asia, increased 30.3which decreased 25.5 and 17.3 percent, 17.1 percent,respectively, due to a significant reduction in demand for hard disk drive filters, semiconductor filtration systems and 11.4 percent from the prior year duePTFE membrane filtration products. The reduction in demand is primarily to strengtha result of a worldwide contraction in the end markets served by our membrane product line.for computers, data storage devices and other electronic products that began in the second quarter of Fiscal 2009.
Consolidated ResultsThe Company reported record net earnings for 2007Fiscal 2009 of $150.7$131.9 million compared to $132.3$172.0 million in 2006, an increaseFiscal 2008, a decrease of 13.923.3 percent. Diluted net earnings per share was a record $1.83, up 18.1$1.67, down 21.2 percent from $1.55$2.12 in the prior year. The Company’s operating income of $211.1$170.0 million increaseddecreased from prior year operating income of $192.8$245.8 million by 9.530.9 percent. Operating income in
The table below shows the Engine Products segment as a percentpercentage of total operating income decreasedcontributed by each segment for each of the last three fiscal years. Corporate and Unallocated includes corporate expenses determined to 62.9 percent from 67.7 percent inbe non-allocable to the prior year. Operatingsegments and interest income in the Industrial Products segment as a percent of total operating income of 37.8 percent increased from the prior year of 33.6 percent.and expense:
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|
|
| 2009 |
|
| 2008 |
|
| 2007 |
|
|
Engine Products |
| 44.5 | % |
| 61.1 | % |
| 62.9 | % |
|
Industrial Products |
| 51.8 | % |
| 42.1 | % |
| 37.8 | % |
|
Corporate and Unallocated |
| 3.7 | % |
| (3.2 | %) |
| (0.7 | %) |
|
Total Company |
| 100 | % |
| 100 | % |
| 100 | % |
|
International operating income, prior to corporate expense allocations, totaled 77.777.9 percent of consolidated operating income in 2007Fiscal 2009 as compared to 77.289.4 percent in 2006. Of the 2007 international operating income, prior to corporate expense allocations, Europe contributed 44.8 percent while Asia contributed 49.7 percent.Fiscal 2008. Total international operating income increased 10.2decreased 39.8 percent from the prior year. This increasedecrease is attributable to strong salesrestructuring charges internationally exceeding domestic restructuring costs, weaker foreign currencies and overall weak business conditions abroad. The table below shows the percentage of Special Applications Products and Gas Turbine Systems Products.total operating income contributed by each major geographic region for each of the last three fiscal years:
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|
|
|
|
|
|
|
|
|
| 2009 |
|
| 2008 |
|
| 2007 |
|
|
United States |
| 22.1 | % |
| 10.6 | % |
| 22.3 | % |
|
Europe |
| 23.3 | % |
| 43.3 | % |
| 34.8 | % |
|
Asia |
| 43.5 | % |
| 37.9 | % |
| 38.6 | % |
|
Other |
| 11.1 | % | 8.2 | % |
| 4.3 | % |
| |
Total Company |
| 100 | % |
| 100 | % |
| 100 | % |
|
Gross margin for 2007Fiscal 2009 was 31.531.6 percent, a decrease from 32.932.5 percent in the prior year. A number of factors combined to lower theThe Company had $10.1 million in restructuring costs which reduced gross margin forin the year, including higher than expected global
12
Tableyear. In addition, lower absorption of Contents
distributionfixed costs due to increased Customer demand, some lower margin Gas Turbine System Products and Industrial Filtration Solutions Products sales as well as some process inefficiencies. Gross margin wasthe drop in production volumes, net of savings from completed restructuring related activities, negatively impacted gross margin by higher than expectedapproximately $23 million. Partially offsetting these factors were the positive impacts of improved product mix, improved distribution costs associated with implementingefficiencies and better execution on large project shipments. During Fiscal 2008, the investments madeCompany began using a new warehouse management system at its main U.S. distribution center. The company encountered start-up problems during the transition to increase the Company’s distribution capacity and capabilities. Plant rationalization and start-up costs for new facilities were $5.3systems which, although now resolved, resulted in $7.6 million in 2007, downunanticipated charges in Fiscal 2008 that did not recur in Fiscal 2009. The Company also incurred a charge of approximately $5.0 million to pretax income related to the use of the Last-In, First-Out (LIFO) accounting method for its U.S. inventories, which charges increasing commodity costs to income immediately. As commodity costs were relatively flat in Fiscal 2009, the Company did not experience a similar impact from $5.4 million in the prior year.rising commodity prices.
Operating expenses for 2007Fiscal 2009 were $393.8$419.8 million or 20.522.5 percent of sales, up from $363.8as compared to $480.1 million or 21.5 percent in the prior year. While operatingOperating expenses were up in total dollars, the amount as a percent of sales was downincreased due to a gainsales volume declines and $7.7 million in operating leverage with revenue increasesrestructuring cost during the year, offset by $19.4 million in benefits from restructuring actions taken and continued cost containment efforts.$19.5 million of lower incentive compensation expense as compared to the prior year. The Company’s expense reduction programs remain in effect.
Interest expense of $14.6$17.0 million increased $4.7$0.4 million from $9.9$16.6 million in the prior year as a result of investments in working capital, the Aerospace Filtration Systems, Inc. acquisition in March, and continued capital investments.higher debt levels. Net other income totaled $8.3$8.5 million in 2007 compared to $6.3Fiscal 2009 up from $6.9 million in the prior year. Components of other income for 2007Fiscal 2009 were as follows: interest income of $1.1$1.6 million, earnings from non-consolidated joint ventures of $5.9$2.3 million, royalty income of $6.1 million, charitable donations of $0.4$0.6 million, foreign exchange gainslosses of $0.2$0.4 million and other miscellaneous income and expense items resulting in incomeexpenses of $1.5$0.5 million.
The effective income tax rate for fiscal 2007Fiscal 2009 was 26.4 percent.18.3 percent compared to 27.2 percent in Fiscal 2008. The decrease in effective income tax rate for fiscal 2006 was 30.1 percent. In the fourth quarter of fiscal 2006, the Company recognized a $3.6 million tax charge for the additional $80.0 million foreign earnings repatriation plan approved pursuant to the American Jobs Creation Act of 2004. The favorable comparison for 2007 is primarily due to the settlements of long-standing court cases and examinations in various jurisdictions for tax charge mentioned above plusyears 2003 through 2006, the reassessment of the corresponding unrecognized tax benefits for the subsequent open years and a favorable resolution of a foreign tax matter. Partially offsetting these effects, the Company’s Fiscal 2009 tax rate was unfavorably impacted by an additional $3.1 millionincreased expense from the repatriation of discreteforeign earnings. Absent these items, in 2007 comparedthe underlying tax rate for the Fiscal
2009 has decreased from Fiscal 2008 by 1.2 points to 2006 related to the30.4 percent. The reinstatement of the U.S. Research and Experimentation Tax Credit, the favorable resolution of some open foreign and statecredit, changes in current year unrecognized tax positions, the expiration of the statute of limitations on certain matters previously reserved,benefits, reduced statutory tax rates and the tax benefit from dividends received from foreign subsidiaries. The tax rate going forward is dependent upon the applicable tax rates, the geographic mix of profits, and resolution of tax audits. The Company expects thatearnings between foreign jurisdictions all contributed to the tax rate will be between 29 and 32 percentreduction in fiscal 2008.the underlying rate.
Total backlog at July 31, 20072009, was $616.1$528.0 million, up 19.2down 33.7 percent from the same period in the prior year. Backlog is one of many indicators of business conditions in our market.the Company’s markets. However, it is not always indicative of future results for a number of reasons, including short lead times in our aftermarketthe Company’s replacement parts businesses and the timing of receipt of orders in many of our original equipmentthe Company’s Engine OEM and industrialIndustrial markets. In the Engine Products segment, total open order backlog increased 9.3decreased 31.8 percent from the prior year. In the Industrial Products segment, total open order backlog increased 38.0decreased 36.8 percent from the prior year. Because some of the change in backlog can be attributed to a change in the ordering patterns of ourthe Company’s Customers and/or the impact of foreign exchange translation rates, it may not necessarily correspond to higher future sales.
Fiscal 20062008 Compared to Fiscal 20052007
Engine Products SegmentSales for the Engine Products segment were $991.6 million,$1.229 billion, an increase of 7.313.4 percent from $923.8 million$1.084 billion in the prior year, reflecting increases in the Off-Road and Aftermarket Products businesses, partially offset by decreased On-Road Products sales in the NAFTA region. The impact of foreign currency increased sales across all products within this segment both in the United States and internationally.
Within theby $60.6 million, or 5.6 percent. Earnings before income taxes as a percentage of Engine Products segment worldwide sales of Off-road12.9 percent decreased from 13.0 percent in the prior year. The Engine Products segment as a percent of sales was down slightly from last year due the impact of distribution inefficiencies and start-up costs related to the implementation of a new warehouse management system at our Rensselaer, Indiana distribution center, offset by stronger global volume across most business units.
Worldwide sales of Off-Road Products were $308.2$448.7 million, an increase of 7.727.4 percent from $286.2$352.1 million in the prior year. Sales in the United States showed an increase of 5.827.1 percent, primarily driven by the impact of the acquisition of Aerospace Filtration Systems, Inc. in March of Fiscal 2007 and robust sales in the Company’s defense business due to continued improvementsthe combination of replacement parts sales growth, new vehicle programs (including the Mine Resistant Ambush Protected armored vehicles) and retrofit programs for the Abrams Tank and military helicopters including the Black Hawk. In addition, strong sales in newagriculture, mining and non-residential construction and mining equipment demand.markets more than offset a decrease in residential construction markets. Internationally, sales of Off-roadOff-Road Products were up 9.927.8 percent from the prior year, with sales increasing in both Europe and Asia and Europe by 14.024.4 percent and 8.436.3 percent, respectively, reflecting the strength in the off-roadheavy construction market and increased demand for mining and agricultural equipment market internationally.
Worldwide sales of TruckOn-Road Products were $184.3$123.1 million, an increasea decrease of 5.326.0 percent from $175.0$166.4 million in the prior year. TruckOn-Road Products sales in the United States increased 6.9decreased 43.3 percent from the prior year due to record heavyas a result of lower new truck build rates and strongat the Company’s Customers following the implementation of the 2007 Environmental Protection Agency diesel emission sales.regulations. International TruckOn-Road Products sales increased 0.914.9 percent from the prior year. StrongOn-Road Products sales in Europe resulted in an increase of 10.4 percentbenefited from stronger build rates and increased market share. Offsetting Europe’sresulting in a sales increase was a decrease in sales in Asia of 5.9 percent primarily as a result of the weaker Japanese yen.
13
Table of Contents28.1 percent.
Worldwide Engine Aftermarket Products sales of $499.1$657.3 million increased 7.916.2 percent from $462.6$565.8 million in the prior year as equipment utilization rates remained high spurring demand for replacement filters.year. Sales in the United States increased 9.14.6 percent over the prior year while internationalyear. International sales increased 6.528.4 percent with sales increasing in Europe, Asia and Mexico by 6.125.3 percent, 5.423.5 percent and 25.777.0 percent, respectively. The large percentage increase in Mexico is partially a result of transferring some Customer relationships to the Company’s Mexican subsidiary from the United States to better serve the Customers. Geographic expansion and high equipment utilization rates contributed to the overall increases. In addition, sales continue to benefit from the increasing amount of equipment in the field with the Company’s PowerCore™ filtration systems. Sales of PowerCore™ replacement filters increased 58.9 percent over the prior year.
Industrial Products SegmentSales for the Industrial Products segment were $702.8$1,003.4 million, an increase of 4.620.2 percent from $671.9$834.6 million in the prior year, resulting from stronger sales ofin Industrial Filtration Solutions Products, Special Application Products and Gas Turbine Systems Products and Special Applications Products.
Within theacross all regions. The impact of foreign currency increased sales by $62.0 million, or 7.4 percent. Earnings before income taxes as a percentage of Industrial Products segment worldwidesales of 10.2 percent increased from 9.6 percent in the prior year. The improvement in earnings as a percent of sales over the prior year was driven by cost leverage across most business units due to strong global volumes offset slightly lower margins on a few large projects in both our Gas Turbine and Industrial Air Filtration business units.
Worldwide sales of Industrial Filtration Solutions Products of $440.2$600.5 million increased 3.616.6 percent from $424.7$515.0 million in the prior year. Sales in the United States, Europe, Asia and South Africa and Mexico increased 5.89.9 percent, 2.722.0 percent, 33.616.5 percent and 45.125.0 percent, respectively. SalesU.S. sales included the impact of the acquisition of LMC West, Inc. in February of Fiscal 2008. Demand was strong worldwide but specifically in Europe, decreased 0.9 percent fromwhere manufacturing investment conditions were favorable throughout the prior year reflecting stability in the market despite the negative impact of foreign currency translation.fiscal year.
Worldwide sales of Gas Turbine Products were $121.2$213.1 million, an increase of 7.434.9 percent from $112.9$158.0 million in the prior yearyear. Growth globally has been strong in both the power generation and oil and gas markets. The Gas Turbine Products sales are typically large systems and, as business conditions strengthened primarily towarda result, the end of fiscal 2006.Company’s shipments and revenues fluctuate from quarter to quarter.
Worldwide sales of Special Applications Products were $141.3$189.7 million, a 5.317.4 percent increase from $134.3$161.5 million in the prior year. Sales in the United States, decreased 16.9Europe, and Asia increased 8.3 percent, 25.3 percent, and 17.8 percent, respectively, from the prior year due primarily to softness in the end markets served by our membrane product line whileas sales in Europeof disk drive filters and Asia increased 13.4 percent and 8.5 percent from the prior year, respectively, due to strong demand for computer hard drives and other consumer electronics.PTFE membranes remained strong.
Consolidated ResultsThe Company reported record net earnings for 2006Fiscal 2008 of $132.3$172.0 million compared to $110.6$150.7 million in 2005,Fiscal 2007, an increase of 19.714.1 percent. Diluted net earnings per share was a record $1.55,$2.12, up 22.115.8 percent from $1.27$1.83 in the prior year. The Company’s operating income of $192.8$245.8 million increased from prior year operating income of $156.5$211.1 million by 23.216.4 percent. Operating income in
The table below shows the Engine Products segment as a percentpercentage of total operating income decreased to 67.7 percent from 77.4 percent incontributed by each segment for each of the prior year. Operating income in the Industrial Products segment as a percent of total operating income of 33.6 percent decreased from the prior year of 34.2 percent. This change is primarily attributable to the Company’s decision to adjust its basis of measurement for earnings before income taxes such that certain expenses, such as amortization of intangibles, which were previously considered to belast three fiscal years. Corporate and Unallocated are now included inincludes corporate expenses determined to be non-allocable to the Enginesegments and Industrial Products segment results. This adjustment is discussed further in Note J.interest income and expense:
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| 2008 |
|
| 2007 |
|
| 2006 |
|
|
Engine Products |
| 61.1 | % |
| 62.9 | % |
| 67.7 | % |
|
Industrial Products |
| 42.1 | % |
| 37.8 | % |
| 33.6 | % |
|
Corporate and Unallocated |
| (3.2 | %) |
| (0.7 | %) |
| (1.3 | %) |
|
Total Company |
| 100 | % |
| 100 | % |
| 100 | % |
|
International operating income, prior to corporate expense allocations, totaled 77.289.4 percent of consolidated operating income in 2006Fiscal 2008 as compared to 82.777.7 percent in 2005. Of the 2006 international operating income, prior to corporate expense allocations, Europe contributed 42.4 percent while Asia contributed 48.5 percent.Fiscal 2007. Total international operating income increased 15.034.0 percent from the prior year. This increase is attributable to stronger foreign currencies, the favorable impact of new plants globally and overall strong salesbusiness conditions. The table below shows the percentage of Special Applications Products and Gas Turbine Systems Products.total operating income contributed by each major geographic region for each of the last three fiscal years:
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| 2008 |
|
| 2007 |
|
| 2006 |
|
|
United States |
| 10.6 | % |
| 22.3 | % |
| 22.8 | % |
|
Europe |
| 43.3 | % |
| 34.8 | % |
| 32.7 | % |
|
Asia |
| 37.9 | % |
| 38.6 | % |
| 37.5 | % |
|
Other |
| 8.2 | % |
| 4.3 | % |
| 7.0 | % | |
Total Company |
| 100 | % |
| 100 | % |
| 100 | % |
|
Gross margin for 2006Fiscal 2008 was 32.932.5 percent, an increase from 31.731.5 percent in the prior year. The primary drivers for the improved gross margin benefitedinclude higher production volumes, a favorable product mix, cost controls and productivity improvements. Partially offsetting the improvements was a charge of $5.0 million to pretax income related to the use of the Last-In, First-Out (LIFO) accounting method for its
U.S. inventories, which charges increasing commodity costs to income immediately. Also partially offsetting the improvements in gross margin were higher than expected distribution costs associated with implementing the investments made to increase the Company’s distribution capabilities and higher purchased commodity costs. During the second quarter, the Company began utilizing a new warehouse management system at its main U.S. distribution center. The Company encountered start-up problems during the transition to the new system. There were incremental expenses related to refining the system which resulted in $7.6 million in unanticipated charges for the year. Gross margin in Fiscal 2007 was also negatively impacted by a higher mix of systems sales versus replacement part sales and higher than expected distribution costs in Europe from the Company’s focus on cost reduction efforts, production efficiencies and some selective price increases. The Company continued its efforts to improve manufacturing infrastructure and reduce product costs through plant rationalization.integration of new distribution facilities while Customer demand ramped up beyond expectations. Plant rationalization and start-up costs for new facilities were $5.4$0.6 million in 2006, upFiscal 2008, down from the $4.0$5.3 million in the prior year.
Operating expenses for 2006Fiscal 2008 were $363.8$480.1 million or 21.5 percent of sales, up from $349.1$393.8 million or 21.920.5 percent in the prior year. Operating expensesThis increase was driven by the impact of foreign exchange as well as investments in fiscal 2006 included $2.8 millionresearch and development to support essential product development initiatives and the development of stock option expense that was not included in fiscal 2005. Operating expenses in fiscal 2005 included a $6.4 million increase to the Company’s legal reserve for the EPC patent infringement judgment.next generation technologies and products across many product lines. The Company continuedalso increased its investment in information technology to focus on operating expense controls in 2006.improve Customer support capabilities and enhance its internal system infrastructure capabilities.
Interest expense of $9.9$16.6 million increased $0.5$2.0 million from $9.4$14.6 million in the prior year.year as a result of increased borrowing costs associated with the increases in working capital and the Aerospace Filtration Systems, Inc. acquisition in March of 2007. Net other income totaled $6.3$6.9 million in 2006Fiscal 2008 compared to $7.7$8.3 million in the prior year. Components of other income for 2006Fiscal 2008 were as follows: interest income of $1.7$1.5 million, earnings from non-consolidated joint
14
ventures of $5.0$1.9 million, royalty income of $7.6 million, charitable donations of $2.1$0.9 million, foreign exchange gainslosses of $0.3$3.1 million and other miscellaneous income and expense items resulting in incomeexpenses of $1.4$0.1 million.
The effective income tax rate for fiscal 2006Fiscal 2008 was 30.127.2 percent. In the fourth quarter of fiscal 2006, the Company recognized a $3.6 million tax charge for the additional $80.0 million foreign earnings repatriation plan approved pursuant to the American Jobs Creation Act of 2004. The effective income tax rate for fiscal 2005Fiscal 2007 was 28.6 percent26.4 percent. The Company’s Fiscal 2008 tax rate benefited from the effect of changes in foreign statutory tax rates on outstanding deferred tax positions and reduced state tax expense due to lower U.S. earnings. U.S. earnings were also included a $4.0 millionsignificantly lower percentage of total earnings, emphasizing the fact that the average tax charge forrate continues to reflect the significant contribution from the Company’s international operations, the majority of which have statutory tax rates below those of the U.S. Offsetting these favorable effects, the Company’s Fiscal 2008 tax rate was also impacted by a previous $80.0 millionreduced U.S. dividends received deduction, a reduced benefit from the repatriation of foreign earnings, repatriation plan approved pursuant to the American Jobs Creation Actexpiration of 2004. The higher fiscal 2006 effectivesome foreign tax rate as compared to the prior year is primarily a result of the mix of earnings in our various jurisdictions. Higher tax jurisdictions such as Japan, Germany and the United States contributed a higher proportion of our taxable earnings as compared to the prior year. The unfavorable timing of the phase-out/phase-in provisions of the United States export credit versus the manufacturing creditincentives, and the expiration of the researchU.S. Research and development credit also adversely affected the rate for fiscal 2006.Experimentation credit.
Total backlog at July 31, 20062008, was $516.7$771.2 million, up 25.425.2 percent from the same period in the prior year. Backlog is one of many indicators of business conditions in our market.the Company’s markets. However, it is not always indicative of future results for a number of reasons, including short lead times in our aftermarketthe Company’s replacement parts businesses and the timing of receipt of orders in many of our original equipmentthe Company’s Engine OEM and industrialIndustrial markets. In the Engine Products segment, total open order backlog increased 20.324.9 percent from the prior year. In the Industrial Products segment, total open order backlog increased 36.425.6 percent from the prior year. Because some of the change in backlog can be attributed to a change in the ordering patterns of ourthe Company’s Customers and/or the impact of foreign exchange translation rates, it may not necessarily correspond to higher future sales.
Liquidity and Capital Resources
Financial ConditionAt July 31, 2007,2009, the Company’s capital structure was comprised of $156.8$35.1 million of current debt, $129.0$253.7 million of long-term debt and $624.7$688.6 million of shareholders’ equity. The Company had cash and cash equivalents of $55.2$143.7 million at July 31, 2007.2009. The ratio of long-term debt to total capital was 17.126.9 percent and 15.519.3 percent at July 31, 20072009 and 2006,2008, respectively.
Total debt outstanding increased $105.4decreased $32.8 million forduring the year to $285.8$288.7 million outstanding at July 31, 2007. The increase is a result of an increase in short-term2009. Short-term borrowings outstanding at the end of the year of $49.7were $109.8 million lower as compared to the prior year, and an increase in long-term debt of $55.6increased $77.0 million (including current maturities) from the prior year.
The increase in long-term debt was comprised of twoa new note agreements.agreement. On May 18, 2007,November 14, 2008, the Company issued a 1.65 billion yen, or approximately $13.9an $80 million guaranteedsenior unsecured note, that maturesdue on May 18, 2014.November 14, 2013. The debt was issued at face value and bears interest payable semi-annually at a rate of 2.019 percent. On June 1, 2007, the Company issued $100 million of senior unsecured notes. The first $50 million was funded on June 1, 2007, and the remaining two $25 million tranches will be funded on September 28, 2007 and November 30, 2007. The three tranches are due on June 1, 2017, September 28, 2017, and November 30, 2017, respectively. The debt was issued at face value and bears interest payable semi-annually at a rate of 5.486.59 percent. The proceeds from the notes will benote were used to refinance existing debt orand for general corporate purposes.
15
The following table summarizes the Company’s fixed cash obligations as of July 31, 20072009, for the years indicated (thousands of dollars):
Payments Due by Period | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations | Total | Less than 1 year | 1 - 3 years | 3 – 5 years | More than 5 years | ||||||||||||||||||
Long-term debt obligations | $ | 161,094 | $ | 32,935 | $ | 11,370 | $ | 45,119 | $ | 71,670 | |||||||||||||
Capital lease obligations | 1,577 | 732 | 534 | 137 | 174 | ||||||||||||||||||
Interest on long-term debt obligations | 46,513 | 8,234 | 11,376 | 9,183 | 17,720 | ||||||||||||||||||
Operating lease obligations | 18,509 | 7,914 | 7,768 | 2,406 | 421 | ||||||||||||||||||
Purchase obligations(1) | 145,568 | 141,834 | 3,734 | — | — | ||||||||||||||||||
Pension and deferred compensation(2) | 26,135 | 2,009 | 4,764 | 3,210 | 16,152 | ||||||||||||||||||
Total | $ | 399,396 | $ | 193,658 | $ | 39,546 | $ | 60,055 | $ | 106,137 | |||||||||||||
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| Payments Due by Period |
| ||||||||||
Contractual Obligations |
| Total |
| Less than |
| 1 - 3 |
| 3 – 5 |
| More than |
| |||||
Long-term debt obligations |
| $ | 257,879 |
| $ | 4,982 |
| $ | 47,678 |
| $ | 97,434 |
| $ | 107,785 |
|
Capital lease obligations |
|
| 1,291 |
|
| 514 |
|
| 718 |
|
| 59 |
|
| — |
|
Interest on long-term debt obligations |
|
| 79,030 |
|
| 13,484 |
|
| 25,344 |
|
| 19,952 |
|
| 20,250 |
|
Operating lease obligations |
|
| 21,290 |
|
| 8,422 |
|
| 8,924 |
|
| 3,750 |
|
| 194 |
|
Purchase obligations(1) |
|
| 125,599 |
|
| 106,621 |
|
| 18,500 |
|
| 478 |
|
| — |
|
Pension and deferred compensation(2) |
|
| 78,643 |
|
| 6,416 |
|
| 10,100 |
|
| 9,725 |
|
| 52,402 | |
Total(3) |
| $ | 563,732 |
| $ | 140,439 |
| $ | 111,264 |
| $ | 131,398 |
| $ | 180,631 |
|
(1) | Purchase obligations consist primarily of inventory, tooling, contract employment services and capital expenditures. The Company’s purchase orders for inventory are based on expected Customer demand, and quantities and dollar volumes are subject to change. |
(2) | Pension and deferred compensation consists of long-term pension liabilities and salary and bonus deferrals elected by certain executives under the Company’s deferred compensation plan. Deferred compensation balances earn interest based on a treasury bond rate as defined by the plan and are payable at the election of the participants. |
(3) | In addition to the above contractual obligations, the Company may be obligated for additional cash outflows of $16.9 million of potential tax obligations. The payment and timing of any such payments is affected by the ultimate resolution of the tax years that are under audit or remain subject to examination by the relevant taxing authorities, and are therefore not currently capable of estimation by period. |
As a result of its current over funded status,past contribution practices, the Company does not have a minimum required contribution under the Pension Benefit Guarantee Corporation requirements for its U.S. pension plans for fiscal 2008. ThereFiscal 2010. As such, there is no current intention to make a U.S. pension contribution.contribution in Fiscal 2010. For its non-U.S. pension plans, the Company estimates that it will contribute approximately $4.0$5 million in fiscal 2008Fiscal 2010 based upon the local government prescribed funding requirements. Future estimates of the Company’s pension plan contributions may change significantly depending on the actual rate of return on plan assets, discount rates and regulatory rules.requirements.
On April 2, 2007, the The Company amended and renewed its existing $150 millionhas a five-year, multi-currency revolving credit facility that was to mature on September 2, 2009. The amendment extendswith a group of banks under which the maturity date of the facility to April 2, 2012 and increases the capacityCompany may borrow up to $250 million. There were no other material changes in terms and conditions.This facility matures on April 2, 2013. The agreement provides that loans may be made under a selection of currencies and rate formulas including Base Rate Advances or Off Shore Rate Advances. The interest rate on each advance is based on certain market interest rates and leverage ratios. Facility fees and other fees on the entire loan commitment are payable over the duration of this facility. There was $20.0 million outstanding at July 31, 20072009, and no amounts$70.0 million outstanding at July 31, 2006, leaving $230.02008. The amount available for further borrowing reflects a reduction for issued standby letters of credit, as discussed below. At July 31, 2009 and 2008, $210.0 million and $150.0$161.5 million, respectively, was available for further borrowing under such facilities. The weighted average interest rate on these short-term borrowings outstanding at July 31, 2009 and 2008, was 0.56 percent and 2.73 percent, respectively.
The Company also has three uncommitted credit facilities in the United States, which provide unsecured borrowings for general corporate purposes. At July 31, 2009 and 2008, there was $70.0 million available for use. There was $9.6 million and $28.0 million outstanding under these facilities at July 31, 20072009 and July 31, 2006,2008, respectively. The weighted average interest rate on these short-term borrowings outstanding at July 31, 20072009 and 2008, was 5.59 percent.0.53 percent and 2.79 percent, respectively.
The Company also has three agreements under uncommitted credit facilities, which provide unsecured borrowings for general corporate purposes. At July 31, 2007 and 2006, there was $70.0 million available for use. There was $34.1 million and no balance outstanding under these facilities at July 31, 2007 and 2006 respectively. The weighted average interest rate on these short-term borrowings outstanding at July 31, 2007 was 5.58 percent.
The Company also has a 100€100 million euro program for issuing treasury notes for raising short, medium and long-term financing for its European operations. There was 22.7 million euro, or $31.1 million,were no amounts outstanding on this program at
July 31, 20072009 and 35.3 million euro, or $45.0 million, outstanding as of July 31, 2006. The weighted average interest rate on these short-term issuances at July 31, 2007 and 2006 was 4.27 percent and 3.13 percent, respectively.2008. Additionally, the Company’s European operations have lines of credit in the amountwith an available limit of 100.1 million euro.€72.9 million. There were no amounts outstanding on these lines of credit as of July 31, 2009. As of July 31, 2007,2008, there was 26.0€23.5 million, euro, or $35.6 million, outstanding. As of July 31, 2006 there was 20.1 million euro, or $25.6$36.9 million outstanding. The weighted average interest rate of these short-term borrowings outstanding at July 31, 2007 and 20062008, was 5.52 and 3.38 percent, respectively.
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Table of Contents5.60 percent.
Other international subsidiaries may borrow under various credit facilities. There were no amounts outstanding under these credit facilities as of July 31, 2009. As of July 31, 2007 and 2006,2008, borrowings under these facilities were $2.4 million and $2.6 million, respectively.$4.5 million. The weighted average interest rate on these international borrowings outstanding at July 31, 20072008, was 2.88 percent.
During the first quarter of Fiscal 2009, the global credit market began to experience a significant tightening of credit availability and 2006 was 3.90 percentinterest rate volatility. This crisis resulted in reduced funding available for commercial banks and 7.92 percent,corporate debt issuers. As a result, capital market financing became more expensive and less available. The Company has assessed the implications of these factors on its current business and believes that its current financial resources are sufficient to continue financing its operations. There can be no assurance, however, that the cost or availability of future borrowings will not be impacted by ongoing capital market disruptions.
The Company is exposed to changes in the fair value of its fixed-rate debt resulting from interest rate fluctuations. To hedge this exposure the Company entered into two fixed-to-variable interest rate swaps on August 3, 2009, subsequent to year end, for $80 million and $25 million, respectively, for approximately 5 and 8 years, respectively. These interest rate swaps will be accounted for as fair value hedges. Changes in the payment of interest resulting from the interest rate swaps will be recorded as an offset to interest expense.
Certain note agreements contain debt covenants related to working capital levels and limitations on indebtedness. As of July 31, 2007,2009, the Company was in compliance with all such covenants. The Company currently expects to remain in compliance with these covenants.
Also, at July 31, 20072009 and 2006,2008, the Company had outstanding standby letters of credit totaling $16.5$20.0 million and $18.7$18.5 million, respectively, upon which no amounts had been drawn. The letters of credit guarantee payment to third parties in the event the Company is in breach of a specified bond financing agreement and insurance contract terms as detailed in each letter of credit.
Shareholders’ equity increased $77.9decreased $51.4 million in 2007Fiscal 2009 to $624.7 million.$688.6 million at July 31, 2009. The increasedecrease was primarily due to current year earnings of $150.7 million, an increase in accumulated other comprehensive income of $18.8 million primarily resulting from increases duechanges to foreign currency translation of $28.6$63.4 million, partially offset by $10.2$58.6 million (net of tax) of adjustments related to the implementation of the Financial Accounting Standards Board’s new pension statement. This statement requires recognition of the overfunded or underfunded status of defined benefit postretirement plans as an asset or liability, in the statement of financial position and to recognize change in that funded status in accumulated other comprehensive income in the year in which the adoption occurs and in comprehensive income in the following years. There were also increases of $14.8 million of stock option and other stock activity offset by $76.9$32.8 million of treasury stock repurchases and $29.5$35.5 million of dividend declarations. These decreases were partially offset by current year earnings of $131.9 million.
Cash FlowsDuring fiscal 2007, $117.0Fiscal 2009, $276.9 million of cash was generated from operating activities, compared with $156.7$173.5 million in 2006Fiscal 2008 and $142.6$117.0 million in 2005.Fiscal 2007. Operating cash flows in 2007 decreasedFiscal 2009 increased by $39.6$103.4 million from the prior year, primarily due to paymentsyear. Operating cash flows were positively impacted by the decreased level of $25.3 million tosales as a result of the worldwide recession and the Company’s defined benefit plans and increasescash flow improvement initiatives. This led to a decrease in accounts receivable and inventory levels of $31.4$146.8 million and inventories$115.5 million, respectively, and corresponding increase operating cash flows. These positive impacts were partially offset by the negative impacts of $36.5 million. Accounts receivable increased 14.5 percent, slightly faster than the 13.3 percent increasedecreases in sales. Inventories increased due to a numberaccounts payable and accrued compensation of factors including expanded inventory levels to better serve our Customer needs as global distribution capacity is broadened, additional amounts of inventory in-transit due to higher international sales$82.3 million and the inclusion of inventory related to the Aerospace Filtration Systems acquisition.$22.9 million, respectively, which reduced operating cash flows. In addition to cash generated from operating activities, the Company increased its outstanding short-term debt by $44.9 million and net long-term debt by $55.4$72.7 million. Cash flow generated by operations, $3.9 million of proceeds from the sale of the Maryville, TN air dryer business and increased$80.0 million of additional long-term debt levels were used primarily to support $76.6$45.6 million of net capital expenditures, $76.9the acquisition of Western Filter Corporation for $78.5 million, $32.8 million for stock repurchases, acquisitions and investments of $40.6 million and $28.8$35.2 million for dividend payments.payments and repayment of $103.7 million of short-term debt. Cash and cash equivalents increased $9.8$60.3 million during 2007.Fiscal 2009.
Net capital expenditures for property, plant and equipment totaled $45.6 million in Fiscal 2009, $70.8 million in Fiscal 2008 and $76.6 million in 2007, $77.6 million in 2006 and $50.2 million in 2005.Fiscal 2007. Net capital expenditures is comprised of purchases of property, plant, and equipment of $46.1 million, $72.1 million, and $77.4 million $81.3 million,in Fiscal 2009, 2008 and $55.0 million in fiscal 2007, 2006 and 2005, respectively, partially offset by proceeds from the sale of property, plant, and equipment of
$0.5 million, $1.3 million, and $0.8 million $3.7 million,in Fiscal 2009, 2008 and $4.8 million in fiscal 2007, 2006 and 2005, respectively. Fiscal 20072009 capital expenditures primarily related to new distribution facilitiesplant capacity additions and productivity enhancing investments at various plants worldwide.
Capital spending in 2008Fiscal 2010 is planned at $60.0$30.0 million to $70.0$40.0 million. Significant planned expenditures include the expansion of two current manufacturing facilities. It is anticipated that 2008Fiscal 2010 capital expenditures will be financed primarily by cash on hand, cash generated from operations and existing lines of credit.
The Company expects that cash generated by operating activities will exceed $150 million in 2008.Fiscal 2010. At July 31, 2007,2009, the Company had $55.2cash of $143.7 million, cash, $265.9which primarily exists at subsidiaries outside of the United States. The Company also had $270.4 million available under existing credit facilities in the United States, and 151.4€172.9 million, euro, or $207.3$245.3 million, available under existing credit facilities in Europe.Europe and $41.4 million available under various credit facilities and currencies in Asia and the rest of the world. The Company believes that the combination of existing cash, available credit under existing credit facilities and the expected cash generated by operating activities will be adequate to meet cash requirements for fiscal 2008,Fiscal 2010, including debt repayment, issuance of anticipated dividends, possible share repurchase activity and capital expenditures.
17
DividendsThe Company’s dividend policy is to maintain a payout ratio, which allows dividends to increase with the long-term growth of earnings per share. The Company’s dividend payout ratio target is 20.020 percent to 30.030 percent of the average earnings per share of the last three years. The current quarterly dividend of 0.10 cents per share equates to 25.8 percent of the average net earnings per share for 2005 through 2007.
Share Repurchase PlanIn fiscal 2007,Fiscal 2009, the Company repurchased 2.20.8 million shares of common stock for $76.9$32.8 million under the share repurchase plan authorized in March 2006 at an average price of $35.21$40.86 per share. The Company repurchased 3.82.2 million shares for $118.9$92.2 million in 2006.Fiscal 2008. The Company repurchased 3.82.2 million shares for $116.3$76.9 million in 2005.Fiscal 2007. As of July 31, 2007,2009, the Company had remaining authorization to repurchase 4.00.9 million shares under this plan.
Off-Balance Sheet ArrangementsThe Company does not have any off-balance sheet arrangements, with the exception of the guarantee of 50 percent of certain debt of its joint venture, Advanced Filtration Systems, Inc. as further discussed in Note K of the Company’s Notes to Consolidated Financial Statements. As of July 31, 2007,2009, the joint venture had $3.5$27.7 million of outstanding debt. The Company does not believe that this guarantee will have a current or future effect on its financial condition, results of operation, liquidity or capital resources.
Environmental Matters New Accounting Standards The CompanyIn May 2009, the Financial Accounting Standards Board (FASB) issued FAS No. 165, Subsequent Events (FAS 165), which establishes reserves as appropriategeneral standards of accounting and disclosure for potential environmental liabilitiesevents that occur after the balance sheet date but before the financial statements are issued. This new standard was effective for interim or annual financial periods ending after June 15, 2009, and will continue to accrue reserves in appropriate amounts. While uncertainties exist with respect to the amounts and timing of the Company’s ultimate environmental liabilities, management believes that such liabilities, individually and in the aggregate, willdid not have a material adverse effectan impact on the Company’sour consolidated financial conditionposition or results of operations.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1,NewInterim Disclosures about Fair Value of Financial Instruments, (FSP No. FAS-107-1 and APB-28-1), which amends FAS 107,Disclosures about Fair Value of Financial Instrumentsand Accounting StandardsPrinciples Board (APB) Opinion No. 28,Interim Financial Reporting, to require disclosures about fair value of financial instruments for interim periods. This FSP will be effective for the Company for the quarter ended October 31, 2009, and will expand the Company’s disclosures regarding the use of fair value in interim periods.
In December 2008, the FASB issued FSP No. FAS 132(R)-1,Employers’ Disclosures about Postretirement Benefit Plan Assets(FSP No. FAS 132(R)), which provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This FSP is effective for fiscal years ending after December 15, 2009. The Company is currently evaluating the impact of adopting FSP No. FAS 132(R) on our defined benefit pension and other postretirement plan note disclosures.
In September 2006, the FASB issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132 (R)132(R) (“(SFAS 158”)158). ThisThe portion of the statement that requires recognition of the overfunded or underfunded status of defined benefit postretirement plans as an asset or liability in the statement of financial position and to recognize changeswas adopted in that funded status in accumulated other comprehensive income in the year in which the adoption occurs and in other comprehensive in the following years.
Fiscal 2007 with minimal impact. SFAS 158 also requires measurement of the funded status of a plan as of the date of the statement of financial position. SFAS 158 was effective for recognition of the funded status of the benefit plans for the Company’s fiscal year 2007 and resulted in a $10.2 million decrease in shareholders’ equity, net of tax. See further discussion in Note F of the Company’s Notes to Consolidated Financial Statements on the impact of this change on the Company’s consolidated financial statements. SFAS 158’s provisions regarding the change in the measurement date of postretirement benefits plans will requireThat provision required the Company to change its measurement date from April 30 to July 31 beginning with fiscal yearin Fiscal 2009. The adoption of the measurement date provision resulted in an after-tax decrease to Retained earnings of $0.9 million, a decrease to Other assets of $0.5 million increase to Other long-term liabilities of $0.8 million and an increase to Deferred income taxes of $0.5 million.
In JuneSeptember 2006, the FASB issued SFAS No. 157,Fair Value Measurements(SFAS 157). This statement defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 applies whenever another standard requires (or permits) assets or liabilities to be measured at fair value, except for the measurement of share-based payments. SFAS 157 does not expand the use of fair value to any new circumstances, and was effective for the majority of the Company’s assets and liabilities for its Fiscal 2009 year beginning August 1, 2008. The adoption of this portion of SFAS 157 in Fiscal 2009 did not have a material impact on the Company’s financial statements. On February 12, 2008, the FASB Interpretation No. 48,issued FASB Staff Position (FSP) FAS 157-2,Accounting for Uncertainty in Income Taxes, an interpretationEffective Date of FASB Statement No. 109157 (“FIN 48”)(FSP FAS 157-2). This pronouncement prescribes a recognition thresholdFSP FAS 157-2 delays by one year the effective date of SFAS 157 for certain non-financial assets and measurement attribute fornon-financial liabilities. The Company is currently evaluating the financial statement recognitionimpact the FSP FAS 157-2 will have on the determination of fair value related to non-financial assets and measurementnon-financial liabilities in Fiscal 2010. The adoption of tax positions taken orFSP FAS 157-2 is not expected to have a material impact on the Company’s financial statements.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be taken in a tax return. FIN 48measured at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and was effective for the Company with its 2009 fiscal year, beginning August 1, 2008. The adoption of SFAS 159 did not have a material impact on the Company’s financial statements.
In December 15, 20062007, the FASB issued SFAS No. 141(R),Business Combinations(SFAS 141(R)), which changes the accounting for business combinations and their effects on the financial statements. SFAS 141(R) will be effective for the Company with itsat the beginning of Fiscal 2010. In February 2009, the FASB issued FASB Staff Position 141(R)-a,Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies(FSP FAS 141(R)-a), which will amend certain provisions of SFAS 141(R). The adoptions of SFAS 141(R) and FSP FAS 141(R)-a are not expected to have a material impact on the Company’s consolidated financial statements.
In March 2008, fiscal year, commencing August 1, 2007.the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133(SFAS 161). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities, including (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The Company is currently evaluatingadopted the effectprovisions of FIN 48 on itsSFAS 161 effective February 1, 2009. The adoption of SFAS 161 only requires additional disclosures about the Company’s derivatives and thus did not affect the Company’s consolidated financial statements.
Market Risk
The Company’s market risk includes the potential loss arising from adverse changes in foreign currency exchange rates and interest rates. The Company manages foreign currency market risk from time to time through the use of a variety of financial and derivative instruments. The Company does not enter into any of these instruments for trading purposes to generate revenue. Rather, the Company’s objective in managing these risks is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates. The Company uses forward exchange contracts and other hedging activities to hedge the U.S. dollar value resulting from existing recognized foreign currency denominated asset and liability balances and also for anticipated foreign currency transactions. The Company also naturally hedges foreign
currency through its production in the countries in which it sells
18
its products. The Company’s market risk on interest rates is the potential decrease in fair value of long-term debt resulting from a potential increase in interest rates. See further discussion of these market risks below.
Foreign CurrencyDuring 2007,Fiscal 2009, the U.S. dollar was generally weakerstrong throughout the year relativecompared to many of the currencies of the foreign countries in which the Company operates. The overall weaknessstrength of the dollar had a positivenegative impact on the Company’s international net sales results because the foreign denominated revenues translated into morefewer U.S. dollars.
It is not possible to determine the true impact of foreign currency translation changes; however,changes. However, the direct effect on reported net sales and net earnings can be estimated. For the year ended July 31, 2007,2009, the impact of foreign currency translation resulted in an overall increasedecrease in reported net sales of $47.2$76.8 million, a decrease in operating expenses of $24.5 million and an increasea decrease in reported net earnings of $5.1$3.8 million. Foreign currency translation had a positivenegative impact in severalmost regions around the world. In Europe, the weakerstronger U.S. dollar relative to the euro and British pound sterling resulted in an increasea decrease of $42.9$66.2 million in reported net sales and an increase of $3.4 millioninsignificant decrease in reported net earnings. In the Asia-Pacific region, the weaker U.S. dollar relative to the Thai bhat had a positive impact on foreign currency translation with a increase in reported net sales of $5.3 million and an increase in reported net earnings of $1.2 million, while theThe stronger U.S. dollar relative to the Japanese yenAustralian dollar, Korean won, Mexican peso and South African rand had a negative impact on foreign currency translation with a decrease in reported net sales of $4.6$10.7 million, $6.1 million, $12.3 million and $4.1$8.4 million, respectively, and a decrease in reported net earnings of $0.6 million, $0.6 million, $2.1 million and $0.4 million, respectively. Foreign currency losses were partially offset by gains relative to the Japanese yen and Chinese renminbi of $13.8 million and $4.4 million, respectively, in reported net sales and $0.3 million for both currencies.and $0.7 million, respectively, in reported net earnings.
The Company maintains significant assets and operations in Europe, Asia-Pacific, South Africa and Mexico, resulting in exposure to foreign currency gains and losses. A portion of the Company’s foreign currency exposure is naturally hedged by incurring liabilities, including bank debt, denominated in the local currency in which the Company’s foreign subsidiaries are located.
The foreign subsidiaries of the Company generally purchase productsthe majority of their input costs and partsthen sell to many of their Customers in various currencies. As a result, the same local currency.
The Company may be exposed to cost increases relative to local currencies in the markets to which it sells. To mitigate such adverse trends, the Company, from time to time, enters into forward exchange contracts and other hedging activities. Additionally, foreign currency positions are partially offsetting and are netted against one another to reduce exposure.
Some products made in the United States are sold abroad, primarily in Europe and Canada.abroad. As a result, sales of such products are affected by the value of the U.S. dollar relative to other currencies. Any long-term strengthening of the U.S. dollar could depress these sales. Also, competitive conditions in the Company’s markets may limit its ability to increase product pricing in the face of adverse currency movements.
InterestThe Company’s exposure to market risks for changes in interest rates relates primarily to its short-term investments, short-term borrowings and interest rate swap agreements as well as the potential increase in fair value of long-term debt resulting from a potential decrease in interest rates. The Company has no earnings or cash flow exposure due to market risks on its long-term debt obligations as a result of the fixed-rate nature of the debt. However, interest rate changes would affect the fair market value of the debt. As of July 31, 2007,2009, the estimated fair value of long-term debt with fixed interest rates was $154.4$253.1 million compared to its carrying value of $156.0$250.1 million. The fair value is estimated by discounting the projected cash flows using the rate that similar amounts of debt could currently be borrowed. As of July 31, 2007, our2009, the Company’s financial liabilities with exposure to changes in interest rates consisted mainly of $123.1$29.6 million of short-term debt outstanding. Assuming a hypothetical increase of one-half percent in short-term interest rates, with all other variables remaining constant, interest expense would have increased $0.7$0.6 million in fiscal 2007.Fiscal 2009.
PensionsThe Company is exposed to market return fluctuations on its qualified defined benefit pension plans. During Fiscal 2009, the market value of these assets declined in conjunction with the global economic downturn. This decline in market value is the principle reason that pension expense is expected to increase by $1.1 million in Fiscal 2010. At July 31, 2009, the Company’s annual measurement date for its
pension plans, the plans were under funded by $40.7 million since the projected benefit obligation exceeded the fair value of plan assets.
Critical Accounting Policies
The Company’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and
19
expenses during the periods presented. Management bases these estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the recorded values of certain assets and liabilities. The Company believes its use of estimates and underlying accounting assumptions adheres to generally accepted accounting principles and is consistently applied. Valuations based on estimates and underlying accounting assumptions are reviewed for reasonableness on a consistent basis throughout the Company. Management believes the Company’s critical accounting policies that require more significant judgments and estimates used in the preparation of its consolidated financial statements and that are the most important to aid in fully understanding its financial results are the following:
Revenue recognition and allowance for doubtful accountsRevenue is recognized when both product ownership and the risk of loss hashave transferred to the Customer and the Company has no remaining obligations. The Company records estimated discounts and rebates as a reduction of sales in the same period revenue is recognized. Allowances for doubtful accounts are estimated by management based on evaluation of potential losses related to Customer receivable balances. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company determines the allowance based on historical write-off experience in the industry, regional economic data and evaluation of specific Customer accounts for risk of loss. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged off against the allowance when the Company feels it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposure related to its Customers. The establishment of this reserve requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though management considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates could have an effect on reserve balances required.
Goodwill and other intangible assetsGoodwill is testedassessed for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company performs impairment reviewsassessments for its reporting units and uses a discounted cash flow model based on management’s judgments and assumptions to determine the estimated fair value. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The Company performed an impairment testassessment during the third quarter of fiscal 2007Fiscal 2009 to satisfy its annual impairment requirement. Impairment testingThe impairment assessment in the third quarter indicated that the estimated fair value of each reporting unit exceeded its corresponding carrying amount, including recorded goodwill and, as such, no impairment existed at that time. Other intangible assets with definite lives continue to be amortized over their estimated useful lives. Definite lived intangible assets are also subject to impairment testing.assessments. A considerable amount of management judgment and assumptions are required in performing the impairment tests,assessments, principally in determining the fair value of each reporting unit. While the Company believes its judgments and assumptions are reasonable, different assumptions could change the estimated fair values and, therefore, impairment charges could be required.
Inventory The Company’s inventories are valued at the lower of cost or market. Domestic inventories are valued using the last-in first-out (“LIFO”) method, while the international subsidiaries use the first-in, first-out (“FIFO”) method. Reserves for shrink and obsolescence are estimated using standard quantitative measures based on historical losses, including issues related to specific inventory items. Though management considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates could have an effect on reserve balances required.
Product warranty The Company estimates warranty costs using standard quantitative measures based on historical warranty claim experience and, in some cases, evaluating specific Customer warranty issues. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses relating to warranty issues. Though management considers these balances adequate and proper, changes in the future could impact these determinations.
20
Income taxesAs part of the process of preparing the Company’s Consolidated Financial Statements, management is required to estimate income taxes in each of the jurisdictions in which the Company operates. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and book accounting purposes. These
differences result in deferred tax assets and liabilities, which are included within the Company’s Consolidated Balance Sheet. These assets and liabilities are evaluated by using estimates of future taxable income streams and the impact of tax planning strategies. Management assesses the likelihood that deferred tax assets will be recovered from future taxable income and to the extent management believes that recovery is not likely, a valuation allowance is established. To the extent that a valuation allowance is established or increased, an expense within the tax provision is included in the statement of operations. Reserves are also estimated for uncertain tax positions that are currently unresolved. The Company routinely monitors the potential impact of such situations and believes that it is properly reserved. Valuations related to tax accruals and assets can be impacted by changes to tax codes, changes in statutory tax rates and the Company’s future taxable income levels.
Our The Company’s accounting for income taxes in Fiscal 2008 will bewas affected by the adoption of Financial Accounting Standards Board (FASB) Interpretation (FIN)FIN No. 48,Accounting for Uncertainty in Income Taxes,which we arethe Company was required to adopt on August 1, 2007. This pronouncement prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. As such, the new standard requires usrequired the Company to reassess all of ourthe Company’s uncertain tax return positions in accordance with this new accounting principle. As of July 31, 2009, the liability for unrecognized tax benefits was $16.9 million.
Employee Benefit PlansThe Company incurs expenses relating to employee benefits such as non-contributory defined benefit pension plans and postretirement health care benefits. In accounting for these employment costs, management must make a variety of assumptions and estimates including mortality rates, discount rates, overall Company compensation increases, expected return on plan assets and health care cost trend rates. The Company considers historical data as well as current facts and circumstances and uses a third-party specialist to assist management in determining these estimates.
To develop the assumption regarding the expected long-term rate of return on assets for its U.S. pension plans, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. The Company amended its target asset allocation strategy during fiscal 2007 after its April 30 measurement date. Prior to amendingThis resulted in the target asset allocations,selection of the 8.50 percent long-term rate of return on assets assumption for the Company’s guidelines calledU.S. pension plans. The expected long-term rate of return on assets assumption for the plans outside the U.S. reflects the investment allocation and expected total portfolio returns specific to each plan and country. The expected long-term rate of return on assets shown in the pension benefit disclosure for non-U.S. plans is an asset allocationasset-based weighted average of 55all non-U.S. plans.
Reflecting the relatively long-term nature of the plans’ obligations, approximately 45 percent of the plans assets are invested in equity securities, 30 percent in alternative investments (funds of hedge funds), 10 percent fixed income, and 5 percent private equity. Within equity securities, the Company targeted an allocation of 25 percent small cap, 15 percent large cap, and 15 percent international. For fiscal year 2008, the Company’s asset allocation guidelines will target an allocation of 45 percent equity securities, 30 percent alternative investments (fund of hedge funds), 10 percentin real assets (investments into funds containing commodities and real estate), 10 percent in fixed income and 5 percent in private equity. Within equity securities, the Company will targettargets an allocation of 15 percent international, 15 percent equity long / short, 10 percent small cap, and 5 percent large cap. Subsequent to the April 30, 2007 measurement date, the assets of the plans were reallocated to conform to the new asset guidelines established by the Company.
A one percent change in the expected long-term rate of return on plan assets would have changed the 2007Fiscal 2009 annual pension expense by approximately $2.3$3.6 million. The expected long-term rate of return on assets assumption for the plans outside the U.S. follows the same methodology as described above but reflects the investment allocation and expected total portfolio returns specific to each plan and country.
The Company’s objective in selecting a discount rate for its pension plans is to select the best estimate of the rate at which the benefit obligations could be effectively settled on the measurement date taking into account the nature and duration of the benefit obligations of the plan. In making this best estimate, the Company looks at rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the benefits. This process includes looking atassessing the universe of bonds available on the measurement date with a quality rating of Aa or better. Similar appropriate benchmarks are used to determine the discount rate for the non-U.S. plans. As of ourthe measurement date of April 30, 2007,July 31, 2009, the Company decreased itselected to maintain the 6.00 percent discount rate on U.S. plans to
21
6.00 percent from 6.25 percentelected as of April 30, 2006. The decrease of 25 basis points wasJuly 31, 2009, for the U.S. pension plans. This is consistent with the changes in published bond indices. TheA 0.25 percent change increasedin the Company’s U.S. projecteddiscount rate would have changed the benefit obligation as of April 30, 2007related to the U.S. plans by approximately $5.5$6.5 million at July 31, 2009, and is expected to increasechanged Fiscal 2009 annual pension expense in fiscal year 2008 by approximately $0.3 million.
At April 30, 2007, the Company’s annual measurement date for its pension plans, the plans were over-funded by $64.9 million since the fair valueTable of plan assets exceeded the projected benefit obligation. As of April 30, 2007, the Company had an unrecognized actuarial loss of $7.3 million which will be amortized as pension expense into the future over the average remaining service period of the employees in the plans in accordance with SFAS 87 and SFAS 158.Contents
The Company, through its management, may make forward-looking statements reflecting the Company’s current views with respect to future events and financial performance. These forward-looking statements, which may be included in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in press releases and in other documents and materials as well as in written or oral statements made by or on behalf of the Company, are subject to certain risks and uncertainties, including those discussed in Item 1A of this Form 10-K, which could cause actual results to differ materially from historical results or those anticipated. The words or phrases “will likely result,” “are expected to,” “will continue,” “estimate,” “project,” “believe,” “expect,” “anticipate,” “forecast” and similar expressions are intended to identify forward-looking statements within the meaning of Section 21e of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation Reform Act of 1995 (“PSLRA”). In particular the Company desires to take advantage of the protections of the PSLRA in connection with the forward-looking statements made in this annual report on Form 10-K.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements are made. In addition, the Company wishes to advise readers that the factors listed in Item 1A of this Form 10-K, as well as other factors, could affect the Company’s performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures about Market Risk
Market risk disclosure appears in Management’s Discussion and Analysis on page 1822 under “Market Risk.”
22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAFinancial Statements and Supplementary Data
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of July 31, 2007.2009. The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of July 31, 2009, as stated in this report which follows in Item 8 of this Form 10-K.
![]() | |
William M. Cook | ![]() Thomas R. VerHage |
23
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Donaldson Company, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, ofshareholders' equity and cash flows and of changes in shareholders’ equity present fairly, in all material respects, the financial position of Donaldson Company, Inc. and its subsidiaries at July 31, 20072009 and 2006,July 31, 2008, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 20072009, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2007,2009, based on criteria established inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’sCompany's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sManagement's Report on Internal Control Overover Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’sCompany's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note A to the consolidated financial statements, the Company changed the manner in which it accounts for defined benefit arrangements effective July 31, 2007 and2007. Also, as discussed in Note I to the consolidated financial statements, the Company changed its method of accountingthe manner in which it accounts for share-based payments as ofunrecognized income tax positions effective August 1, 2005.2007.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP |
PricewaterhouseCoopers LLPMinneapolis, MinnesotaSeptember 28, 2007
24
Consolidated Statements of Earnings
Donaldson Company, Inc. and Subsidiaries
Year ended July 31, | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
2007 | 2006 | 2005 |
| Year ended July 31, |
| ||||||||||||||||||||
| 2009 |
| 2008 |
| 2007 |
| |||||||||||||||||||
(thousands of dollars, except share and per share amounts) |
| (thousands of dollars, except share |
| ||||||||||||||||||||||
Net sales | $ | 1,918,828 | $ | 1,694,327 | $ | 1,595,733 |
| $ | 1,868,629 |
| $ | 2,232,521 |
| $ | 1,918,828 |
| |||||||||
Cost of sales | 1,313,964 | 1,137,747 | 1,090,158 |
|
| 1,278,923 |
|
| 1,506,659 |
|
| 1,313,964 |
| ||||||||||||
Gross margin | 604,864 | 556,580 | 505,575 |
| 589,706 |
| 725,862 |
| 604,864 |
| |||||||||||||||
Selling, general and administrative | 357,306 | 329,905 | 316,851 |
| 379,108 |
| 436,293 |
| 357,306 |
| |||||||||||||||
Research and development | 36,458 | 33,887 | 32,234 |
|
| 40,643 |
|
| 43,757 |
|
| 36,458 |
| ||||||||||||
Operating income | 211,100 | 192,788 | 156,490 |
| 169,955 |
| 245,812 |
| 211,100 |
| |||||||||||||||
Interest expense | 14,559 | 9,875 | 9,414 |
| 17,018 |
| 16,550 |
| 14,559 |
| |||||||||||||||
Other income, net | (8,320 | ) | (6,254 | ) | (7,657 | ) |
|
| (8,488 | ) |
| (6,901 | ) |
| (8,320 | ) | |||||||||
Earnings before income taxes | 204,861 | 189,167 | 154,733 |
| 161,425 |
| 236,163 |
| 204,861 |
| |||||||||||||||
Income taxes | 54,144 | 56,860 | 44,179 |
|
| 29,518 |
|
| 64,210 |
|
| 54,144 |
| ||||||||||||
Net earnings | $ | 150,717 | $ | 132,307 | $ | 110,554 |
| $ | 131,907 |
| $ | 171,953 |
| $ | 150,717 |
| |||||||||
Weighted average shares — basic | 80,454,861 | 82,992,475 | 84,990,739 |
| 77,879,036 |
| 79,207,604 |
| 80,454,861 |
| |||||||||||||||
Weighted average shares — diluted | 82,435,756 | 85,139,250 | 86,883,408 |
| 79,172,042 |
| 81,211,343 |
| 82,435,756 |
| |||||||||||||||
Net earnings per share — basic | $ | 1.87 | $ | 1.59 | $ | 1.30 |
| $ | 1.69 |
| $ | 2.17 |
| $ | 1.87 |
| |||||||||
Net earnings per share — diluted | $ | 1.83 | $ | 1.55 | $ | 1.27 |
| $ | 1.67 |
| $ | 2.12 |
| $ | 1.83 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
25
Consolidated Balance Sheets
Donaldson Company, Inc. and Subsidiaries
At July 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
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|
|
|
| ||||||||||||
2007 | 2006 |
| At July 31, |
| ||||||||||||||
| 2009 |
| 2008 |
| ||||||||||||||
(thousands of dollars, except share amounts) |
| (thousands of dollars, |
| |||||||||||||||
Assets |
|
|
|
|
| |||||||||||||
Current assets |
|
|
|
|
| |||||||||||||
Cash and cash equivalents | $ | 55,237 | $ | 45,467 |
| $ | 143,687 |
| $ | 83,357 |
| |||||||
Accounts receivable, less allowance of $6,768 and $8,398 | 357,341 | 312,214 | ||||||||||||||||
Accounts receivable, less allowance of $7,387 and $7,509 |
| 280,187 |
| 413,863 |
| |||||||||||||
Inventories | 201,221 | 153,165 |
| 180,238 |
| 264,129 |
| |||||||||||
Deferred income taxes | 22,591 | 17,407 |
| 21,501 |
| 32,061 |
| |||||||||||
Prepaids and other current assets | 37,254 | 33,152 |
|
| 51,154 |
|
| 60,347 |
| |||||||||
Total current assets | 673,644 | 561,405 |
|
| 676,767 |
|
| 853,757 |
| |||||||||
Property, plant and equipment, net | 364,433 | 317,364 |
| 381,068 |
| 415,159 |
| |||||||||||
Goodwill | 124,607 | 110,609 |
| 169,027 |
| 134,162 |
| |||||||||||
Intangible assets | 46,301 | 22,129 |
| 65,386 |
| 46,317 |
| |||||||||||
Other assets | 110,032 | 112,560 |
|
| 41,748 |
|
| 99,227 |
| |||||||||
Total assets | $ | 1,319,017 | $ | 1,124,067 |
| $ | 1,333,996 |
| $ | 1,548,622 |
| |||||||
Liabilities and shareholders’ equity |
|
|
|
|
| |||||||||||||
Current liabilities |
|
|
|
|
| |||||||||||||
Short-term borrowings | $ | 123,114 | $ | 73,368 |
| $ | 29,558 |
| $ | 139,404 |
| |||||||
Current maturities of long-term debt | 33,667 | 6,541 |
| 5,496 |
| 5,669 |
| |||||||||||
Trade accounts payable | 173,862 | 163,783 |
| 123,063 |
| 200,967 |
| |||||||||||
Accrued employee compensation and related taxes | 55,578 | 49,129 |
| 54,662 |
| 66,155 |
| |||||||||||
Accrued liabilities | 44,692 | 42,969 |
| 39,624 |
| 56,296 |
| |||||||||||
Other current liabilities | 28,031 | 24,079 |
|
| 47,681 |
|
| 48,216 |
| |||||||||
Total current liabilities | 458,944 | 359,869 |
| 300,084 |
| 516,707 |
| |||||||||||
Long-term debt | 129,004 | 100,495 |
| 253,674 |
| 176,475 |
| |||||||||||
Deferred income taxes | 37,624 | 40,890 |
| 9,416 |
| 35,738 |
| |||||||||||
Other long-term liabilities | 68,747 | 76,011 |
|
| 82,204 |
|
| 79,667 |
| |||||||||
Total liabilities | 694,319 | 577,265 |
| 645,378 |
| 808,587 |
| |||||||||||
Commitments and contingencies (Note K) |
|
|
|
|
| |||||||||||||
Shareholders’ equity |
|
|
|
|
| |||||||||||||
Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued | — | — |
| — |
| — |
| |||||||||||
Common stock, $5.00 par value, 120,000,000 shares authorized, 88,643,194 shares issued in 2007 and 2006 | 443,216 | 443,216 | ||||||||||||||||
Common stock, $5.00 par value, 120,000,000 shares authorized, 88,643,194 shares issued in 2009 and 2008 |
| 443,216 |
| 443,216 |
| |||||||||||||
Retained earnings | 387,257 | 275,598 |
| 615,817 |
| 522,476 |
| |||||||||||
Stock compensation plans | 20,821 | 20,535 |
| 19,894 |
| 27,065 |
| |||||||||||
Accumulated other comprehensive income | 70,008 | 51,194 | ||||||||||||||||
Treasury stock — 9,500,372 and 8,102,921 shares in 2007 and 2006, at cost | (296,604 | ) | (243,741 | ) | ||||||||||||||
Accumulated other comprehensive income (loss) |
| (9,677 | ) |
| 112,883 |
| ||||||||||||
Treasury stock-11,295,409 and 11,021,619 shares in 2009 and 2008, at cost |
|
| (380,632 | ) |
| (365,605 | ) | |||||||||||
Total shareholders’ equity | 624,698 | 546,802 |
|
| 688,618 |
|
| 740,035 |
| |||||||||
Total liabilities and shareholders’ equity | $ | 1,319,017 | $ | 1,124,067 |
| $ | 1,333,996 |
| $ | 1,548,622 |
| |||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
26
Consolidated Statements of Cash Flows
Donaldson Company, Inc. and Subsidiaries
Year ended July 31, | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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2007 | 2006 | 2005 |
| Year ended July 31, |
| ||||||||||||||||||||
| 2009 |
| 2008 |
| 2007 |
| |||||||||||||||||||
(thousands of dollars) |
| (thousands of dollars) |
| ||||||||||||||||||||||
Operating Activities |
|
|
|
|
|
|
| ||||||||||||||||||
Net earnings | $ | 150,717 | $ | 132,307 | $ | 110,554 |
| $ | 131,907 |
| $ | 171,953 |
| $ | 150,717 |
| |||||||||
Adjustments to reconcile net earnings to net cash provided by operating activities |
|
|
|
|
|
|
| ||||||||||||||||||
Depreciation and amortization | 49,566 | 44,700 | 44,284 |
| 58,597 |
| 56,732 |
| 49,566 |
| |||||||||||||||
Equity in (earnings) loss of affiliates | (691 | ) | (664 | ) | 323 | ||||||||||||||||||||
Equity in earnings of affiliates, net of distributions |
| (982 | ) |
| (1,558 | ) |
| (691 | ) | ||||||||||||||||
Deferred income taxes | (4,628 | ) | 6,868 | 2,957 |
| (4,726 | ) |
| (1,205 | ) |
| (4,401 | ) | ||||||||||||
Tax benefit of equity plans | (5,898 | ) | (10,943 | ) | — |
| (2,663 | ) |
| (9,178 | ) |
| (5,898 | ) | |||||||||||
Stock option expense | 3,422 | 2,832 | — | ||||||||||||||||||||||
Stock compensation plan expense |
| 1,900 |
| 9,312 |
| 6,608 |
| ||||||||||||||||||
Other, net | (13,241 | ) | (13,551 | ) | 2,520 |
| (7 | ) |
| (2,528 | ) |
| (16,626 | ) | |||||||||||
Changes in operating assets and liabilities, net of acquired businesses |
|
|
|
|
|
|
| ||||||||||||||||||
Accounts receivable | (31,418 | ) | (12,147 | ) | (17,349 | ) |
| 116,983 |
| (29,779 | ) |
| (31,418 | ) | |||||||||||
Inventories | (36,469 | ) | 587 | (6,745 | ) |
| 66,145 |
| (49,400 | ) |
| (36,469 | ) | ||||||||||||
Prepaids and other current assets | 841 | (5,794 | ) | 2,087 |
| (11,489 | ) |
| (4,755 | ) |
| 658 |
| ||||||||||||
Trade accounts payable and other accrued expenses | 4,844 | 26,649 | 3,957 |
|
| (78,738 | ) |
| 33,940 |
|
| 4,999 |
| ||||||||||||
Payment of litigation judgment | — | (14,170 | ) | — | |||||||||||||||||||||
Net cash provided by operating activities | 117,045 | 156,674 | 142,588 |
|
| 276,927 |
|
| 173,534 |
|
| 117,045 |
| ||||||||||||
Investing Activities |
|
|
|
|
|
|
| ||||||||||||||||||
Purchases of property, plant and equipment | (77,440 | ) | (81,272 | ) | (54,979 | ) |
| (46,080 | ) |
| (72,152 | ) |
| (77,440 | ) | ||||||||||
Proceeds from sale of property, plant, and equipment | 857 | 3,688 | 4,781 |
| 511 |
| 1,330 |
| 857 |
| |||||||||||||||
Acquisitions, investments, and divestitures of affiliates | (40,615 | ) | (4,560 | ) | (13,362 | ) |
|
| (74,318 | ) |
| (2,377 | ) |
| (40,615 | ) | |||||||||
Net cash used in investing activities | (117,198 | ) | (82,144 | ) | (63,560 | ) |
|
| (119,887 | ) |
| (73,199 | ) |
| (117,198 | ) | |||||||||
Financing Activities |
|
|
|
|
|
|
| ||||||||||||||||||
Proceeds from long-term debt | 64,903 | 4,400 | 30,000 |
| 80,471 |
| 50,297 |
| 64,903 |
| |||||||||||||||
Repayments of long-term debt | (9,507 | ) | (7,613 | ) | (23,944 | ) |
| (7,745 | ) |
| (33,074 | ) |
| (9,507 | ) | ||||||||||
Change in short-term borrowings | 44,904 | (31,650 | ) | 81,917 |
| (103,695 | ) |
| 12,478 |
| 44,904 |
| |||||||||||||
Purchase of treasury stock | (76,898 | ) | (118,909 | ) | (116,268 | ) |
| (32,773 | ) |
| (92,202 | ) |
| (76,898 | ) | ||||||||||
Dividends paid | (28,806 | ) | (26,443 | ) | (19,757 | ) |
| (35,166 | ) |
| (33,003 | ) |
| (28,806 | ) | ||||||||||
Tax benefit of equity plans | 5,898 | 10,943 | — |
| 2,663 |
| 9,178 |
| 5,898 |
| |||||||||||||||
Exercise of stock options | 7,346 | 4,774 | 2,703 |
|
| 4,476 |
|
| 9,308 |
|
| 7,346 |
| ||||||||||||
Net cash used in financing activities | 7,840 | (164,498 | ) | (45,349 | ) | ||||||||||||||||||||
Net cash provided by (used in) financing activities |
|
| (91,769 | ) |
| (77,018 | ) |
| 7,840 |
| |||||||||||||||
Effect of exchange rate changes on cash | 2,083 | 1,369 | 883 |
|
| (4,941 | ) |
| 4,803 |
|
| 2,083 |
| ||||||||||||
Increase (decrease) in cash and cash equivalents | 9,770 | (88,599 | ) | 34,562 | |||||||||||||||||||||
Increase in cash and cash equivalents |
| 60,330 |
| 28,120 |
| 9,770 |
| ||||||||||||||||||
Cash and cash equivalents, beginning of year | 45,467 | 134,066 | 99,504 |
|
| 83,357 |
|
| 55,237 |
|
| 45,467 |
| ||||||||||||
Cash and cash equivalents, end of year | $ | 55,237 | $ | 45,467 | $ | 134,066 |
| $ | 143,687 |
| $ | 83,357 |
| $ | 55,237 |
| |||||||||
|
|
|
|
|
|
| |||||||||||||||||||
Supplemental Cash Flow Information |
|
|
|
|
|
|
| ||||||||||||||||||
Cash paid during the year for: |
|
|
|
|
|
|
| ||||||||||||||||||
Income taxes | $ | 59,179 | $ | 36,145 | $ | 33,087 |
| $ | 41,196 |
| $ | 50,629 |
| $ | 59,179 |
| |||||||||
Interest | 12,630 | 9,287 | 8,453 |
| 14,861 |
| 14,589 |
| 12,630 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
27
Consolidated Statements of Changes in Shareholders’ Equity
Donaldson Company, Inc. and Subsidiaries
Common Stock | Additional Paid-in Capital | Retained Earnings | Stock Compensation Plans | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Common |
| Additional |
| Retained |
| Stock |
| Accumulated |
| Treasury |
| Total |
| |||||||||||||||||||||||||||||||||||||||
(thousands of dollars, except per share amounts) |
| (thousands of dollars, except per share amounts) |
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance July 31, 2004 | $ | 443,216 | $ | — | $ | 113,271 | $ | 20,589 | $ | 31,558 | $ | (59,341 | ) | $ | 549,293 | ||||||||||||||||||||||||||||||||||||||
Balance July 31, 2006 |
| $ | 443,216 |
| $ | — |
| $ | 275,598 |
| $ | 20,535 |
| $ | 51,194 |
| $ | (243,741 | ) | $ | 546,802 |
| |||||||||||||||||||||||||||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||
Net earnings | 110,554 | 110,554 |
|
|
|
|
| 150,717 |
|
|
|
|
|
|
| 150,717 |
| ||||||||||||||||||||||||||||||||||||
Foreign currency translation | 1,877 | 1,877 |
|
|
|
|
|
|
|
|
| 28,615 |
|
|
| 28,615 |
| ||||||||||||||||||||||||||||||||||||
Additional minimum pension liability, net of tax | (5,499 | ) | (5,499 | ) |
|
|
|
|
|
|
|
|
| 312 |
|
|
| 312 |
| ||||||||||||||||||||||||||||||||||
Net loss on cash flow hedging derivatives | (316 | ) | (316 | ) |
|
|
|
|
|
|
|
|
| 118 |
|
|
|
| 118 |
| |||||||||||||||||||||||||||||||||
Comprehensive income | 106,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 179,762 |
| ||||||||||||||||||||||||||||||||||||
Treasury stock acquired | (116,268 | ) | (116,268 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Stock options exercised | (7,273 | ) | (30,080 | ) | 9,310 | 14,992 | (13,051 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Deferred stock and other activity | (1,207 | ) | 10,675 | 428 | 9,896 | ||||||||||||||||||||||||||||||||||||||||||||||||
Performance awards | (6 | ) | 620 | 614 | |||||||||||||||||||||||||||||||||||||||||||||||||
Tax reduction — employee plans | 7,273 | 7,273 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends ($.235 per share) | (19,757 | ) | (19,757 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance July 31, 2005 | 443,216 | — | 172,775 | 40,574 | 27,620 | (159,569 | ) | 524,616 | |||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Net earnings | 132,307 | 132,307 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation | 15,287 | 15,287 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Additional minimum pension liability, net of tax | 8,438 | 8,438 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss on cash flow hedging derivatives | (151 | ) | (151 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | 155,881 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Treasury stock acquired | (118,909 | ) | (118,909 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Stock options exercised | (22,381 | ) | 12,358 | — | 11,934 | 1,911 | |||||||||||||||||||||||||||||||||||||||||||||||
Deferred stock and other activity | (11,310 | ) | (17,291 | ) | 20,893 | (7,708 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Performance awards | 320 | (2,748 | ) | 1,910 | (518 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Stock option expense | 2,832 | 2,832 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Tax reduction — employee plans | 22,381 | 22,381 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends ($.410 per share) | (33,684 | ) | (33,684 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance July 31, 2006 | 443,216 | — | 275,598 | 20,535 | 51,194 | (243,741 | ) | 546,802 | |||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Net earnings | 150,717 | 150,717 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation | 28,615 | 28,615 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Additional minimum pension liability, net of tax | 312 | 312 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net gain on cash flow hedging derivatives | 118 | 118 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | 179,762 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Treasury stock acquired | (76,898 | ) | (76,898 | ) |
|
|
|
|
|
|
|
|
|
|
| (76,898 | ) |
| (76,898 | ) | |||||||||||||||||||||||||||||||||
Stock options exercised | (7,700 | ) | (9,499 | ) | 1,513 | 19,133 | 3,447 |
|
|
| (7,700 | ) |
| (9,499 | ) |
| 1,513 |
|
|
| 19,133 |
| 3,447 |
| |||||||||||||||||||||||||||||
Deferred stock and other activity | (2,273 | ) | 541 | 3,276 | 1,544 |
|
|
|
|
| (2,273 | ) |
| 541 |
|
|
| 3,276 |
| 1,544 |
| ||||||||||||||||||||||||||||||||
Performance awards | (1,163 | ) | (1,768 | ) | 1,626 | (1,305 | ) |
|
|
|
|
| (1,163 | ) |
| (1,768 | ) |
|
|
| 1,626 |
| (1,305 | ) | |||||||||||||||||||||||||||||
Stock option expense | 3,422 | 3,422 |
|
|
|
|
| 3,422 |
|
|
|
|
|
|
| 3,422 |
| ||||||||||||||||||||||||||||||||||||
Tax reduction — employee plans | 7,700 | 7,700 |
|
|
| 7,700 |
|
|
|
|
|
|
|
|
| 7,700 |
| ||||||||||||||||||||||||||||||||||||
Adjustment to adopt SFAS 158, net of tax | (10,231 | ) | (10,231 | ) |
|
|
|
|
|
|
|
|
| (10,231 | ) |
|
|
| (10,231 | ) | |||||||||||||||||||||||||||||||||
Dividends ($.370 per share) | (29,545 | ) | (29,545 | ) |
|
|
|
|
|
|
|
| (29,545 | ) |
|
|
|
|
|
|
|
|
|
| (29,545 | ) | |||||||||||||||||||||||||||
Balance July 31, 2007 | $ | 443,216 | $ | — | $ | 387,257 | $ | 20,821 | $ | 70,008 | $ | (296,604 | ) | $ | 624,698 |
|
| 443,216 |
|
| — |
|
| 387,257 |
|
| 20,821 |
|
| 70,008 |
|
| (296,604 | ) |
| 624,698 |
| ||||||||||||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||
Net earnings |
|
|
|
|
| 171,953 |
|
|
|
|
|
|
| 171,953 |
| ||||||||||||||||||||||||||||||||||||||
Foreign currency translation |
|
|
|
|
|
|
|
|
| 57,151 |
|
|
| 57,151 |
| ||||||||||||||||||||||||||||||||||||||
Additional minimum pension liability, net of tax |
|
|
|
|
|
|
|
|
| (14,671 | ) |
|
|
| (14,671 | ) | |||||||||||||||||||||||||||||||||||||
Net gain on cash flow hedging derivatives |
|
|
|
|
|
|
|
|
| 395 |
|
|
|
| 395 |
| |||||||||||||||||||||||||||||||||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 214,828 |
| |||||||||||||||||||||||||||||||||||||
Treasury stock acquired |
|
|
|
|
|
|
|
|
|
|
| (92,202 | ) |
| (92,202 | ) | |||||||||||||||||||||||||||||||||||||
Stock options exercised |
|
|
| (7,827 | ) |
| (9,810 | ) |
| 4,223 |
|
|
| 20,883 |
| 7,469 |
| ||||||||||||||||||||||||||||||||||||
Deferred stock and other activity |
|
|
| (2,981 | ) |
| 2,564 |
| 3,474 |
|
|
| 1,363 |
| 4,420 |
| |||||||||||||||||||||||||||||||||||||
Performance awards |
|
|
| (675 | ) |
| 279 |
| (1,453 | ) |
|
|
| 955 |
| (894 | ) | ||||||||||||||||||||||||||||||||||||
Stock option expense |
|
|
|
|
| 4,214 |
|
|
|
|
|
|
| 4,214 |
| ||||||||||||||||||||||||||||||||||||||
Tax reduction — employee plans |
|
|
| 11,483 |
|
|
|
|
|
|
|
|
| 11,483 |
| ||||||||||||||||||||||||||||||||||||||
Adjustment to adopt FIN 48 |
|
|
|
|
| (336 | ) |
|
|
|
|
| (336 | ) | |||||||||||||||||||||||||||||||||||||||
Dividends ($.430 per share) |
|
|
|
|
|
|
|
| (33,645 | ) |
|
|
|
|
|
|
|
|
| (33,645 | ) | ||||||||||||||||||||||||||||||||
Balance July 31, 2008 |
|
| 443,216 |
|
| — |
|
| 522,476 |
|
| 27,065 |
|
| 112,883 |
|
| (365,605 | ) |
| 740,035 |
| |||||||||||||||||||||||||||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||
Net earnings |
|
|
|
|
| 131,907 |
|
|
|
|
| 131,907 |
| ||||||||||||||||||||||||||||||||||||||||
Foreign currency translation |
|
|
|
|
|
|
|
|
| (63,385 | ) |
|
|
| (63,385 | ) | |||||||||||||||||||||||||||||||||||||
Pension liability adjustment, net of tax |
|
|
|
|
|
|
|
|
| (58,593 | ) |
|
|
| (58,593 | ) | |||||||||||||||||||||||||||||||||||||
Net gain on cash flow hedging derivatives |
|
|
|
|
|
|
|
|
| (582 | ) |
|
|
|
| (582 | ) | ||||||||||||||||||||||||||||||||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 9,347 |
| |||||||||||||||||||||||||||||||||||||
Treasury stock acquired |
|
|
|
|
|
|
|
|
|
|
| (32,773 | ) |
| (32,773 | ) | |||||||||||||||||||||||||||||||||||||
Stock options exercised |
|
|
| (2,998 | ) |
| (6,151 | ) |
|
|
|
|
| 12,104 |
| 2,955 |
| ||||||||||||||||||||||||||||||||||||
Deferred stock and other activity |
|
|
| (529 | ) |
| (88 | ) |
| (4,344 | ) |
|
|
| 3,710 |
| (1,251 | ) | |||||||||||||||||||||||||||||||||||
Performance awards |
|
|
| (266 | ) |
| (60 | ) |
| (2,827 | ) |
|
|
| 1,932 |
| (1,221 | ) | |||||||||||||||||||||||||||||||||||
Stock option expense |
|
|
|
|
| 4,143 |
|
|
|
|
|
|
| 4,143 |
| ||||||||||||||||||||||||||||||||||||||
Tax reduction — employee plans |
|
|
| 3,793 |
|
|
|
|
|
|
|
|
| 3,793 |
| ||||||||||||||||||||||||||||||||||||||
Adjustment to adopt FAS 158 measurement date provision, net of tax |
|
|
|
|
| (887 | ) |
|
|
|
|
|
|
| (887 | ) | |||||||||||||||||||||||||||||||||||||
Dividends ($.460 per share) |
|
|
|
|
|
|
|
| (35,523 | ) |
|
|
|
|
|
|
|
|
|
| (35,523 | ) | |||||||||||||||||||||||||||||||
Balance July 31, 2009 |
| $ | 443,216 |
| $ | — |
| $ | 615,817 |
| $ | 19,894 |
| $ | (9,677 | ) | $ | (380,632 | ) | $ | 688,618 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Donaldson Company, Inc. and Subsidiaries
NOTE A
Summary of Significant Accounting Policies
Description of BusinessDonaldson Company, Inc. (“Donaldson” or the “Company”), is a leading worldwide provider of filtration systems and replacement parts. The Company’s product mix includes air and liquid filtersfiltration systems and exhaust and emission control products for mobile equipment; in-plant air cleaning systems; compressed air purification systems; air intake systems for industrial gas turbines and specialized filters and membranes for such diverse applications as computer disk drives, industrial bags and semi-conductor processing.products. Products are manufactured at more than 3540 plants around the world and through three joint ventures. Products are sold to original equipment manufacturers (“OEM”), distributors and dealers, and directly to end users.
Principles of ConsolidationThe Consolidated Financial Statements include the accounts of Donaldson Company, Inc. and all majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated. The Company’s three joint ventures that are not majority-owned are accounted for under the equity method. The Company does not have any variable interests in variable interest entities as of July 31, 2007.2009. The company uses a fiscal period which ends on a calendar basis for international affiliates and on the Friday nearest to July 31 for domesticU.S. purposes. Fiscal year 2007 results included 53 weeks of domesticU.S. sales and earnings.
Use of EstimatesThe preparation of Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Foreign Currency TranslationFor most foreign operations, local currencies are considered the functional currency. Assets and liabilities are translated to U.S. dollars at year-end exchange rates, and the resulting gains and losses arising from the translation of net assets located outside the United States are recorded as a cumulative translation adjustment, a component of accumulatedAccumulated other comprehensive income (loss) in the Consolidated Balance Sheets. Elements of the Consolidated Statements of Earnings are translated at average exchange rates in effect during the year. Realized and unrealized foreign currency transaction gains and losses are included in Other income, net in the Consolidated Statements of Earnings. Foreign currency transaction gainslosses of $0.2 million, $0.3$3.1 million and $1.0$0.2 million are included in other income, net in the Consolidated Statements of Earnings in Fiscal 2009, 2008, and 2007, 2006 and 2005, respectively.
Cash EquivalentsThe Company considers all highly liquid temporary investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents are carried at cost that approximates market value.
Accounts Receivable and Allowance for Doubtful AccountsTrade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company determines the allowance based on historical write-off experience in the industry, regional economic data and evaluation of specific Customer accounts for risk of loss. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged off against the allowance when the Company feels it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposure related to its Customers.
InventoriesInventories are stated at the lower of cost or market. DomesticU.S. inventories are valued using the last-in, first-out (“LIFO”) method, while the international subsidiaries use the first-in, first-out (“FIFO”) method. Inventories valued at LIFO were approximately 3033 and 3435 percent of total inventories at July 31, 20072009 and 2006,2008, respectively. For inventories valued under the LIFO method, the FIFO cost exceeded the LIFO carrying values by $32.7$34.0 million and $31.7$37.7 million at July 31, 20072009 and 2006,2008, respectively. Results of
29
respectively. Results of operations for all periods presented were not materially affected by anythe liquidation of LIFO inventory. The components of inventory are as follows (thousands of dollars):
July 31, 2007 | July 31, 2006 |
|
|
|
|
|
|
| |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| July 31, |
| July 31, |
| |||||||||||||
Materials | $ | 87,490 | $ | 56,194 |
| $ | 71,518 |
| $ | 110,135 |
| ||||||
Work in process | 19,793 | 20,304 |
| 20,022 |
| 23,728 |
| ||||||||||
Finished products | 93,938 | 76,667 |
|
| 88,698 |
|
| 130,266 |
| ||||||||
Total inventories | $ | 201,221 | $ | 153,165 |
| $ | 180,238 |
| $ | 264,129 | |||||||
Property, Plant and EquipmentProperty, plant and equipment are stated at cost. Additions, improvements or major renewals are capitalized, while expenditures that do not enhance or extend the asset’s useful life are charged to operating expense as incurred. Depreciation is computed under the straight-line method. Depreciation expense was $52.9 million in Fiscal 2009, $52.4 million in Fiscal 2008, and $46.6 million in 2007, $42.6 million in 2006, and $42.6 million in 2005.Fiscal 2007. The estimated useful lives of property, plant and equipment are 10 to 40 years for buildings, including building improvements, and 3 to 10 years for machinery and equipment. The components of property, plant and equipment are as follows (thousands of dollars):
July 31, 2007 | July 31, 2006 |
|
|
|
|
|
|
| |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| July 31, |
| July 31, |
| |||||||||||||
Land | $ | 19,946 | $ | 18,336 |
| $ | 21,793 |
| $ | 21,561 |
| ||||||
Buildings | 215,407 | 182,969 |
| 242,049 |
| 235,615 |
| ||||||||||
Machinery and equipment | 525,958 | 473,483 |
| 600,198 |
| 586,937 |
| ||||||||||
Construction in progress | 35,053 | 33,246 |
|
| 18,507 |
| 57,633 | ||||||||||
Less accumulated depreciation | (431,931 | ) | (390,670 | ) |
|
| (501,479 | ) |
| (486,587 | ) | ||||||
Total property, plant and equipment | $ | 364,433 | $ | 317,364 | |||||||||||||
Total property, plant and equipment, net |
| $ | 381,068 | $ | 415,159 |
Internal-Use SoftwareThe Company capitalizes direct costs of materials and services used in the development and purchase of internal-use software. Amounts capitalized are amortized on a straight-line basis over a period of five years and are reported as a component of machinery and equipment within property, plant and equipment.
Goodwill and Other Intangible AssetsGoodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations under the purchase method of accounting. Other intangible assets, consisting primarily of patents, trademarks and Customer relationships and lists, are recorded at cost and are amortized on a straight-line basis over their estimated useful lives of 53 to 1520 years. Goodwill is testedassessed for impairment annually or if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testingThe impairment assessment for goodwill is done at a reporting unit level. Reporting units are one level below the business segment level, but can be combined when reporting units within the same segment have similar economic characteristics. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The Company completed its annual impairment testsassessment in the third quarters of fiscal 2007Fiscal 2009 and 2006,2008, which indicated no impairment.
Recoverability of Long-Lived AssetsThe Company reviews its long-lived assets, including identifiable intangibles, for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets, the carrying value is reduced to the estimated fair value as measured by the undiscounted cash flows.reduced.
Income TaxesThe provision for income taxes is computed based on the pretax income included in the Consolidated Statements of Earnings. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
30
Comprehensive Income (Loss)Comprehensive income (loss) consists of net income, foreign currency translation adjustments, additional minimumnet changes in the funded status of pension liabilityretirement obligations and net gain or loss on cash flow hedging derivatives, and is presented in the Consolidated Statements of Changes in Shareholders’ Equity. The components of the ending balances of accumulated other comprehensive income (loss) are as follows (thousands of dollars):
July 31, 2007 | July 31, 2006 | July 31, 2005 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Foreign currency translation adjustment | $ | 81,389 | $ | 52,774 | $ | 37,487 | ||||||||
Net loss on cash flow hedging derivatives, net of deferred taxes | (207 | ) | (325 | ) | (174 | ) | ||||||||
Adjustment to adopt FAS 158, net of deferred taxes | (11,174 | ) | — | — | ||||||||||
Additional minimum pension liability, net of deferred taxes | — | (1,255 | ) | (9,693 | ) | |||||||||
Total accumulated other comprehensive income | $ | 70,008 | $ | 51,194 | $ | 27,620 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| July 31, |
| July 31, |
| July 31, |
| |||
Foreign currency translation adjustment |
| $ | 75,155 |
| $ | 138,540 |
| $ | 81,389 |
|
Net gain (loss) on cash flow hedging derivatives, net of deferred taxes |
|
| (394 | ) |
| 188 |
|
| (207 | ) |
Pension liability adjustment, net of deferred taxes |
|
| (84,438 | ) |
| (25,845 | ) |
| (11,174 | ) |
Total accumulated other comprehensive income (loss) |
| $ | (9,677 | ) | $ | 112,883 |
| $ | 70,008 |
|
Cumulative foreign translation is not adjusted for income taxes alltaxes. All translation relates to permanent investments in non-U.S. subsidiaries.
Earnings Per ShareThe Company’s basic net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares. The Company’s diluted net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares and dilutive shares relating to stock options, restricted stock and stock incentive plans. Certain outstanding options were excluded from the diluted net earnings per share calculations because their exercise prices were greater than the average market price of the Company’s common stock during those periods. There were 10,000, 443,703,1,158,451 options, 245,344 options, and 540,09510,000 options excluded from the diluted net earnings per share calculation for the fiscal year ended July 31, 2007, 2006,2009, 2008, and 2005,2007, respectively. The following table presents information necessary to calculate basic and diluted earnings per share:
2007 | 2006 | 2005 |
|
|
|
|
|
|
|
|
|
| |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 |
| 2008 |
| 2007 |
| |||||||||||||||||||
(thousands of dollars, except per share amounts) |
| (thousands of dollars, |
| ||||||||||||||||||||||
Weighted average shares — basic | 80,455 | 82,992 | 84,991 |
| 77,879 |
| 79,208 |
| 80,455 |
| |||||||||||||||
Dilutive shares | 1,981 | 2,147 | 1,892 |
| 1,293 |
| 2,003 |
| 1,981 |
| |||||||||||||||
Weighted average shares — diluted | 82,436 | 85,139 | 86,883 |
| 79,172 |
| 81,211 |
| 82,436 |
| |||||||||||||||
Net earnings for basic and diluted earnings per share computation | $ | 150,717 | $ | 132,307 | $ | 110,554 |
| $ | 131,907 |
| $ | 171,953 |
| $ | 150,717 |
| |||||||||
Net earnings per share — basic | $ | 1.87 | $ | 1.59 | $ | 1.30 |
| $ | 1.69 |
| $ | 2.17 |
| $ | 1.87 |
| |||||||||
Net earnings per share — diluted | $ | 1.83 | $ | 1.55 | $ | 1.27 |
| $ | 1.67 |
| $ | 2.12 |
| $ | 1.83 |
|
Treasury StockRepurchased common stock is stated at cost and is presented as a separate reduction of shareholders’ equity.
Research and DevelopmentResearch and development costs are charged against earnings in the year incurred. Research and development expenses include basic scientific research and the application of scientific advances to the development of new and improved products and their uses.
Stock-Based CompensationThe Company offers stock-based employee compensation plans, which are more fully described in Note H. On August 1, 2005, the Company adopted the Statement of Financial Standards (“SFAS”) No. 123R,Share Based Payment – Revised 2004, using the modified prospective transition method. Under this method, stock-basedStock-based employee compensation cost is recognized using the fair-value based method for all new awards granted after August 1, 2005. Compensation costs for unvested stock options and awards that arewere outstanding at August 1, 2005, will beare recognized over the requisite service period based on the grant-date fair value of those options and awards as previously calculated under the pro-forma disclosures under SFAS 123.
31
Table of Contentsdisclosures.
Prior to the adoption of SFAS 123R, the Company accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Boards (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations. If the fair value based method prescribed in SFAS 123 had been applied in fiscal 2005 to all stock awards, the Company’s net income and basic and diluted net income per share would have been reduced as summarized below:
2005 | ||||||
---|---|---|---|---|---|---|
(thousands of dollars, except per share amounts) | ||||||
Net earnings, as reported | $ | 110,554 | ||||
Add total stock-based employee compensation expenses included in the determination of net income, net of tax | 3,784 | |||||
Less total stock-based employee compensation expense under the fair value-based method, net of tax | (12,150 | ) | ||||
Pro forma net earnings | $ | 102,188 | ||||
Basic net earnings per share | ||||||
As reported | $ | 1.30 | ||||
Pro forma | $ | 1.20 | ||||
Diluted net earnings per share | ||||||
As reported | $ | 1.27 | ||||
Pro forma | $ | 1.17 |
Effective June 27, 2005, the Board of Directors of the Company authorized the acceleration of vesting of certain unvested and “out-of-the-money” stock options outstanding under the Plan. The accelerated options were granted in fiscal 2004 and fiscal 2005 with a three-year vesting period and had exercise prices per share ranging from $30.38 to $30.69. Options for the purchase of 511,242 shares of the common stock of the Company became exercisable immediately as a result of this action. No options held by any director or named executive officer were included in the acceleration action. As a result, the amount of pre-tax compensation expense amortized during fiscal 2007 was reduced by approximately $1.2 million from what it would have otherwise been.
Revenue RecognitionRevenue is recognized when both product ownership and the risk of loss hashave transferred to the Customer, and the Company has no remaining obligations. The Company records estimated discounts and rebates as a reduction of sales in the same period revenue is recognized. Shipping and handling costs for fiscalFiscal 2009, 2008 and 2007 2006 and 2005 totaling $34.8$50.4 million, $35.3$53.0 million and $34.2$34.8 million, respectively, are classified as a component of operating expenses.
Product WarrantiesThe Company provides for estimated warranty costs at the time of sale and accrues for specific items at the time their existence is known and the amounts are determinable. The Company estimates warranty costs using standard quantitative measures based on historical warranty claim experience and evaluation of specific Customer warranty issues.
Derivative Instruments and Hedging ActivitiesThe Company recognizes all derivatives on the balance sheet at fair value. Derivatives that are not hedges are adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in shareholders’ equity through other comprehensive income until the hedged item is recognized. Gains or losses related to the ineffective portion of any hedge are recognized through earnings in the current period.
Exit or Disposal ActivitiesThe Company accounts for costs relating to exit or disposal activities under SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities for exit and disposal activities. SFAS No. 146 addresses recognition, measurement and reporting of costs associated with exit and disposal activities including restructuring. See Note L for disclosures related to restructuring.
GuaranteesUpon issuance of a guarantee, the Company recognizes a liability for the fair value of an obligation assumed under a guarantee. See Note K for disclosures related to guarantees.
32
New Accounting StandardsIn May 2009, the Financial Accounting Standards Board (FASB) issued FAS No. 165, Subsequent Events (FAS 165), which establishes general standards of accounting and disclosure for events that occur after the balance sheet date but before the financial statements are issued. This new standard was effective for interim or annual financial periods ending after June 15, 2009, and did not have an impact on our consolidated financial position or results of operations.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1,Interim Disclosures about Fair Value of Financial Instruments, (FSP No. FAS-107-1 and APB-28-1), which amends FAS 107,Disclosures about Fair Value of Financial Instrumentsand Accounting Principles Board (APB) Opinion No. 28,Interim Financial Reporting, to require disclosures about fair value of financial instruments for interim periods. This FSP will be effective for the Company for the quarter ended October 31, 2009, and will expand the Company’s disclosures regarding the use of fair value in interim periods.
In December 2008, the FASB issued FSP No. FAS 132(R)-1,Employers’ Disclosures about Postretirement Benefit Plan Assets(FSP No. FAS 132(R)), which provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This FSP is effective for fiscal years ending after December 15, 2009. The Company is currently evaluating the impact of adopting FSP No. FAS 132(R) on our defined benefit pension and other postretirement plan note disclosures.
In September 2006, the FASB issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132 (R)132(R) (“(SFAS 158”)158). ThisThe portion of the statement that requires recognition of the overfunded or underfunded status of defined benefit postretirement plans as an asset or liability in the statement of financial position and to recognize changeswas adopted in that funded status in accumulated other comprehensive income in the year in which the adoption occurs and in other comprehensive income in the following years.Fiscal 2007 with minimal impact. SFAS 158 also requires measurement of the funded status of a plan as of the date of the statement of financial position. SFAS 158 was effective for recognition of the funded status of the benefit plans for the Company’s fiscal year 2007 and resulted in a $10.2 million decrease in shareholders’ equity, net of tax. See further discussion in Note F of the Company’s Notes to Consolidated Financial Statements on the impact of this change on the Company’s consolidated financial statements. SFAS 158’s provisions regarding the change in the measurement date of postretirement benefits plans will requireThat provision required the Company to change its measurement date from April 30 to July 31 beginning with fiscal yearin Fiscal 2009. The adoption of the measurement date provision resulted in an after-tax decrease to Retained earnings of $0.9 million, a decrease to Other assets of $0.5 million increase to Other long-term liabilities of $0.8 million and an increase to Deferred income taxes of $0.5 million.
In JuneSeptember 2006, the FASB issued SFAS No. 157,Fair Value Measurements(SFAS 157). This statement defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 applies whenever another standard requires (or permits) assets or liabilities to be measured at fair value, except for the measurement of share-based payments. SFAS 157 does not expand the use of fair value to any new circumstances, and was effective for the majority of the Company’s assets and liabilities for its Fiscal 2009 year beginning August 1, 2008. The adoption of this portion of SFAS 157 in Fiscal 2009 did not have a
material impact on the Company’s financial statements. On February 12, 2008, the FASB Interpretation No. 48,issued FASB Staff Position (FSP) FAS 157-2,Accounting for Uncertainty in Income Taxes, an InterpretationEffective Date of FASB Statement No. 109157 (“FIN 48”)(FSP FAS 157-2). This pronouncement prescribes a recognition thresholdFSP FAS 157-2 delays by one year the effective date of SFAS 157 for certain non-financial assets and measurement attribute fornon-financial liabilities. The Company is currently evaluating the financial statement recognitionimpact the FSP FAS 157-2 will have on the determination of fair value related to non-financial assets and measurementnon-financial liabilities in Fiscal 2010. The adoption of tax positions taken orFSP FAS 157-2 is not expected to have a material impact on the Company’s financial statements.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be taken in a tax return. FIN 48measured at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and was effective for the Company with its 2009 fiscal year, beginning August 1, 2008. The adoption of SFAS 159 did not have a material impact on the Company’s financial statements.
In December 15, 20062007, the FASB issued SFAS No. 141(R),Business Combinations(SFAS 141(R)), which changes the accounting for business combinations and their effects on the financial statements. SFAS 141(R) will be effective for the Company with itsat the beginning of Fiscal 2010. In February 2009, the FASB issued FASB Staff Position 141(R)-a,Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies(FSP FAS 141(R)-a), which will amend certain provisions of SFAS 141(R). The adoptions of SFAS 141(R) and FSP FAS 141(R)-a are not expected to have a material impact on the Company’s consolidated financial statements.
In March 2008, fiscal year, commencing August 1, 2007.the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133(SFAS 161). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities, including (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The Company is currently evaluatingadopted the effectprovisions of FIN 48 on itsSFAS 161 effective February 1, 2009. The adoption of SFAS 161 only requires additional disclosures about the Company’s derivatives and thus did not affect the Company’s consolidated financial statements.
NOTE B
Goodwill and Other Intangible Assets
The Company has allocated goodwill to its Industrial Products and Engine Products segments. Additions to goodwill and other intangible assets in fiscal 2006Fiscal 2009 relate to the acquisition of AirCel100 percent of the stock of Western Filter Corporation on January 19, 2006October 15, 2008, for $78.5 million, as part of the IndustrialEngine Products segmentsegment. The weighted average life of the intangibles acquired in this acquisition is 17.6 years and consists primarily of customer related intangibles. Goodwill associated with this acquisition is tax deductible. Dispositions of goodwill and other intangible assets in Fiscal 2009 relate to the final purchase price allocationsale of the air dryer business in Maryville, Tennessee, on October 31, 2008, for the 2005 Le Bozec acquisition as$4.6 million, which resulted in a loss on sale of $0.6 million. This air dryer business was part of the EngineIndustrial Products segment. Additions to goodwill and other intangible assets in fiscal 2007Fiscal 2008 relate to the acquisition of Aerospace Filtration Systems,LMC West, Inc. on March 1, 2007, as part of the Engine Products segment and Rawsen Equipment (Pty) Limited on June 1, 2007,February 4, 2008, as part of the Industrial Products segment. Financial results for each of the above acquisitions are included in the Company’s consolidated results from the date of acquisition. Pro forma financial results are not presented as the acquisitions are not material, individually or in the aggregate. The Company completed its annual impairment testsassessment in the third quarter of fiscal 2007Fiscal 2009 and 2006,2008, which indicated no impairment.
Following is a reconciliation of goodwill for the years ended July 31, 20072009 and 2006:2008:
Industrial Products | Engine Products | Total Goodwill | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(thousands of dollars) | |||||||||||||||
Balance as of August 1, 2005 | $ | 99,440 | $ | 5,864 | $ | 105,304 | |||||||||
Acquisition activity | 2,234 | — | 2,234 | ||||||||||||
Final purchase price allocation | — | 1,394 | 1,394 | ||||||||||||
Usage of pre-acquisition net operating losses | (1,166 | ) | — | (1,166 | ) | ||||||||||
Foreign exchange translation | 2,419 | 424 | 2,843 | ||||||||||||
Balance as of July 31, 2006 | $ | 102,927 | $ | 7,682 | $ | 110,609 | |||||||||
Acquisition activity | 388 | 9,621 | 10,009 | ||||||||||||
Foreign exchange translation | 3,380 | 609 | 3,989 | ||||||||||||
Balance as of July 31, 2007 | $ | 106,695 | $ | 17,912 | $ | 124,607 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Engine |
| Industrial |
| Total |
| |||
|
| (thousands of dollars) |
| |||||||
Balance as of July 31, 2007 |
| $ | 17,912 |
| $ | 106,695 |
| $ | 124,607 |
|
Acquisition activity |
|
| — |
|
| 625 |
|
| 625 |
|
Foreign exchange translation |
|
| 1,214 |
|
| 7,716 |
|
| 8,930 |
|
Balance as of July 31, 2008 |
| $ | 19,126 |
| $ | 115,036 |
| $ | 134,162 |
|
Acquisition activity |
|
| 43,646 |
|
| — |
|
| 43,646 |
|
Disposition activity |
|
| — |
|
| (1,089 | ) |
| (1,089 | ) |
Foreign exchange translation |
|
| (1,190 | ) |
| (6,502 | ) |
| (7,692 | ) |
Balance as of July 31, 2009 |
| $ | 61,582 |
| $ | 107,445 |
| $ | 169,027 |
|
33
Intangible assets are comprised of patents, trademarks and Customer relationships and lists. Following is a reconciliation of intangible assets for the years ended July 31, 20072009 and 2006:2008:
Gross Carrying Amount | Accumulated Amortization | Net Intangible Assets |
|
|
|
|
|
|
|
|
|
| |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross |
| Accumulated |
| Net Intangible |
| |||||||||||||||||||
(thousands of dollars) |
| (thousands of dollars) |
| ||||||||||||||||||||||
Balance as of August 1, 2005 | $ | 27,489 | $ | (4,323 | ) | $ | 23,166 | ||||||||||||||||||
Balance as of July 31, 2007 |
| $ | 57,203 |
| $ | (10,902 | ) | $ | 46,301 |
| |||||||||||||||
Intangibles acquired | 300 | — | 300 |
| 1,868 |
| — |
| 1,868 |
| |||||||||||||||
Amortization expense | — | (2,060 | ) | (2,060 | ) |
| — |
| (4,330 | ) |
| (4,330 | ) | ||||||||||||
Foreign exchange translation | 994 | (271 | ) | 723 |
|
| 3,171 |
|
| (693 | ) |
| 2,478 |
| |||||||||||
Balance as of July 31, 2006 | $ | 28,783 | $ | (6,654 | ) | $ | 22,129 | ||||||||||||||||||
Balance as of July 31, 2008 |
| $ | 62,242 |
| $ | (15,925 | ) | $ | 46,317 |
| |||||||||||||||
Intangibles acquired | 25,248 | — | 25,248 |
| 26,710 |
| — |
| 26,710 |
| |||||||||||||||
Intangibles sold |
| (300 | ) |
| 114 |
| (186 | ) | |||||||||||||||||
Amortization expense | — | (2,926 | ) | (2,926 | ) |
| — |
| (5,601 | ) |
| (5,601 | ) | ||||||||||||
Foreign exchange translation | 3,172 | (1,322 | ) | 1,850 |
|
| (2,843 | ) |
| 989 |
|
| (1,854 | ) | |||||||||||
Balance as of July 31, 2007 | $ | 57,203 | $ | (10,902 | ) | $ | 46,301 | ||||||||||||||||||
Balance as of July 31, 2009 |
| $ | 85,809 |
| $ | (20,423 | ) | $ | 65,386 |
|
Net intangible assets consist of patents, trademarks and tradenames of $23.7$23.9 million and $15.9$23.5 million as of July 31, 20072009 and 2006,2008, respectively, and Customer related intangibles of $22.6$41.5 million and $6.2$22.8 million as of July 31, 20072009 and 2006,2008, respectively. Amortization expense relating to existing intangible assets is expected to be approximately $4.1 million for each of the years ending July 31, 2008 and 2009, $4.0$6.1 million for the year ending July 31, 2010, $3.9$6.0 million for the year ending July 31, 2011, and $3.8$5.9 million for the year ending July 31, 2012.2012, $5.7 million for the year ending July 31, 2013 and $5.3 million for the year ending July 31, 2014.
NOTE C
Credit Facilities
On April 2, 2007, the The Company amended and renewed its existing $150 millionhas a five-year, multi-currency revolving credit facility that was to mature on September 2, 2009. The amendment extendswith a group of banks under which the maturity date of the facility to April 2, 2012 and increases the capacityCompany may borrow up to $250 million. There were no other material changes in terms and conditions.This facility matures on April 2, 2013. The agreement provides that loans may be made under a selection of currencies and rate formulas including Base Rate Advances or Off Shore Rate Advances. The interest rate on each advance is based on certain market interest rates and leverage ratios. Facility fees and other fees on the entire loan commitment are payable over the duration of this facility. There was $20.0 million outstanding at July 31, 20072009, and no amounts$70.0 million outstanding at July 31, 2006, leaving $230.02008. The amount available for further borrowing reflects a reduction for issued standby letters of credit, as discussed below. At July 31, 2009 and 2008, $210.0 million and $150.0$161.5 million, respectively, was available for further borrowing under such facilities. The weighted average interest rate on these short-term borrowings outstanding at July 31, 2009 and 2008, was 0.56 percent and 2.73 percent, respectively.
The Company also has three uncommitted credit facilities in the United States, which provide unsecured borrowings for general corporate purposes. At July 31, 2009 and 2008, there was $70.0 million available for use. There was $9.6 million and $28.0 million outstanding under these facilities at July 31, 20072009 and July 31, 2006, 2008,
respectively. The weighted average interest rate on these short-term borrowings outstanding at July 31, 20072009 and 2008, was 5.59 percent.0.53 percent and 2.79 percent, respectively.
The Company also has three agreements under uncommitted credit facilities, which provide unsecured borrowings for general corporate purposes. At July 31, 2007 and 2006, there was $70.0 million available for use. There was $34.1 million and no balance outstanding under these facilities at July 31, 2007 and 2006 respectively. The weighted average interest rate on these short-term borrowings outstanding at July 31, 2007 was 5.58 percent.
The Company also has a 100€100 million euro program for issuing treasury notes for raising short, medium and long-term financing for its European operations. There was 22.7 million euro, or $31.1 million,nothing outstanding on this program at July 31, 20072009 and 35.3 million euro, or $45.0 million, outstanding as of July 31, 2006. The weighted average interest rate on these short-term issuances at July 31, 2007 and 2006 was 4.27 percent and 3.13 percent, respectively.2008. Additionally, the Company’s European operations have lines of credit in the amountwith an available limit of 100.1 million euro.€72.9 million. There was nothing outstanding on these lines of credit as of July 31, 2009. As of July 31, 2007,2008, there was 26.0€23.5 million, euro, or $35.6 million, outstanding. As of July 31, 2006 there was 20.1 million euro, or $25.6$36.9 million outstanding. The weighted average interest rate of these short-term borrowings outstanding at July 31, 2007 and 20062008, was 5.52 and 3.38 percent, respectively.5.60 percent.
Other international subsidiaries may borrow under various credit facilities. There was nothing outstanding under these credit facilities as of July 31, 2009. As of July 31, 2007 and 2006,2008, borrowings under these facilities were $2.4 million and $2.6 million, respectively.$4.5 million. The weighted
34
average interest rate on these international borrowings outstanding at July 31, 2007 and 20062008, was 3.90 percent and 7.92 percent, respectively.2.88 percent.
As discussed further in Note K, at July 31, 20072009 and 2006,2008, the Company had outstanding standby letters of credit totaling $16.5$20.0 million and $18.7$18.5 million, respectively, upon which no amounts had been drawn. The letters of credit guarantee payment to third parties in the event the Company is in breach of specified bond financing agreement and insurance contract terms as detailed in each letter of credit.
NOTE D
Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
| 2009 |
| 2008 |
| ||
|
| (thousands of dollars) |
| ||||
6.39% Unsecured senior notes due August 15, 2010, interest payable semi-annually, principal payments of $5.0 million, to be paid annually commencing August 16, 2006 |
|
| 9,981 |
|
| 14,942 |
|
4.85% Unsecured senior notes, interest payable semi-annually, principal payment of $30.0 million due December 17, 2011. |
|
| 30,000 |
|
| 30,000 |
|
6.59% Unsecured senior notes, interest payable semi-annually, principal payment of $80.0 million due November 14, 2013 |
|
| 80,000 |
|
| — |
|
5.48% Unsecured senior notes, interest payable semi-annually, principal payment of $50.0 million due June 1, 2017 |
|
| 50,000 |
|
| 50,000 |
|
5.48% Unsecured senior notes, interest payable semi-annually, principal payment of $25.0 million due September 28, 2017 |
|
| 25,000 |
|
| 25,000 |
|
5.48% Unsecured senior notes, interest payable semi-annually, principal payment of $25.0 million due November 30, 2017 |
|
| 25,000 |
|
| 25,000 |
|
1.418% Guaranteed senior notes, interest payable semi-annually, principal payment of ¥1.2 billion due January 31, 2012 |
|
| 12,679 |
|
| 11,123 |
|
2.019% Guaranteed senior note, interest payable semi-annually, principal payment of ¥1.65 billion due May 18, 2014 |
|
| 17,434 |
|
| 15,295 |
|
Variable Rate Commercial Property Loan, to a maximum of R37 million, interest rate of 13.75% as of July 31, 2008, repaid in 2009 |
|
| — |
|
| 1,882 |
|
Variable Rate Industrial Development Revenue Bonds (“Low Floaters”) interest payable monthly, principal payment of $7.755 million due September 1, 2024, and an interest rate of 0.67% as of July 31, 2009 |
|
| 7,755 |
|
| 7,755 |
|
Capitalized lease obligations and other, with various maturity dates and Interest rates |
|
| 1,321 |
|
| 1,147 |
|
Total |
|
| 259,170 |
|
| 182,144 |
|
Less current maturities |
|
| 5,496 |
|
| 5,669 |
|
Total long-term debt |
| $ | 253,674 |
| $ | 176,475 |
|
2007 | 2006 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(thousands of dollars) | |||||||||||
6.31% Unsecured senior notes, interest payable semi-annually, principal payment of $27.4 million due July 15, 2008 | 27,377 | 27,771 | |||||||||
6.39% Unsecured senior notes due August 15, 2010, interest payable semi-annually, principal payments of $5.0 million, to be paid annually commencing August 16, 2006 | 19,876 | 24,775 | |||||||||
4.85% Unsecured senior notes, interest payable semi-annually, principal amount of $30.0 million due December 17, 2011 | 30,000 | 30,000 | |||||||||
5.48% Unsecured senior notes, interest payable semi-annually, principal payment of $50.0 million due June 1, 2017 | 50,000 | — | |||||||||
1.418% Guaranteed senior notes, interest payable semi-annually, principal amount of 1.2 billion yen due January 31, 2012 | 10,120 | 10,468 | |||||||||
2.019% Guaranteed senior note, interest payable semi-annually, principal amount of 1.65 billion yen due May 18, 2014 | 13,915 | — | |||||||||
Variable Rate Commercial Property Loan, to a maximum of 37 million rand, final installment due September 2016, interest payable monthly, and an interest rate of 11.25% as of July 31, 2007 | 2,052 | 4,082 | |||||||||
Variable Rate Industrial Development Revenue Bonds (“Lower Floaters”) due September 1, 2024, principal amount of $7.755 million, interest payable monthly, and an interest rate of 3.59% as of July 31, 2007 | 7,755 | 7,755 | |||||||||
Capitalized lease obligations and other, with various maturity dates and Interest rates | 1,576 | 2,185 | |||||||||
Total | 162,671 | 107,036 | |||||||||
Less current maturities | 33,667 | 6,541 | |||||||||
Total long-term debt | $ | 129,004 | $ | 100,495 | |||||||
Annual maturities of long-term debt are $33.7 million in 2008, $6.9 million in 2009, $5.1$5.5 million in 2010, $5.1$5.4 million in 2011, $40.2$43.0 million in 2012, $97.5 million in 2014 and $71.8$107.8 million thereafter. The Company estimates thatThere are no maturities in 2013. As of July 31, 2009, the carryingestimated fair value of long-term debt approximateswith fixed interest rates was $253.1 million compared to its fair market value.carrying value of $250.1 million.
On May 18, 2007,November 14, 2008, the Company issued a 1.65 billion yen, or approximately $13.9an $80 million as of July 31, 2007, guaranteedsenior unsecured note. The note that maturesis due on May 18, 2014.November 14, 2013. The debt was issued at face value and bears interest payable semi-annually at a rate of 2.0196.59 percent. The proceeds from the note were used to refinance existing debt and for general corporate purposes.
On June 1, 2007, the Company issued $100 million of senior unsecured notes. The first $50 million was funded on June 1, 2007, and the remaining two $25 million tranches will bewere funded on September 28, 2007, and November 30, 2007. The three tranches are due on June 1, 2017, September 28, 2017, and November 30, 2017, respectively. The debt was issued at face value and bears interest payable semi-annually at a rate of 5.48 percent. The proceeds from the notes will bewere used to refinance existing debt orand for general corporate purposes.
The Company is exposed to changes in the fair value of its fixed-rate debt resulting from interest rate fluctuations. To hedge this exposure the Company entered into two fixed-to-variable interest rate swaps on August 3, 2009, subsequent to year end, for $80 million and $25 million, respectively, for approximately 5 and 8 years, respectively. These interest rate swaps will be accounted for as fair value hedges. Changes in the payment of interest resulting from the interest rate swaps will be recorded as an offset to interest expense.
Certain note agreements contain debt covenants related to working capital levels and limitations on indebtedness. As of July 31, 2007,2009, the Company was in compliance with all such covenants.
35
Table of Contents The Company currently expects to remain in compliance with these covenants.
NOTE E
Derivatives and Other Financial Instruments
Derivatives The Company records all derivative instruments in the financial statements at fair value. The Company uses derivative instruments, primarily forward exchange contracts and interest rate swaps, to manage its exposure to fluctuations in foreign exchange rates and interest rates. It is the Company’s policy to enter into derivative transactions only to the extent true exposures exist; the Company does not enter into derivative transactions for speculative or trading purposes. The Company enters into derivative transactions only with highly rated counterparties. These transactions may expose the Company to credit risk to the extent that the instruments have a positive fair value, but the Company has not experienced any material losses, nor does the Company anticipate any material losses.
Each derivative transaction the Company enters into is designated at inception as a hedge and is expected to be highly effective. The Company evaluates hedge effectiveness at inception and on an ongoing basis. When a derivative is determined to be or is no longer expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is recorded in earnings on the same line as the underlying transaction risk.
The Company is exposed to changes in the fair value of its fixed-rate debt resulting from interest rate fluctuations. To hedge this exposure, the Company has from time to time entered into fixed to variable interest rate swaps that were accounted for as fair value hedges. The fair value of these swaps was recorded net of the underlying outstanding debt. Changes in the payment of interest resulting from the interest rate swaps are recorded as an offset to interest expense. Effectiveness is assessed based on changes in the fair value of the underlying debt using incremental borrowing rates currently available on loans with similar terms and maturities. The Company did not have any interest rate swaps outstanding as of July 31, 2007.
The Company enters into forward exchange contracts of generally less than one year to hedge forecasted transactions amongst theits subsidiaries, and to reduce potential exposure related to fluctuations in foreign exchange rates for existing recognized assets and liabilities andliabilities. It also utilizes forward exchange contracts for anticipated intercompany and third-party transactions such as purchases, sales and dividend payments denominated in local currencies. Forward exchange contracts are designated as cash flow hedges as they are designed to hedge the variability of cash flows associated with the underlying existing recognized or anticipated transactions. Changes in the value of derivatives designated as cash flow hedges are recorded in other comprehensive income in shareholders’ equity until earnings are affected by the variability of the underlying cash flows. At that time, the applicable amount of gain or loss from the derivative instrument that is deferred in shareholders’ equity is reclassified to earnings and is included in other income or expense. For foreign currency forward contracts used as cash flow hedges, effectivenessearnings. Effectiveness is measured using spot rates to value both the hedge contract and the hedged item. The excluded forward points, as well as any ineffective portions of hedges, are recorded in earnings through the same line as the underlying transaction. During fiscal year 2007, $0.2Fiscal 2009, $0.4 million of losses were recorded due to the exclusion of forward points from the assessment of hedge effectiveness.
Net unrealized losses of $0.2 million and $0.3 million from cash flow hedges were recorded in accumulated other comprehensive income as of July 31, 2007 and 2006, respectively. These unrealized losses and gains are reclassified, as appropriate, as earnings are affected by the variability of the underlying cash flows during the term of the hedges. For fiscal year 2007, $0.3The Company expects to record $0.6 million of net deferred gains were reclassifiedlosses from accumulated otherthese forward exchange contracts during the next twelve months.
The Company is exposed to changes in the fair value of its fixed-rate debt resulting from interest rate fluctuations. To hedge this exposure the Company entered into two fixed-to-variable interest rate swaps on August 3, 2009, subsequent to year end, for $80 million and $25 million, respectively, for approximately 5 and 8 years, respectively. These interest rate swaps will be accounted for as fair value hedges. Changes in the payment of interest resulting from the interest rate swaps will be recorded as an offset to interest expense.
The Company entered into and settled an interest rate lock in October 2008. The interest rate lock settlement resulted in a $0.5 million in gain, net of deferred taxes of $0.2 million, which will be amortized into income over the life of the related debt.
The following summarizes the Company’s fair value of outstanding derivatives at July 31, 2009, and 2008, on the Consolidated Balance Sheets (thousands of dollars):
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| July 31, |
| July 31, |
| ||
Asset derivatives recorded under the caption Prepaids and other current assets |
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Foreign exchange contracts |
| $ | 493 |
| $ | 952 |
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Liability derivatives recorded under the caption Other current liabilities |
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Foreign exchange contracts |
| $ | 2,366 |
| $ | 1,252 |
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The impact on Other comprehensive income (OCI) and earnings from foreign exchange contracts that qualified as cash flow hedges for the twelve months ended July 31, 2009 and 2008, was as follows (thousands of dollars):
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|
|
| July 31, |
| July 31, |
| ||
Net carrying amount at beginning of year |
| $ | 188 |
| $ | (206 | ) |
Cash flow hedges deferred in OCI |
|
| (1,826 | ) |
| 2,628 |
|
Cash flow hedges reclassified to income (effective portion) |
|
| 580 |
|
| (2,211 | ) |
Change in deferred taxes |
|
| 408 |
|
| (23 | ) |
Net carrying amount at July 31 |
| $ | (650 | ) | $ | 188 |
|
The Company’s derivative financial instruments present certain market and counterparty risks; however, concentration of counterparty risk is mitigated as the Company deals with a variety of major banks worldwide. In addition, only conventional derivative financial instruments are utilized. The Company would not be materially impacted if any of the counterparties to the derivative financial instruments outstanding at July 31, 2009, failed to perform according to the terms of its agreement. At this time, the Company does not require collateral or any other income.form of securitization to be furnished by the counterparties to its derivative instruments.
Fair Value of Financial Instruments �� At July 31, 20072009 and 2006,2008, the Company’s financial instruments included cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings, long-term debt and derivative contracts. The fair values of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings approximated carrying values because of the short-term nature of these instruments. Derivative contracts are reported at their fair values based on third-party quotes. As of July 31, 2007,2009, the estimated fair value of long-term debt with fixed interest rates was $154.4$253.1 million compared to its carrying value of $156.0$250.1 million. The fair value is estimated by discounting the projected cash flows using the rate that similar amounts of debt could currently be borrowed.
36
Credit RiskThe Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate swaps and foreign exchange forward contracts. Collateral is generally not required of the counterparties or of the Company. In the unlikely event a counterparty fails to meet the contractual terms of an interest rate swap or foreign exchange forward contract, the Company’s risk is limited to the fair value of the instrument. There were no interest rate swaps outstanding at July 31, 2009 or 2008. The Company actively monitors its exposure to credit risk through the use of credit approvals and credit limits, and by
selecting major international banks and financial institutions as counterparties. The Company has not had any historical instances of non-performance by any counterparties, nor does it anticipate any future instances of non-performance.
NOTE F
Employee Benefit Plans
Pension PlansThe Company and certain of its subsidiaries have defined benefit pension plans for many of its hourly and salaried employees. The domesticU.S. plans include plans that provide defined benefits as well as a plan for salaried workers that provides defined benefits pursuant to a cash balance feature whereby a participant accumulates a benefit comprised of a percentage of current salary that varies with years of service, interest credits and transition credits. The international plans generally provide pension benefits based on years of service and compensation level. TheDuring Fiscal 2009, the Company useschanged its measurement date to July 31, in accordance with the measurement date provisions of FAS 158, as discussed below. During Fiscal 2008, the Company used an April 30 measurement date for its pension plans.
Net periodic pension costs for the Company’s pension plans include the following components:
2007 | 2006 | 2005 |
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| 2009 |
| 2008 |
| 2007 |
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(thousands of dollars) |
| (thousands of dollars) |
| ||||||||||||||||||||||
Net periodic cost: |
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Service cost | $ | 15,067 | $ | 14,851 | $ | 13,369 |
| $ | 15,385 |
| $ | 15,996 |
| $ | 15,067 |
| |||||||||
Interest cost | 17,014 | 14,577 | 14,404 |
| 18,481 |
| 17,702 |
| 17,014 |
| |||||||||||||||
Expected return on assets | (24,955 | ) | (20,060 | ) | (18,235 | ) |
| (29,143 | ) |
| (28,275 | ) |
| (24,955 | ) | ||||||||||
Transition amount amortization | 523 | 551 | 1,223 |
| 193 |
| 164 |
| 523 |
| |||||||||||||||
Prior service cost amortization | 314 | 208 | 214 |
| 438 |
| 380 |
| 314 |
| |||||||||||||||
Actuarial loss amortization | 1,408 | 1,898 | 455 | ||||||||||||||||||||||
Actuarial (gain)/loss amortization |
| 1,088 |
| (58 | ) |
| 1,408 |
| |||||||||||||||||
Curtailment loss | 408 | 1,296 | — |
| 910 |
| — |
| 408 |
| |||||||||||||||
Settlement (gain)/loss | (2,357 | ) | (356 | ) | 409 | ||||||||||||||||||||
Settlement gain |
|
| — |
|
| (35 | ) |
| (2,357 | ) | |||||||||||||||
Net periodic benefit cost | $ | 7,422 | $ | 12,965 | $ | 11,839 |
| $ | 7,352 |
| $ | 5,874 |
| $ | 7,422 |
| |||||||||
Negotiations with one of our unions resulted in a freeze in pension benefits at one of our U.S. plants. In exchange for the freezing of the plan, participants will be eligible for a company match in a defined contribution plan. The freeze in the plan resulted in a curtailment loss of $0.9 million during Fiscal 2009.
In anticipation of Japanese defined benefit plan law changes, the Company terminated the defined benefit plan offered to its employees in Japan on December 31, 2006, which resulted in a net settlement gain of $1.9 million in the second quarter of fiscalFiscal 2007. This plan was replaced with a defined contribution plan as of January 1, 2007. The Company incurred the cost of initial contributions to the defined contribution plan as well as other costs of converting participants to the new defined contribution plan resulting in a net pretax gain for the net settlement and transition to the defined contribution plan of approximately $0.6 million during the second quarter of fiscalFiscal 2007.
Effective July 31, 2007, the Company adopted SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R). This statement requires recognition of the overfunded or underfunded status of defined benefit postretirement plans as an asset or liability in the statement of financial position and to recognizeposition. This statement also requires that changes in thatthe funded status are recognized in accumulated other comprehensive income in the year in which the adoption occurs and in other comprehensive income in the following years. SFAS 158’s provisions regarding the change in the measurement date of postretirement benefits plans will require usrequired the Company to change ourits measurement date from April 30 to July 31 beginning with fiscal yearduring Fiscal 2009. The adoption of the measurement date provisions resulted in an after-tax decrease to Retained earnings of $0.9 million, a decrease to Other assets of $0.5 million increase to Other long-term liabilities of $0.8 million and an increase to Deferred income taxes of $0.5 million.
37
The adoption of FAS 158 on July 31, 2007, resulted in incremental adjustments to the following individual line items in the Consolidated Balance Sheet:
At July 31, 2007 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(thousands of dollars) | Prior to Adopting SFAS 158 | Effect of Adopting SFAS 158 | As Reported at July 31, 2007 | ||||||||||||
Other assets | 122,068 | (12,036 | ) | 110,032 | |||||||||||
Deferred income taxes | 42,426 | (4,802 | ) | 37,624 | |||||||||||
Other long-term liabilities | 65,750 | 2,997 | 68,747 | ||||||||||||
Accumulated other comprehensive income (loss) | 80,239 | (10,231 | ) | 70,008 |
The obligations and funded status of the Company’s pension plans as of 20072009 and 2006,2008, is as follows:
2007 | 2006 |
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| ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 |
| 2008 |
| ||||||||||||||
(thousands of dollars) |
| (thousands of dollars) |
| |||||||||||||||
Change in benefit obligation: |
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| |||||||||||||
Benefit obligation, beginning of year | $ | 299,001 | $ | 285,152 |
| $ | 330,258 |
| $ | 312,514 |
| |||||||
Service cost | 15,067 | 14,851 |
| 18,730 |
| 15,996 |
| |||||||||||
Interest cost | 17,014 | 14,577 |
| 22,868 |
| 17,702 |
| |||||||||||
Participant contributions | 1,311 | 1,220 |
| 1,476 |
| 1,381 |
| |||||||||||
Plan amendments | 2,194 | 1,508 |
| — |
| 1,221 |
| |||||||||||
Actuarial (gain) loss | 1,157 | (5,720 | ) | |||||||||||||||
Actuarial gain |
| (1,077 | ) |
| (2,410 | ) | ||||||||||||
Currency exchange rates | 6,146 | 3,787 |
| (13,338 | ) |
| 3,610 |
| ||||||||||
Curtailment | (1,147 | ) | — | |||||||||||||||
Settlement | (11,080 | ) | (956 | ) |
| — |
| (272 | ) | |||||||||
Benefits paid | (17,149 | ) | (15,418 | ) |
|
| (20,763 | ) |
| (19,484 | ) | |||||||
Benefit obligation, end of year | $ | 312,514 | $ | 299,001 |
| $ | 338,154 |
| $ | 330,258 |
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Change in plan assets: |
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Fair value of plan assets, beginning of year | $ | 317,751 | $ | 254,670 |
| $ | 378,695 |
| $ | 377,461 |
| |||||||
Actual return on plan assets | 36,693 | 50,941 |
| (62,057 | ) |
| 5,389 |
| ||||||||||
Company contributions | 41,956 | 23,973 |
| 13,356 |
| 11,316 |
| |||||||||||
Participant contributions | 1,311 | 1,220 |
| 1,476 |
| 1,381 |
| |||||||||||
Currency exchange rates | 5,595 | 2,733 |
| (13,228 | ) |
| 2,904 |
| ||||||||||
Settlement | (8,696 | ) | (368 | ) |
| — |
| (272 | ) | |||||||||
Benefits paid | (17,149 | ) | (15,418 | ) |
|
| (20,763 | ) |
| (19,484 | ) | |||||||
Fair value of plan assets, end of year | $ | 377,461 | $ | 317,751 |
| $ | 297,479 |
| $ | 378,695 |
| |||||||
Funded status: |
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Over (under) funded status at April 30, 2007 | $ | 64,947 | $ | 18,750 | ||||||||||||||
Over (under) funded status at July 31, 2009 and April 30, 2008 |
| $ | (40,675 | ) | $ | 48,437 |
| |||||||||||
Fourth quarter contributions | 639 | 17,311 |
|
| — |
|
| 808 |
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Over (under) funded status after fourth quarter contributions | $ | 65,586 | $ | 36,061 |
| $ | (40,675 | ) | $ | 49,245 |
| |||||||
The net overfundedunder funded status of $65.6$40.7 million at July 31, 20072009, is recognized in the accompanying Consolidated Balance Sheet as $81.0$4.3 million within Other assets for ourthe Company’s over funded plans and $15.4$45.0 million within Other long-term liabilities for our underfundedthe Company’s under funded plans. Included in Accumulated other comprehensive income at July 31, 20072009, are the following amounts that have not yet been recognized in net periodic pension expense: unrecognized actuarial losses of $7.3$123.0 million, unrecognized prior service cost of $5.5$4.2 million and unrecognized transition obligations of $3.7$3.4 million. The actuarial gain,loss, prior service cost and unrecognized transition obligation are included in accumulatedAccumulated other comprehensive income, andnet of tax. The amounts expected to be recognized in net periodic pension expense during fiscal 2008 is $0.1Fiscal 2010 are $1.4 million, $0.4$0.3 million and $0.1$0.2 million, respectively. Prior to the adoption of FAS 158, the additional minimum and liability and balance in accumulated other comprehensive income was $1.5 million at July 31, 2007. The increase in accumulated other comprehensive income due to the adoption of FAS 158 was $15.0 million. The accumulated benefit obligation for all defined benefit pension plans was $270.2$296.7 million and $261.1$282.7 million at July 31, 2009, and April 30, 2007 and 2006,2008, respectively.
38
The reconciliation of funded status as of July 31, 2006 is as follows (thousands of dollars):
Over (under) funded status | $ | 36,061 | ||||
Unrecognized actuarial loss | 18,715 | |||||
Unrecognized prior service cost | 4,333 | |||||
Unrecognized net transition obligation | 4,796 | |||||
Net amount recognized in Consolidated Balance Sheet | $ | 63,905 | ||||
The amounts recognized in the Consolidated Balance Sheet as of July 31, 2006 are as follows (thousands of dollars):
Prepaid benefit cost | $ | 81,939 | ||||
Accrued benefit liability | (18,034 | ) | ||||
Additional minimum liability | (2,815 | ) | ||||
Intangible asset | 812 | |||||
Accumulated other comprehensive income | 2,003 | |||||
Net amount recognized in Consolidated Balance Sheet | $ | 63,905 | ||||
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $15.7$246.7 million, $13.7$234.3 million and $0.6$213.3 million, respectively, as of July 31, 2009, and $16.4 million, $13.8 million and $0.0 million, respectively, as of April 30, 2007 and $45.5 million, $35.7 million and $14.6 million, respectively, as of April 30, 2006.2008.
For the years ended July 31, 20072009 and 2006,2008, the U.S. pension plans represented approximately 7772 percent and 8275 percent, respectively, of the Company’s total plan assets, and approximately 72 percent and 7170 percent, respectively, of the Company’s total projected benefit obligation. Considering the significance
The weighted-average discount rates and rates of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation are as follows:
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Weighted average actuarial assumptions | Weighted average actuarial assumptions | 2007 | 2006 |
| 2009 |
| 2008 |
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All U.S. plans: |
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|
| ||||||||||||
Discount rate | 6.00 | % | 6.25 | % |
| 6.00 | % |
| 6.00 | % | |||||||
Rate of compensation increase | 5.00 | % | 5.00 | % |
| 5.00 | % |
| 5.00 | % | |||||||
Non-U.S. plans: |
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|
|
| ||||||||||||
Discount rate | 5.23 | % | 4.64 | % |
| 5.90 | % |
| 6.30 | % | |||||||
Rate of compensation increase | 4.01 | % | 3.62 | % |
| 3.87 | % |
| 4.48 | % |
The weighted-average discount rates, expected returns on plan assets and rates of increase in future compensation levels used to determine the net periodic benefit cost are as follows:
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Weighted average actuarial assumptions | Weighted average actuarial assumptions | 2007 | 2006 | 2005 |
| 2009 |
| 2008 |
| 2007 |
| |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
All U.S. plans: |
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|
| |||||||||||||||||
Discount rate | 6.25 | % | 5.50 | % | 6.25 | % |
| 6.00 | % |
| 6.00 | % |
| 6.25 | % | |||||||||
Expected return on plan assets | 8.50 | % | 8.50 | % | 8.50 | % |
| 8.50 | % |
| 8.50 | % |
| 8.50 | % | |||||||||
Rate of compensation increase | 5.00 | % | 5.00 | % | 5.00 | % |
| 5.00 | % |
| 5.00 | % |
| 5.00 | % | |||||||||
Non-U.S. plans: |
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|
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|
|
| |||||||||||||||||
Discount rate | 4.64 | % | 4.43 | % | 4.73 | % |
| 6.30 | % |
| 5.23 | % |
| 4.64 | % | |||||||||
Expected return on plan assets | 6.60 | % | 6.08 | % | 6.71 | % |
| 7.14 | % |
| 7.49 | % |
| 6.60 | % | |||||||||
Rate of compensation increase | 3.62 | % | 3.29 | % | 3.43 | % |
| 4.48 | % |
| 4.01 | % |
| 3.62 | % |
Expected Long-Term Rate of ReturnTo develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This resulted in the selection of the 8.50 percent long-term rate of return on assets assumption for the Company’s U.S. pension plans. The expected long-term rate of return on assets assumption for the plans outside the
39
U.S. reflects the investment allocation and expected total portfolio returns specific to each plan and country. The expected long-term rate of return on assets shown in the pension benefit disclosure for non-U.S. plans is an asset-based weighted average of all non-U.S. plans.
Discount RateThe Company’s objective in selecting a discount rate is to select the best estimate of the rate at which the benefit obligations could be effectively settled on the measurement date, taking into account the nature and duration of the benefit obligations of the plan. In making this best estimate, the Company looks at rates of return on high-quality fixed-income investments currently available, and expected to be available, during the period to maturity of the benefits. This process includes looking at the universe of bonds available on the measurement date with a quality rating of Aa or better. Similar appropriate benchmarks are used to determine the discount rate for the non-U.S. plans. The discount rate for non-U.S. plans disclosed in the assumptions used to determine net periodic benefit cost and to determine benefit obligations is based upon a weighted average, using year-end projected benefit obligations, of all non-U.S. plans.
Plan AssetsThe Company’s pension plan weighted-average asset allocations by asset category are as follows:
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|
| Plan Assets at |
| ||||
Asset Category |
| 2009 |
| 2008 |
| ||
All U.S. plans: |
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|
Equity securities |
|
| 41 | % |
| 44 | % |
Alternative investments |
|
| 42 | % |
| 36 | % |
Real assets |
|
| 12 | % |
| 12 | % |
Fixed income |
|
| 5 | % |
| 8 | % |
Total U.S. plans |
|
| 100 | % |
| 100 | % |
Non U.S. plans: |
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|
|
|
|
|
|
Equity securities |
|
| 44 | % |
| 64 | % |
Debt securities |
|
| 56 | % |
| 36 | % |
Total Non U.S. plans |
|
| 100 | % |
| 100 | % |
Plan Assets at | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Asset Category | 2007 | 2006 | |||||||||
All U.S. plans: | |||||||||||
Equity securities | 60 | % | 62 | % | |||||||
Alternative investments | 33 | % | 31 | % | |||||||
Fixed income | 7 | % | 7 | % | |||||||
Total U.S. plans | 100 | % | 100 | % | |||||||
Non U.S. plans: | |||||||||||
Equity securities | 67 | % | 64 | % | |||||||
Debt securities | 33 | % | 33 | % | |||||||
Cash and other | — | 3 | % | ||||||||
Total Non U.S. plans | 100 | % | 100 | % | |||||||
Investment Policies and Strategies.For the Company’s U.S. plans, the Company uses a total return investment approach to achieve a long-term return on plan assets, with a prudent level of risk for the purpose of meeting its retirement income commitments to employees. The plan’s investments are diversified to assist in managing risk. The Company amended its target asset allocation strategy during fiscal 2007 after its April 30 measurement date. Prior to amending the target asset allocations, the Company’s guidelines called for an asset allocation of 55 percent equity securities, 30 percent alternative investments (funds of hedge funds), 10 percent fixed income, and 5 percent private equity. Within equity securities, the Company targeted an allocation of 25 percent small cap, 15 percent large cap, and 15 percent international. For fiscal year 2008, the Company’s asset allocation guidelines will target an allocation of 45 percent equity securities, 30 percent alternative investments (fund(funds of hedge funds), 10 percent real assets (investments into funds containing commodities and real estate), 10 percent fixed income and 5 percent private equity. Within equity securities, the Company will target an allocation of 15 percent international, 15 percent equity long / short, 10 percent small cap, and 5 percent large cap. Subsequent to the April 30, 2007 measurement date, the assets of the plans were reallocated to conform to the new asset guidelines established by the Company. These target allocation guidelines are determined in consultation with the Company’s investment consultant, and through the use of modeling the risk/return trade-offs among asset classes utilizing assumptions about expected annual return, expected volatility/standard deviation of returns and expected correlations with other asset classes. Investment policy and performance is measured and monitored on an ongoing basis by the Company’s investment committee through its use of an investment consultant and through quarterly investment portfolio reviews.
40
For the Company’s non-U.S. plans, the general investment objectives are to maintain a suitably diversified portfolio of secure assets of appropriate liquidity which will generate income and capital growth to meet, together with any new contributions from members and the Company, the cost of current and future benefits.
Estimated Contributions and Future PaymentsAs a result of its current over funded status,past funding practices, the Company does not have a minimum required contribution under the Pension Benefit Guarantee Corporation requirements for its U.S. pension plans for fiscal 2008. ThereFiscal 2010. As a result, there is no current intention to make a U.S. pension contribution.contribution in Fiscal 2010. For its non-U.S. pension plans, the Company estimates that it will contribute approximately $4.0$5 million in fiscal 2008Fiscal 2010, based upon the local government prescribed funding requirements.
Estimated future benefit payments for the Company’s U.S. and non-U.S. plans are as follows (thousands of dollars):
Fiscal year 2008 | $ | 15,708 | ||||||||
Fiscal year 2009 | $ | 16,706 | ||||||||
|
|
|
|
| ||||||
Fiscal year 2010 | $ | 18,894 |
| $ | 18,528 |
| ||||
Fiscal year 2011 | $ | 17,359 |
| $ | 18,624 |
| ||||
Fiscal year 2012 | $ | 22,554 |
| $ | 22,469 |
| ||||
Fiscal years 2013-2017 | $ | 113,186 | ||||||||
Fiscal year 2013 |
| $ | 20,829 |
| ||||||
Fiscal year 2014 |
| $ | 23,313 |
| ||||||
Fiscal years 2015-2019 |
| $ | 125,346 |
|
Postemployment and Postretirement Benefit PlansThe Company provides certain postemployment and postretirement health care benefits for certain U.S. employees for a limited time after termination of employment. The Company has recorded a liability for its postretirement benefit plan in the amount of $3.2$1.7 million and $3.6$3.1 million as of July 31, 20072009 and July 31, 2006,2008, respectively. The annual cost resulting from these benefits is not material. Union negotiations have resulted in one U.S. plant freezing the plan. This change resulted in a curtailment gain of $1.4 million. For measurement purposes, an 8 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2007. We haveFiscal 2009. The Company has assumed that the long-term rate of increase will decrease gradually to an ultimate annual rate of 5 percent. A one-percentage point increase in the health care cost trend rate would increase the fiscal 2007Fiscal 2009 and 2006 costs2008 liability by $0.1 million and $0.5 million.million, respectively.
401(k) Retirement Savings and Employee Stock Ownership PlanThe Company provides a contributory employee savings plan to U.S. employees that permits participants to make contributions by salary reduction pursuant to section 401(k) of the Internal Revenue Code. EmployeeThrough April 13, 2009, employee contributions of up to 25 percent of compensation are matched at a rate equaling 100 percent of the first 3 percent contributed and 50 percent of the next 2 percent contributed. The Company’s contributions under this plan are based on the level of employee contributions as well as a discretionary contribution based on performance of the Company. The Plan was amended effective April 13, 2009, to reduce Company fixed matching contributions to the Plan for salaried employees. After April 13, 2009, fixed matching contributions for salaried employees were calculated at 50 percent of up to 3 percent of compensation deferred by the participant and deposited into the Plan, and 25 percent of the next 2 percent of compensation deferred by
the participant and deposited to the Plan. In addition, the Company fixed matching contribution was eliminated for Company Executive Officers and Vice Presidents. Total contribution expense for these plans was $8.1$5.1 million, $6.4$8.3 million and $5.8$8.1 million for the years ended July 31, 2009, 2008 and 2007, 2006 and 2005, respectively.
Employee Stock Ownership Plan The Company maintains This plan also includes shares from an Employee Stock Ownership Plan (“ESOP”) for eligible employees.. As of July 31, 2007,2009, all shares of the planESOP have been allocated to participants. The ESOP’s only assets are Company common stock. Total ESOP shares are considered to be shares outstanding for earnings per share calculations.
Deferred Compensation and Other Benefit PlansThe Company provides various deferred compensation and other benefit plans to certain executives. The deferred compensation plan allows these employees to defer the receipt of all or a portion of their salary, bonus and other stock related compensation and up to 75 percent of their salary to future periods. Other benefit plans are provided to supplement the benefits for a select group of highly compensated individuals which are reduced because of compensation limitations set by the Internal Revenue Code. The Company has recorded a liability in the amount of $10.7$10.0 million and $10.6 million as of both yearsthe year ended July 31, 20072009 and July 31, 2006,2008, respectively, related primarily to its deferred compensation plans.
41
NOTE G
Shareholders’ Equity
Stock RightsOn January 27, 2006, the Board of Directors of the Company approved the extension of the benefits afforded by the Company’s existing rights plan by adopting a new shareholder rights plan. Pursuant to the Rights Agreement, dated as of January 27, 2006, by and between the Company and Wells Fargo Bank, N.A., as Rights Agent, one right was issued on March 3, 2006, for each outstanding share of common stock of the Company upon the expiration of the Company’s existing rights. Each of the new rights entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, without par value, at a price of $143.00 per one one-thousandth of a share. The rights, however, will not become exercisable unless and until, among other things, any person acquires 15 percent or more of the outstanding common stock of the Company. If a person acquires 15 percent or more of the outstanding common stock of the Company (subject to certain conditions and exceptions more fully described in the Rights Agreement), each right will entitle the holder (other than the person who acquired 15 percent or more of the outstanding common stock) to purchase common stock of the Company having a market value equal to twice the exercise price of a right. The rights are redeemable under certain circumstances at $.001 per right and will expire, unless earlier redeemed, on March 2, 2016.
Stock Compensation PlansThe Stock Compensation Plans in the Consolidated Statements of Changes in Shareholders’ Equity consist of the balance of amounts payable to eligible participants for stock compensation that was deferred to a Rabbi Trust pursuant to the provisions of the 2001 Master Stock Incentive Plan, as well as performance awards payable in common stock discussed further in Note H.
Treasury StockThe Company believes that the share repurchase program is a way of providing return to its shareholders. The Board of Directors authorized the repurchase, at the Company’s discretion, of 8.0 million shares of common stock under the stock repurchase plan dated March 31, 2006. As of July 31, 2007,2009, the Company had remaining authorization to repurchase 4.00.9 million shares under this plan. Following is a summary of treasury stock share activity for fiscal 2007Fiscal 2009 and 2006:2008:
|
|
|
|
|
|
|
|
|
| 2009 |
| 2008 |
| ||
Balance at beginning of year |
|
| 11,021,619 |
|
| 9,500,372 |
|
Stock repurchases |
|
| 802,000 |
|
| 2,245,790 |
|
Net issuance upon exercise of stock options |
|
| (355,491 | ) |
| (647,225 | ) |
Issuance under compensation plans |
|
| (99,612 | ) |
| (67,822 | ) |
Discretionary stock paid into 401(k) plan |
|
| (60,122 | ) |
| — |
|
Other activity |
|
| (12,985 | ) |
| (9,496 | ) |
Balance at end of year |
|
| 11,295,409 |
|
| 11,021,619 |
|
2007 | 2006 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Balance at beginning of year | 8,102,921 | 5,583,393 | ||||||||
Stock repurchases | 2,184,000 | 3,783,000 | ||||||||
Net issuance upon exercise of stock options | (619,514 | ) | (399,612 | ) | ||||||
Issuance under compensation plans | (152,847 | ) | (851,331 | ) | ||||||
Other activity | (14,188 | ) | (12,529 | ) | ||||||
Balance at end of year | 9,500,372 | 8,102,921 | ||||||||
NOTE H
Stock Option Plans
Employee Incentive PlansIn November 2001, shareholders approved the 2001 Master Stock Incentive Plan (the “Plan”) that replaced the 1991 Plan that expired on December 31, 2001, and provided for similar awards. The Plan extends through December 2011 and allows for the granting of nonqualified stock options, incentive stock options, restricted stock, stock appreciation rights (“SAR”), dividend equivalents, dollar-denominated awards and other stock-based awards. Options under the Plan are granted to key employees at or above market price at the date of grant. Options are exercisable for up to 10 years from the date of grant. The Plan also allows for the granting of performance awards to a limited number of key executives. As administered by the Human Resources Committee of the Company’s Board of Directors, these performance awards are payable in common stock and are based on a formula which measures performance of the Company over a three-year period. The Company recorded a net reversal of performance award expense in Fiscal 2009 of $3.1 million. The net benefit is due to the reversal of $3.6 million of Long-Term Compensation Plan expense recognized in prior periods. This reversal reflects an adjustment in the expected payouts for the three-year cycles ending July 31, 2009, and July 31, 2010, to zero based upon actual and forecasted results. Performance award expense under these plans totaled $4.2 million and $2.7 million $5.2 millionin Fiscal 2008 and $5.3 million in 2007, 2006 and 2005, respectively.
Stock options issued from fiscal 1997Fiscal 1999 to fiscal 2007Fiscal 2009 become exercisable for non-executives in equal increments over three years. Stock options issued from fiscalFiscal 1999 to fiscal 2007 becomeFiscal 2009 became exercisable for
42
most executives immediately upon the date of grant. Stock options issued during fiscal 1997 and 1998 became exercisable for executives in equal increments over three years. Certain other stock options issued to executives during fiscalFiscal 2004, 2006 and 2007 become exercisable in equal increments over three years.
Effective June 27, 2005, the Board of Directors of the Company authorized the acceleration of vesting of certain unvested and “out-of-the-money” stock options outstanding under the Plan. The accelerated options were granted in fiscal 2004 and fiscal 2005 with a three-year vesting period and had exercise prices per share ranging from $30.38 to $30.69. Options for the purchase of 511,242 shares of the common stock of the Company became exercisable immediately as a result of this action. No options held by any director or named executive officer were included in the acceleration action. As a result, the amount of pre-tax compensation expense amortized during fiscal 2007 was reduced by approximately $1.2 million from what it would have otherwise been. For fiscal 2007,Fiscal 2009, the Company recorded pretax compensation expense associated with stock options of $3.4$4.1 million and recorded $1.3$1.5 million of related tax benefit.
On August 1, 2005, the Company adopted SFAS No. 123R,Share Based Payment – Revised 2004, using the modified prospective transition method. Under this method, stock-based Stock-based employee compensation cost is recognized using the fair-value based method for all new awards granted after August 1, 2005. Compensation costs for unvested stock options and awards that were outstanding at August 1, 2005, are recognized over the requisite service period based on the grant-date fair value of those options and awards as previously calculated under the pro-forma disclosures under SFAS 123.disclosures. The Company determined the fair value of these awards using the Black-Scholes option pricing model with the following weighted average assumptions:
2007 | 2006 | 2005 |
|
|
|
|
|
|
|
|
|
| ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 |
| 2008 |
| 2007 |
| ||||||||||||||||||
Risk-free interest rate | 4.4 - 4.9% | 4.3 - 5.0% | 3.74% |
| 1.4 – 4.0% |
| 2.1 - 4.2% |
| 4.4 - 4.9% |
| ||||||||||||||
Expected volatility | 18.3 - 23.6% | 20.2 - 27.2% | 24.4% |
| 21.6 – 25.5% |
| 15.2 – 22.4% |
| 18.3 - 23.6% |
| ||||||||||||||
Expected dividend yield | 1.0% | 1.0% | 0.8% |
| 1.0% |
| 1.0% |
| 1.0% |
| ||||||||||||||
Expected life |
|
|
|
|
|
|
| |||||||||||||||||
Director original grants without reloads | 7 years | 7 years | — |
| 8 years |
| 8 years |
| 7 years |
| ||||||||||||||
Director original grants with reloads | — | — | 3 years | |||||||||||||||||||||
Non-officer original grants | 6 years | 6 years | 6 years |
| 7 years |
| 7 years |
| 6 years |
| ||||||||||||||
Officer original grants with reloads | 3 years | 3 years | 3 years |
| 4 years |
| 3 years |
| 3 years |
| ||||||||||||||
Reload grants | <1 year | — | 7 years |
| <5 years |
| <3 years |
| <1 year |
| ||||||||||||||
Officer original grants without reloads | 6 years | 6 years | 6 years |
| 7 years |
| 7 years |
| 6 years |
| ||||||||||||||
Officer original grants with reloads and vesting | 5 years | 3 years | — |
| — |
| — |
| 5 years |
|
Reload grants are grants made to officers or directors who exercised a reloadable option during the fiscal year and made payment of the purchase price using shares of previously owned Company stock. The reload grant is for the number of shares equal to the shares used in payment of the purchase price and/or withheld for minimum tax withholding.
Black-Scholes is a widely accepted stock option pricing model; however, the ultimate value of stock options granted will be determined by the actual lives of options granted and the actual future price levels of the Company’s common stock. The weighted average fair value for options granted during fiscalFiscal 2009, 2008 and 2007 2006is $8.56, $10.60 and 2005 is $7.89 $9.36 and $8.08 per share, respectively, using the Black-Scholes pricing model.
43
The following table summarizes stock option activity:
Options Outstanding | Weighted Average Exercise Price |
|
|
|
|
|
|
| |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Options |
| Weighted |
| |||||||||||||
Outstanding at July 31, 2006 | 6,281,304 | $ | 21.09 | ||||||||||||||
Outstanding at July 31, 2008 |
| 5,181,778 |
| $ | 25.62 |
| |||||||||||
Granted | 553,100 | 35.42 |
| 366,588 |
| 34.23 |
| ||||||||||
Exercised | (965,764 | ) | 15.38 |
| (505,363 | ) |
| 17.64 |
| ||||||||
Canceled | (124,365 | ) | 36.88 |
|
| (44,878 | ) |
| 39.04 |
| |||||||
Outstanding at July 31, 2007 | 5,744,275 | 23.09 | |||||||||||||||
Outstanding at July 31, 2009 |
|
| 4,998,125 |
|
| 26.94 |
|
The total intrinsic value of options exercised during fiscalFiscal 2009, 2008 and 2007 2006was $9.1 million, $26.2 million, and 2005 was $20.6 million, $11.2 million, and $38.7 million, respectively.
Shares reserved at July 31, 20072009 for outstanding options and future grants were 10,536,674.11,521,192. Shares reserved consist of shares available for grant plus all outstanding options. An amount is added to shares reserved each year based on shares outstanding adjusted for certain items as detailed in the Plan. The aggregate number of shares of common stock that may be issued under all awards under the Plan in any calendar year may not exceed 1.5 percent of the sum of the Company’s outstanding shares of common stock, the outstanding share equivalents, as determined by the Company in the calculation of earnings per share on a fully diluted basis, and shares held in treasury of the Company as reported for the Company’s most recent fiscal year that ends during such calendar year.
The following table summarizes information concerning outstanding and exercisable options as of July 31, 2007:2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Range of Exercise Prices | Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price |
| Number |
| Weighted |
| Weighted |
| Number |
| Weighted |
| |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
$5 to $15 | 1,434,692 | 2.28 | $ | 11.58 | 1,434,692 | $ | 11.58 |
| 603,792 |
| 1.03 |
| $ | 12.41 |
| 603,792 |
| $ | 12.41 |
| ||||||||||||||||||
$15 to $25 | 1,473,867 | 4.75 | 18.23 | 1,473,867 | 18.23 |
| 1,281,872 |
| 2.84 |
| 18.02 |
| 1,281,872 |
| 18.02 |
| ||||||||||||||||||||||
$25 and above | 2,835,716 | 6.41 | 31.44 | 2,473,700 | 31.06 | |||||||||||||||||||||||||||||||||
$25 and $35 |
| 2,463,644 |
| 5.52 |
| 31.57 |
| 2,338,294 |
| 31.48 |
| |||||||||||||||||||||||||||
$35 and above |
|
| 648,817 |
| 7.94 |
| 40.47 |
|
| 481,390 |
| 40.61 |
| |||||||||||||||||||||||||
|
| 4,998,125 |
|
| 4.61 |
|
| 26.94 |
|
| 4,705,348 |
|
| 26.30 |
| |||||||||||||||||||||||
5,744,275 | 4.95 | 23.09 | 5,382,259 | 22.35 | ||||||||||||||||||||||||||||||||||
At July 31, 2007,2009, the aggregate intrinsic value of shares outstanding and exercisable was $76.9$57.5 million and $76.0$56.9 million, respectively.
The following table summarizes the status of options which contain vesting provisions:
Options | Weighted Average Grant Date Fair Value |
|
|
|
|
|
|
| |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Options |
| Weighted |
| |||||||||||||
Non-vested at July 31, 2006 | 216,163 | $ | 9.26 | ||||||||||||||
Non-vested at July 31, 2008 |
| 439,684 |
| $ | 10.43 |
| |||||||||||
Granted | 234,000 | 9.91 |
| 79,575 |
| 8.83 |
| ||||||||||
Vested | (77,882 | ) | 9.07 |
| (207,390 | ) |
| 10.16 |
| ||||||||
Canceled | (10,265 | ) | 9.60 |
|
| (19,092 | ) |
| 10.14 |
| |||||||
Non-vested at July 31, 2007 | 362,016 | 9.71 | |||||||||||||||
Non-vested at July 31, 2009 |
|
| 292,777 |
|
| 10.21 |
|
The total fair value of shares vested during fiscalFiscal 2009, 2008 and 2007 2006was $7.9 million, $6.3 million and 2005 was $2.8 million, $5.9 million and $33.2 million, respectively.
As of July 31, 2007,2009 there was $2.2$1.6 million of total unrecognized compensation cost related to non-vested stock options granted under the Plan. This unvested cost is expected to be recognized during fiscal 2008, fiscal 2009Fiscal 2010, Fiscal 2011 and fiscal 2010.Fiscal 2012.
44
NOTE I
Income Taxes
The components of earnings before income taxes are as follows:
2007 | 2006 | 2005 |
|
|
|
|
|
|
|
|
|
| |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 |
| 2008 |
| 2007 |
| |||||||||||||||||||
(thousands of dollars) |
| (thousands of dollars) |
| ||||||||||||||||||||||
Earnings before income taxes: |
|
|
|
|
|
|
| ||||||||||||||||||
United States | $ | 88,157 | $ | 75,658 | $ | 59,973 |
| $ | 69,863 |
| $ | 73,445 |
| $ | 88,157 |
| |||||||||
Foreign | 116,704 | 113,509 | 94,760 |
|
| 91,562 |
|
| 162,718 |
|
| 116,704 |
| ||||||||||||
Total | $ | 204,861 | $ | 189,167 | $ | 154,733 |
| $ | 161,425 |
| $ | 236,163 |
| $ | 204,861 |
| |||||||||
The components of the provision for income taxes are as follows:
2007 | 2006 | 2005 |
|
|
|
|
|
|
|
|
|
| |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 |
| 2008 |
| 2007 |
| |||||||||||||||||||
(thousands of dollars) |
| (thousands of dollars) |
| ||||||||||||||||||||||
Income taxes: |
|
|
|
|
|
|
| ||||||||||||||||||
Current: |
|
|
|
|
|
|
| ||||||||||||||||||
Federal | $ | 27,657 | $ | 21,583 | $ | 18,451 |
| $ | 18,624 |
| $ | 27,180 |
| $ | 27,430 |
| |||||||||
State | 2,975 | 448 | 508 |
| 2,444 |
| 619 |
| 2,975 |
| |||||||||||||||
Foreign | 28,140 | 27,961 | 22,263 |
|
| 13,176 |
|
| 37,616 |
|
| 28,140 |
| ||||||||||||
|
| 34,244 |
|
| 65,415 |
|
| 58,545 |
| ||||||||||||||||
58,772 | 49,992 | 41,222 | |||||||||||||||||||||||
Deferred: |
|
|
|
|
|
|
| ||||||||||||||||||
Federal | (4,495 | ) | 4,860 | 2,026 |
| (3,888 | ) |
| (4,712 | ) |
| (4,674 | ) | ||||||||||||
State | (257 | ) | 278 | 310 |
| 90 |
| 2 |
| (332 | ) | ||||||||||||||
Foreign | 124 | 1,730 | 621 |
|
| (928 | ) |
| 3,505 |
|
| 605 |
| ||||||||||||
|
| (4,726 | ) |
| (1,205 | ) |
| (4,401 | ) | ||||||||||||||||
(4,628 | ) | 6,868 | 2,957 | ||||||||||||||||||||||
Total | $ | 54,144 | $ | 56,860 | $ | 44,179 |
| $ | 29,518 |
| $ | 64,210 |
| $ | 54,144 |
| |||||||||
The following table reconciles the U.S. statutory income tax rate with the effective income tax rate:
2007 | 2006 | 2005 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Statutory U.S. federal rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||||
State income taxes | 0.8 | 0.2 | 0.2 | |||||||||||
Foreign taxes at lower rates | (6.0 | ) | (5.1 | ) | (6.5 | ) | ||||||||
Export, manufacturing and research credits | (1.3 | ) | (1.4 | ) | (1.5 | ) | ||||||||
Tax on repatriation of earnings | (1.1 | ) | 1.9 | 2.6 | ||||||||||
Other | (1.0 | ) | (0.5 | ) | (1.2 | ) | ||||||||
26.4 | % | 30.1 | % | 28.6 | % | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| 2009 |
| 2008 |
| 2007 |
| |||
Statutory U.S. federal rate |
|
| 35.0 | % |
| 35.0 | % |
| 35.0 | % |
State income taxes |
|
| 1.3 |
|
| 0.3 |
|
| 0.8 |
|
Foreign taxes at lower rates |
|
| (7.5 | ) |
| (7.6 | ) |
| (5.9 | ) |
Export, manufacturing and research credits |
|
| (0.5 | ) |
| (0.6 | ) |
| (1.5 | ) |
Tax on repatriation of earnings |
|
| 0.7 |
|
| (0.6 | ) |
| (1.1 | ) |
Change in unrecognized tax benefits |
|
| (10.6 | ) |
| 0.5 |
|
| 0.1 |
|
Other |
|
| (0.1 | ) |
| 0.2 |
|
| (1.0 | ) |
|
|
| 18.3 | % |
| 27.2 | % |
| 26.4 | % |
45
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
| 2009 |
| 2008 |
| ||
|
| (thousands of dollars) |
| ||||
Deferred tax assets: |
|
|
|
|
|
|
|
Accrued expenses |
| $ | 8,438 |
| $ | 11,146 |
|
Compensation and retirement plans |
|
| 30,916 |
|
| 812 |
|
Tax credit and NOL carryforwards |
|
| 1,439 |
|
| 6,625 |
|
Inventory reserves |
|
| 10,183 |
|
| 8,588 |
|
Other |
|
| 2,232 |
|
| 4,370 |
|
Deferred tax assets |
|
| 53,208 |
|
| 31,541 |
|
Valuation allowance |
|
| (1,053 | ) |
| (2,472 | ) |
Net deferred tax assets |
|
| 52,155 |
|
| 29,069 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
| (31,593 | ) |
| (28,636 | ) |
Other |
|
| (2,923 | ) |
| (2,584 | ) |
Deferred tax liabilities |
|
| (34,516 | ) |
| (31,220 | ) |
Net deferred tax asset (liability) |
| $ | 17,639 |
| $ | (2,151 | ) |
2007 | 2006 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(thousands of dollars) | |||||||||||
Deferred tax assets: | |||||||||||
Accrued expenses | $ | 8,613 | $ | 7,927 | |||||||
Tax credit and NOL carryforwards | 2,288 | 2,554 | |||||||||
LIFO and inventory reserves | 5,286 | 4,327 | |||||||||
Other | 2,664 | 2,109 | |||||||||
Deferred tax assets | 18,851 | 16,917 | |||||||||
Valuation allowance | (1,245 | ) | (1,360 | ) | |||||||
Net deferred tax assets | 17,606 | 15,557 | |||||||||
Deferred tax liabilities: | |||||||||||
Depreciation and amortization | (27,338 | ) | (29,313 | ) | |||||||
Compensation and retirement plans | (3,831 | ) | (8,963 | ) | |||||||
Other | (1,470 | ) | (764 | ) | |||||||
Deferred tax liabilities | (32,639 | ) | (39,040 | ) | |||||||
Net deferred tax liability | $ | (15,033 | ) | $ | (23,483 | ) | |||||
The effective tax rate for Fiscal 2009 was 18.3 percent compared 27.2 percent in Fiscal 2008. The decrease in effective rate is primarily due to the settlements of long-standing court cases and examinations in various jurisdictions for tax years 2003 through 2006, the reassessment of the corresponding unrecognized tax benefits for the subsequent open years and a favorable resolution of a foreign tax matter. Partially offsetting these effects, the Company’s Fiscal 2009 tax rate was unfavorably impacted by an increased expense from the repatriation of foreign earnings. Absent these items, the underlying tax rate for the Fiscal 2009 has decreased from Fiscal 2008 by 1.2 points to 30.4 percent. The reinstatement of the U.S. Research and Experimentation credit, changes in current year unrecognized tax benefits, reduced statutory tax rates and the mix of earnings between foreign jurisdictions all contributed to the reduction in the underlying rate.
The Company repatriated $160.0 million of its accumulated foreign earnings in fiscal 2006 under the favorable provisions of the American Jobs Creation Act of 2004. Totalhas not provided for U.S. income taxes of $3.6 million and $4.0 have been provided on these repatriations in 2006 and 2005, respectively. U.S. income taxes have not been provided on additional undistributed earnings of non-U.S. subsidiaries of approximately $339.5$483.4 million. The Company currently plans to permanently reinvest these undistributed earnings.earnings in its non-U.S. subsidiaries. If any portion were to be distributed, the related U.S. tax liability may be reduced by foreign income taxes paid on those earnings plus any available foreign tax credit carryovers. Determination of the unrecognized deferred tax liability related to these undistributed earnings is not practicable.
The decrease in the tax rate from 2006 primarily reflects the lack of the unfavorable tax effect of the special repatriation of foreign earnings that occurred in 2006 and favorable effect of certain 2007 discrete events. The underlying rate continues to reflect the significant contribution from the Company’s international operations, the majority of which have statutory tax rates below those of the U.S. primarily as a result of incentive tax rates the Company has obtained. However, a higher percentage of the Company’s 2007 earnings were made in the U.S., or other countries with higher than average tax rates, causing the underlying mix of statutory rates to increase. Additionally, the Company recognized a higher U.S. state income tax expense due both to the stronger U.S. earnings and fewer state exclusions and credits. More than offsetting these increases were the following discrete items that occurred during 2007. The U.S based tax incentives for the year were favorably affected by the retroactive re-instatement of the Research and Experimentation Credit and an additional claim for prior years’ credits totaling $1.4 million. Repatriation of foreign earnings during 2007 had a net favorable effect on foreign tax credits of $2.2 million. In addition, there were adjustments to prior years which reduced tax expense totaling $6.3 million from settlements of foreign and state audits, favorable rulings on some foreign tax credit issues and release of reserves due to the expiration of statutes of limitation.
While non-US operations have been profitable overall, the Company has cumulative pre-tax loss carryforwards of $7.9$6.7 million, which are carried as net operating losses in certain international subsidiaries. Approximately $2.0 million of these losses are attributable to pre-acquisition carryforwards. If fully realized, the unexpired net operating losses may be carried forward to offset future local income tax payments, at current rates of tax, of $2.3$1.4 million. Approximately 537 percent of these net operating losses expire within the next three years, while the majority of the remaining net operating loss carryforwards have no statutory expiration under current local laws. However, as it is more likely than not that certain of these losses will not be realized, a valuation allowance of $1.2$1.1 million exists as of July 31, 2009.
The Company adopted the provisions of FIN 48,Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109,on August 1, 2007. The standard defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit that in the Company’s judgment is greater than 50 percent likely to be realized. As a result of the implementation of FIN 48, the Company recognized a $0.3 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the August 1, 2007, balance of retained earnings. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (thousands of dollars):
|
|
|
|
|
|
|
|
|
| 2009 |
| 2008 |
| ||
|
| (thousands of dollars) |
| ||||
Gross unrecognized tax benefits at beginning of fiscal year |
| $ | 32,002 |
| $ | 28,209 |
|
Additions for tax positions of the current year |
|
| 3,527 |
|
| 8,221 |
|
Additions for tax positions of prior years |
|
| 772 |
|
| 2,322 |
|
Reductions for tax positions of prior years |
|
| (8,258 | ) |
| (540 | ) |
Settlements |
|
| (10,092 | ) |
| — |
|
Reductions due to lapse of applicable statute of limitations |
|
| (1,023 | ) |
| (6,210 | ) |
Gross unrecognized tax benefits at end of fiscal year |
| $ | 16,928 |
| $ | 32,002 |
|
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the fiscal year ended July 31, 2009, the Company recognized interest expense, net of tax benefit, of approximately $0.7 million. At July 31, 2009 and 2008, accrued interest and penalties on a gross basis were $1.8 million and $5.7 million respectively.
46
The Company’s uncertain tax positions are affected by the tax years that are under audit or remain subject to examination by the relevant taxing authorities. The following tax years, in addition to the current year, remain subject to examination, at least for certain issues, by the major tax jurisdictions indicated:
Major Jurisdictions | Open Tax Years | |
Belgium | 2005 through 2008 | |
China | 2000 through 2008 | |
France | 2006 through 2008 | |
Germany | 2004 through 2008 | |
Italy | 2003 through 2008 | |
Mexico | 2004 through 2008 | |
United Kingdom | 2007 through 2008 | |
United States | 2007 through 2008 |
If the Company were to prevail on all unrecognized tax benefits recorded, substantially all of the unrecognized tax benefits would benefit the effective tax rate. With an average statute of limitations of about 5 years, up to $1.4 million of the unrecognized tax benefits could potentially be realized in the next 12 month period, unless extended by audit.
In accordance with SFAS No. 123R,Share Based Payment – Revised 2004, SFAS No. 109,Accounting for Income Taxesand EITF Topic D-32,Intra-period Tax Allocation of the Effect of Pretax Income from Continuing Operations, the Company has elected to use the “with-and-without” intra-period tax allocation rules. Under these rules, the windfall tax benefit is calculated based on the incremental tax benefit received from deductions related to stock-based compensation.
NOTE J
Segment Reporting
Consistent with SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information, the Company identified two reportable segments: Engine Products and Industrial Products. Segment selection was based on the internal organizational structure, management of operations and performance evaluation by management and the Company’s Board of Directors.
The Engine Products segment sells to OEMs in the construction, mining, agriculture, aerospace, defense and transportationtruck markets and to independent distributors, OEM dealer networks, private label accounts and large equipment fleets. Products include air intakefiltration systems, exhaust and emissions systems, liquid filtration systems and replacement filters.
The Industrial Products segment sells to various industrial end-users, OEMs of gas-fired turbines, and OEMs and end-users requiring highly purified air. Products include dust, fume and mist collectors, compressed air purification systems, static and pulse-clean air filter systems for gas turbines and specialized air filtration systems for diverse applications including computer hard disk drives.
Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments and interest income and expense, non-operating income and expense, and expenses not allocated to the business segments in the same period. During the first quarter of 2006, the Company adjusted its basis of measurement for earnings before income taxes such that certain expenses, such as amortization of intangibles, which were previously considered to be Corporate and Unallocated, are now included in the Engine and Industrial Products segment results. The impact of the change in the basis of measurement resulted in approximately $16.0 million of Corporate and Unallocated expenses being charged to the Engine and Industrial Products segments’ aggregate earnings before income taxes in fiscal 2006 as compared to fiscal 2005. This change resulted in approximately $8.0 million of additional expense to each of the Engine and Industrial Products segments during fiscal 2006 when compared to fiscal 2005. This adjustment to the basis of measurement of segment earnings did not change the business components included in each of the Company’s reportable segments.expense. Assets included in Corporate and Unallocated principally are cash and cash equivalents, inventory reserves, certain prepaids, certain investments, other assets and assets allocated to intercompany transactions.general corporate purposes.
The Company has an internal measurement system to evaluate performance and allocate resources based on profit or loss from operations before income taxes. The Company’s manufacturing facilities serve both reporting segments. Therefore, the Company uses an allocation methodology to assign costs and assets to the segments. A certain amount of costs and assets is assignedrelate to intercompany activitygeneral corporate purposes and isare not assigned to either segment. Certain accounting policies applied to the reportable segments differ from those described in the summary of significant accounting policies. The reportable segments account for receivables on a gross basis and account for inventory on a standard cost basis.
Segment allocated assets are primarily accounts receivable, inventories, property, plant and equipment and goodwill. Reconciling items included in Corporate and Unallocated are created based on accounting
differences between segment reporting and the consolidated, external reporting as well as internal allocation methodologies. Certain prior year amounts have been reclassified between
The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations and sharing of assets. Therefore, we do not represent that these segments, if operated independently, would report the segments to conform to the current structure. Amounts reclassified in net salesoperating profit and earnings before income taxes are not significant.
47
Table of Contentsother financial information shown below.
Segment detail is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Engine |
| Industrial |
| Corporate & |
| Total |
| ||||
|
| (thousands of dollars) |
| ||||||||||
2009 |
|
|
| ||||||||||
Net sales |
| $ | 1,001,961 |
| $ | 866,668 |
| $ | — |
| $ | 1,868,629 |
|
Depreciation and amortization |
|
| 31,517 |
|
| 21,156 |
|
| 5,924 |
|
| 58,597 |
|
Equity earnings in unconsolidated affiliates |
|
| 2,172 |
|
| 94 |
|
| — |
|
| 2,266 |
|
Earnings before income taxes |
|
| 83,797 |
|
| 89,526 |
|
| (11,898 | ) |
| 161,425 |
|
Assets |
|
| 610,341 |
|
| 495,228 |
|
| 228,427 |
|
| 1,333,996 |
|
Equity investments in unconsolidated affiliates |
|
| 15,474 |
|
| 517 |
|
| — |
|
| 15,991 |
|
Capital expenditures, net of acquired businesses |
|
| 24,785 |
|
| 16,637 |
|
| 4,658 |
|
| 46,080 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 1,229,171 |
| $ | 1,003,350 |
| $ | — |
| $ | 2,232,521 |
|
Depreciation and amortization |
|
| 27,386 |
|
| 19,314 |
|
| 10,032 |
|
| 56,732 |
|
Equity earnings in unconsolidated affiliates |
|
| 1,876 |
|
| 34 |
|
| — |
|
| 1,910 |
|
Earnings before income taxes |
|
| 158,931 |
|
| 102,420 |
|
| (25,188 | ) |
| 236,163 |
|
Assets |
|
| 628,444 |
|
| 590,273 |
|
| 329,905 |
|
| 1,548,622 |
|
Equity investments in unconsolidated affiliates |
|
| 15,190 |
|
| 506 |
|
| — |
|
| 15,696 |
|
Capital expenditures, net of acquired businesses |
|
| 34,830 |
|
| 24,564 |
|
| 12,758 |
|
| 72,152 |
|
2007 |
|
|
|
|
|
|
|
|
| �� |
|
|
|
Net sales |
| $ | 1,084,262 |
| $ | 834,566 |
| $ | — |
| $ | 1,918,828 |
|
Depreciation and amortization |
|
| 23,735 |
|
| 16,512 |
|
| 9,319 |
|
| 49,566 |
|
Equity earnings in unconsolidated affiliates |
|
| 6,128 |
|
| (225 | ) |
| — |
|
| 5,903 |
|
Earnings before income taxes |
|
| 140,762 |
|
| 80,321 |
|
| (16,222 | ) |
| 204,861 |
|
Assets |
|
| 540,510 |
|
| 510,817 |
|
| 267,690 |
|
| 1,319,017 |
|
Equity investments in unconsolidated affiliates |
|
| 14,968 |
|
| 2,445 |
|
| — |
|
| 17,413 |
|
Capital expenditures, net of acquired businesses |
|
| 37,083 |
|
| 25,798 |
|
| 14,559 |
|
| 77,440 |
|
Engine Products | Industrial Products | Corporate & Unallocated | Total Company | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(thousands of dollars) | |||||||||||||||||||
2007 | |||||||||||||||||||
Net sales | $ | 1,084,262 | $ | 834,566 | $ | — | $ | 1,918,828 | |||||||||||
Depreciation and amortization | 23,735 | 16,512 | 9,319 | 49,566 | |||||||||||||||
Equity earnings in unconsolidated affiliates | 6,128 | (225 | ) | — | 5,903 | ||||||||||||||
Earnings before income taxes | 140,762 | 80,321 | (16,222 | ) | 204,861 | ||||||||||||||
Assets | 540,510 | 510,817 | 267,690 | 1,319,017 | |||||||||||||||
Equity investments in unconsolidated affiliates | 14,968 | 2,445 | — | 17,413 | |||||||||||||||
Capital expenditures, net of acquired businesses | 37,083 | 25,798 | 14,559 | 77,440 | |||||||||||||||
2006 | |||||||||||||||||||
Net sales | $ | 991,554 | $ | 702,773 | $ | — | $ | 1,694,327 | |||||||||||
Depreciation and amortization | 21,679 | 15,248 | 7,773 | 44,700 | |||||||||||||||
Equity earnings in unconsolidated affiliates | 4,896 | 58 | — | 4,954 | |||||||||||||||
Earnings before income taxes | 135,994 | 65,550 | (12,377 | ) | 189,167 | ||||||||||||||
Assets | 435,285 | 444,242 | 244,540 | 1,124,067 | |||||||||||||||
Equity investments in unconsolidated affiliates | 13,539 | 1,566 | — | 15,105 | |||||||||||||||
Capital expenditures, net of acquired businesses | 39,416 | 27,723 | 14,133 | 81,272 | |||||||||||||||
2005 | |||||||||||||||||||
Net sales | $ | 923,840 | $ | 671,893 | $ | — | $ | 1,595,733 | |||||||||||
Depreciation and amortization | 23,072 | 16,157 | 5,055 | 44,284 | |||||||||||||||
Equity earnings in unconsolidated affiliates | 3,368 | 90 | — | 3,458 | |||||||||||||||
Earnings before income taxes | 125,454 | 53,709 | (24,430 | ) | 154,733 | ||||||||||||||
Assets | 416,805 | 436,111 | 258,857 | 1,111,773 | |||||||||||||||
Equity investments in unconsolidated affiliates | 12,898 | 1,345 | — | 14,243 | |||||||||||||||
Capital expenditures, net of acquired businesses | 28,645 | 20,059 | 6,275 | 54,979 |
48
Following are net sales by product within the Engine Products segment and Industrial Products segment:
2007 | 2006 | 2005 |
|
|
|
|
|
|
|
|
|
| |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 |
| 2008 |
| 2007 |
| |||||||||||||||||||
(thousands of dollars) |
| (thousands of dollars) |
| ||||||||||||||||||||||
Engine Products segment: |
|
|
|
|
|
|
| ||||||||||||||||||
Off-road Products | $ | 352,065 | $ | 308,175 | $ | 286,230 | |||||||||||||||||||
Truck Products | 166,370 | 184,303 | 175,048 | ||||||||||||||||||||||
Aftermarket Products* | 565,827 | 499,076 | 462,562 | ||||||||||||||||||||||
Off-Road Products* |
| $ | 362,785 |
| $ | 448,681 |
| $ | 352,065 |
| |||||||||||||||
On-Road Products |
| 71,958 |
| 123,146 |
| 166,370 |
| ||||||||||||||||||
Aftermarket Products** |
|
| 567,218 |
|
| 657,344 |
|
| 565,827 |
| |||||||||||||||
Total Engine Products segment | 1,084,262 | 991,554 | 923,840 |
|
| 1,001,961 |
|
| 1,229,171 |
|
| 1,084,262 |
| ||||||||||||
Industrial Products segment: |
|
|
|
|
|
|
| ||||||||||||||||||
Industrial Filtration Solutions Products | 515,022 | 440,230 | 424,727 |
| 503,611 |
| 600,526 |
| 515,022 |
| |||||||||||||||
Gas Turbine Products | 158,025 | 121,194 | 112,872 |
| 206,760 |
| 213,138 |
| 158,025 |
| |||||||||||||||
Special Applications Products | 161,519 | 141,349 | 134,294 |
|
| 156,297 |
|
| 189,686 |
|
| 161,519 |
| ||||||||||||
Total Industrial Products segment | 834,566 | 702,773 | 671,893 |
|
| 866,668 |
|
| 1,003,350 |
|
| 834,566 |
| ||||||||||||
Total Company | $ | 1,918,828 | $ | 1,694,327 | $ | 1,595,733 |
| $ | 1,868,629 |
| $ | 2,232,521 |
| $ | 1,918,828 |
| |||||||||
* | Includes Aerospace and Defense products. |
** | Includes replacement part sales to the Company’s OEM Customers. |
*Includes replacement part sales to the Company’s original equipment manufacturers.
Geographic sales by origination and property, plant and equipment:
Net Sales | Property, Plant & Equipment — Net |
|
|
|
|
|
|
| ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Sales |
| Property, Plant & |
| ||||||||||||||
(thousands of dollars) |
| (thousands of dollars) |
| |||||||||||||||
2009 |
|
|
|
|
| |||||||||||||
United States |
| $ | 778,979 |
| $ | 141,052 |
| |||||||||||
Europe |
| 567,117 |
| 138,350 |
| |||||||||||||
Asia-Pacific |
| 419,423 |
| 71,686 |
| |||||||||||||
Other |
|
| 103,110 |
|
| 29,980 |
| |||||||||||
Total |
| $ | 1,868,629 |
| $ | 381,068 |
| |||||||||||
2008 |
|
|
|
|
| |||||||||||||
United States |
| $ | 888,658 |
| $ | 144,429 |
| |||||||||||
Europe |
| 766,797 |
| 166,195 |
| |||||||||||||
Asia-Pacific |
| 471,275 |
| 65,829 |
| |||||||||||||
Other |
|
| 105,791 |
|
| 38,706 |
| |||||||||||
Total |
| $ | 2,232,521 |
| $ | 415,159 |
| |||||||||||
2007 |
|
|
|
|
| |||||||||||||
United States | $ | 827,648 | $ | 142,511 |
| $ | 827,648 |
| $ | 142,511 |
| |||||||
Europe | 615,049 | 129,564 |
| 615,049 |
| 129,564 |
| |||||||||||
Asia-Pacific | 397,080 | 61,057 |
| 397,080 |
| 61,057 |
| |||||||||||
Other | 79,051 | 31,301 |
|
| 79,051 |
|
| 31,301 |
| |||||||||
Total | $ | 1,918,828 | $ | 364,433 |
| $ | 1,918,828 |
| $ | 364,433 |
| |||||||
2006 | ||||||||||||||||||
United States | $ | 799,487 | $ | 134,817 | ||||||||||||||
Europe | 491,665 | 104,343 | ||||||||||||||||
Asia-Pacific | 334,824 | 50,632 | ||||||||||||||||
Other | 68,351 | 27,572 | ||||||||||||||||
Total | $ | 1,694,327 | $ | 317,364 | ||||||||||||||
2005 | ||||||||||||||||||
United States | $ | 750,199 | $ | 128,866 | ||||||||||||||
Europe | 474,084 | 88,775 | ||||||||||||||||
Asia-Pacific | 311,194 | 37,299 | ||||||||||||||||
Other | 60,256 | 20,553 | ||||||||||||||||
Total | $ | 1,595,733 | $ | 275,493 | ||||||||||||||
ConcentrationsThere were no Customers over 10 percent of net sales during Fiscal 2009. Sales to one Customer accounted for 10 percent of net sales in 2007Fiscal 2008 and 12 percent of net sales in 2006 and 2005, respectively.2007. There were no Customers over 10 percent of gross accounts receivable in 2007Fiscal 2009 and 2006.2008.
NOTE K
Commitments and Contingencies
Guarantees to Related PartyThe Company and its partner, Caterpillar Inc., in an unconsolidated joint venture, Advanced Filtration Systems Inc., guarantee certain debt of the joint venture. As of July 31, 2007,2009, the joint venture had $3.5$27.7 million of outstanding debt.
49
Table In addition, during Fiscal 2009, 2008 and 2007, the Company recorded its equity in earnings of Contentsthis equity method investment of $1.0 million, $0.6 million and $5.0 million and royalty income of $5.1 million, $5.4 million and $0.4 million, respectively.
The Company provides for warranties on certain products. In addition, the Company may incur specific Customer warranty issues. Following is a reconciliation of warranty reserves (in thousands of dollars):
Balance at August 1, 2005 | $ | 7,841 | ||||
Accruals for warranties (including changes in estimates) | 4,510 | |||||
Less settlements made during the period | (3,562 | ) | ||||
Balance at July 31, 2006 | $ | 8,789 | ||||
Accruals for warranties (including changes in estimates) | 7,914 | |||||
Less settlements made during the period | (8,158 | ) | ||||
Balance at July 31, 2007 | $ | 8,545 | ||||
|
|
|
|
|
Balance at August 1, 2007 |
| $ | 8,545 |
|
Accruals for warranties issued during the reporting period |
|
| 3,634 |
|
Accruals related to pre-existing warranties (including changes in estimates) |
|
| 3,982 |
|
Less settlements made during the period |
|
| (4,638 | ) |
Balance at July 31, 2008 |
| $ | 11,523 |
|
Accruals for warranties issued during the reporting period |
|
| 2,942 |
|
Accruals related to pre-existing warranties (including changes in estimates) |
|
| (2,141 | ) |
Less settlements made during the period |
|
| (3,109 | ) |
Balance at July 31, 2009 |
| $ | 9,215 |
|
At July 31, 20072009 and 2006,2008, the Company had a contingent liability for standby letters of credit totaling $16.5$20.0 million and $18.7$18.5 million, respectively, which have been issued and are outstanding. The letters of credit guarantee payment to beneficial third parties in the event the Company is in breach of specified contract terms as detailed in each letter of credit. At July 31, 20072009 and 2006,2008, there were no amounts drawn upon these letters of credit.
Legal Proceedings The In accordance with SFAS No. 5, “Accounting for Contingencies,” (SFAS No. 5), the Company wasrecords provisions with respect to identified claims or lawsuits when it is probable that a defendant in a patent infringement lawsuit filed in November 1998 inliability has been incurred and the United States District Court foramount of the Northern District of Iowa (Eastern Division) by Engineered Products Co. (“EPC”). The Company increased its reserves for this matter by $6.4 million in 2005loss can be reasonably estimated. Claims and lawsuits are reviewed quarterly and provisions are taken or adjusted to reflect the rulingstatus of a particular matter. The Company believes the recorded reserves in its consolidated financial statements are adequate in light of the Federal Circuit relating to an appeal the Company filed on the original jury verdict.probable and estimable outcomes. The parties subsequently agreed on a settlement amount and the case was concluded on September 30, 2005. The amount reserved in the fourth quarter of 2005 was adequate to cover the settlement reached by EPC and the Company.
The Company isrecorded liabilities were not currently subject to any pending litigation other than litigation which arises out of and is incidentalmaterial to the conductCompany’s financial position, results of the Company’s business. All such matters are subject to many uncertaintiesoperation and outcomes that are not predictable with assurance. Theliquidity and the Company does not considerbelieve that any of such proceedings that arethe currently pending to be likely to result in a material adverse effect on the Company’s consolidatedidentified claims or litigation will materially affect its financial position, or results of operations.operation and liquidity.
Environmental MattersNOTE L
Restructuring
The following is a reconciliation of restructuring reserves (in thousands of dollars):
|
|
|
|
|
Balance at July 31, 2008 |
| $ | — |
|
Accruals for restructuring during the reporting period |
|
| 17,755 |
|
Less settlements made during the period |
|
| (13,915 | ) |
Balance at July 31, 2009 |
| $ | 3,840 |
|
The dramatic downturn in the worldwide economy made signification cost reduction actions necessary during Fiscal 2009. As a result, costs incurred and shown in the table above are primarily associated with workforce reductions of 2,800 since the beginning of the fiscal year. Gross margin and operating expenses include $10.1 million and $7.7 million of restructuring expenses, respectively. The Engine Products segment, Industrial Products segment, and Corporate and Unallocated incurred $7.2 million, $10.1 million and $0.5 million, respectively.
The Company establishes reserves as appropriate for potential environmental liabilities and will continueexpects to accrue reserves in appropriate amounts. While uncertainties exist with respect to the amounts and timing of the Company’s ultimate environmental liabilities, management believes that such liabilities, individually and in the aggregate, will not have a material adverse effect on the Company’s financial condition or results of operations.settle its remaining liability during Fiscal 2010.
50
NOTE M
Subsequent Events
The Company has evaluated and reviewed for subsequent events that would impact the financial statements for the 12 months ended July 31, 2009, through the issuance date of the financials, September 25, 2009.
NOTE LN
Quarterly Financial Information (Unaudited)
First Quarter | Second Quarter | Third Quarter | Fourth Quarter |
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| First |
| Second |
| Third |
| Fourth |
| ||||||||||||||||||||||||
(thousands of dollars, except per share amounts) |
| (thousands of dollars, except per share amounts) |
| |||||||||||||||||||||||||||||
2007 | ||||||||||||||||||||||||||||||||
2009 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Net sales | $ | 446,419 | $ | 463,740 | $ | 483,988 | $ | 524,681 |
| $ | 573,260 |
| $ | 460,601 |
| $ | 413,447 |
| $ | 421,321 |
| |||||||||||
Gross margin | 143,866 | 141,216 | 149,822 | 169,960 |
| 186,703 |
| 134,012 |
| 130,782 |
| 138,209 |
| |||||||||||||||||||
Net earnings | 36,005 | 31,275 | 40,147 | 43,290 |
| 47,962 |
| 33,793 |
| 26,598 |
| 23,554 |
| |||||||||||||||||||
Basic earnings per share | .44 | .39 | .50 | .54 |
| .62 |
| .43 |
| .34 |
| .30 |
| |||||||||||||||||||
Diluted earnings per share | .43 | .38 | .49 | .53 |
| .60 |
| .43 |
| .34 |
| .30 |
| |||||||||||||||||||
Dividends declared per share | — | .18 | — | .19 |
| — |
| .230 |
| — |
| .230 |
| |||||||||||||||||||
Dividends paid per share | .09 | .09 | .09 | .09 |
| .110 |
| .115 |
| .115 |
| .115 |
| |||||||||||||||||||
2006 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
2008 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Net sales | $ | 403,396 | $ | 392,915 | $ | 429,858 | $ | 468,158 |
| $ | 525,576 |
| $ | 511,763 |
| $ | 587,760 |
| $ | 607,422 |
| |||||||||||
Gross margin | 131,532 | 124,782 | 144,074 | 156,192 |
| 172,864 |
| 163,185 |
| 188,266 |
| 201,547 |
| |||||||||||||||||||
Net earnings | 32,198 | 26,909 | 37,012 | 36,188 |
| 43,323 |
| 34,070 |
| 45,987 |
| 48,573 |
| |||||||||||||||||||
Basic earnings per share | .38 | .32 | .45 | .44 |
| .54 |
| .43 |
| .58 |
| .62 |
| |||||||||||||||||||
Diluted earnings per share | .37 | .32 | .43 | .43 |
| .53 |
| .42 |
| .57 |
| .60 |
| |||||||||||||||||||
Dividends declared per share | .08 | .16 | — | .17 |
| — |
| .210 |
| — |
| .220 |
| |||||||||||||||||||
Dividends paid per share | .08 | .08 | .08 | .08 |
| .100 |
| .100 |
| .110 |
| .110 |
|
The quarters ended January 31, 2009, April 30, 2009, and July 31, 2009, include restructuring charges after-tax of $2.9 million or $0.04 per share, $4.7 million or $0.06 per share and $4.5 million or $0.05 per share, respectively.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. CONTROLS AND PROCEDURESControls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in applicable rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) identified in connection with such evaluation during the fiscal quarter ended July 31, 2007,2009, has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
See Management’s Report on Internal Control over Financial Reporting under Item 8 on page 23.27.
Report of Independent Registered Public Accounting Firm
See Report of Independent Registered Public Accounting Firm under Item 8 on page 23.28.
51
Item 9B. OTHER INFORMATIONOther Information
None.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEDirectors, Executive Officers and Corporate Governance
The information under the captions “Item 1: Election of Directors”; “Corporate Governance,“Director Selection Process,” “Audit Committee,” “Audit Committee Expertise; Complaint-Handling Procedures,” and “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s proxy statement for the 2007 annual shareholders meeting2009 Proxy Statement is incorporated herein by reference. Information on the Executive Officers of the Company is found under the caption “Executive Officers of the Registrant” on page 67 of this Annual Report on Form 10-K.
The Company has adopted a code of business conduct and ethics in compliance with applicable rules of the Securities and Exchange Commission that applies to its principal executive officer, its principal financial officer and its principal accounting officer or controller, or persons performing similar functions. A copy of the code of business conduct and ethics is posted on the Company’s website at www.donaldson.com. The code of business conduct and ethics is available in print, free of charge to any shareholder who requests it. The Company will disclose any amendments to, or waivers of, the code of business conduct and ethics for the Company’s principal executive officer, principal financial officer, and principal accounting officer on the Company’s website.
Item 11. EXECUTIVE COMPENSATIONExecutive Compensation
The information under the captions “Compensation Committee Report”Report,” “Executive Compensation” and “Compensation Discussion and Analysis”‘Director Compensation” of the Company’s proxy statement for the 20072009 annual shareholders meeting is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information under the caption “Security Ownership” of the Company’s proxy statement for the 20072009 annual shareholders meeting is incorporated herein by reference.
52
The following table sets forth information as of July 31, 2007,2009, regarding the Company’s equity compensation plans:
|
|
|
|
|
|
|
|
|
|
|
Plan category |
| Number of securities |
| Weighted-average |
| Number of securities |
| |||
|
| (a) |
| (b) |
| (c) |
| |||
Equity compensation plans approved by security holders |
|
|
|
|
|
|
|
|
|
|
1980 Master Stock Compensation Plan: |
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
| — |
|
| — |
|
| — |
|
Deferred Stock Gain Plan |
|
| 54,667 |
| $ | 13.2261 |
|
| — |
|
1991 Master Stock Compensation Plan: |
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
| 1,350,821 |
| $ | 18.2605 |
|
| — |
|
Deferred Stock Option Gain Plan |
|
| 326,612 |
| $ | 30.6203 |
|
| — |
|
Deferred LTC/Restricted Stock |
|
| 156,304 |
| $ | 21.6543 |
|
| — |
|
2001 Master Stock Incentive Plan: |
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
| 3,112,012 |
| $ | 30.3412 |
|
| See Note 1 |
|
Deferred LTC/Restricted Stock |
|
| 158,437 |
| $ | 30.7006 |
|
| See Note 1 |
|
Long Term Compensation |
|
| 12,334 |
| $ | 43.9300 |
|
| See Note 1 |
|
Subtotal for plans approved by security holders: |
|
| 5,171,187 |
| $ | 26.8030 |
|
|
|
|
Equity compensation plans not approved by security holders |
|
|
|
|
|
|
|
|
|
|
Nonqualified Stock Option Program for Non-Employee Directors |
|
| 535,292 |
| $ | 29.0432 |
|
| See Note 2 |
|
ESOP Restoration |
|
| 30,878 |
| $ | 12.2894 |
|
| See Note 3 |
|
Subtotal for plans not approved by security holders: |
|
| 556,170 |
| $ | 28.1294 |
|
|
|
|
Total: |
|
| 5,737,357 |
| $ | 26.9339 |
|
|
|
|
Note 1: Shares authorized for issuance during the 10-year term are limited in each plan year to 1.5% of the Company’s “outstanding shares” (as defined in the 2001 Master Stock Incentive Plan).
Note 2: The stock option program for non-employee directors (filed as exhibit 10-N to the Company’s 1998 Form 10-K report) provides for each non-employee director to receive annual option grants of 7,200 shares. The 2001 Master Stock Incentive Plan, which was approved by the Company’s stockholders on November 16, 2001, also provides for the issuance of stock options to non-employee directors.
Note 3: The Company has a non-qualified ESOP Restoration Plan established on August 1, 1990 (filed as exhibit 10-E to the Company’s Form 10-Q for the quarter ended January 31, 1998), to supplement the benefits for executive employees under the Company’s Employee Stock Ownership Plan that would otherwise be reduced because of the compensation limitations under the Internal Revenue Code. The ESOP’s 10-year term was completed on July 31, 1997, and the only ongoing benefits under the ESOP Restoration Plan are the accrual of dividend equivalent rights to the participants in the Plan.
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(a) | (b) | (c) | ||||||||||||
Equity compensation plans approved by security holders | ||||||||||||||
1980 Master Stock Compensation Plan: | ||||||||||||||
Stock Options | — | — | — | |||||||||||
Deferred Stock Gain Plan | 66,585 | $ | 12.6273 | — | ||||||||||
1991 Master Stock Compensation Plan: | ||||||||||||||
Stock Options | 2,580,147 | $ | 17.9704 | — | ||||||||||
Deferred Stock Option Gain Plan | 278,066 | $ | 23.8502 | — | ||||||||||
Deferred LTC/Restricted Stock | 177,020 | $ | 20.8675 | — | ||||||||||
2001 Master Stock Incentive Plan: | ||||||||||||||
Stock Options | 2,681,030 | $ | 27.0073 | See Note 1 | ||||||||||
Deferred LTC/Restricted Stock | 95,255 | $ | 34.0938 | See Note 1 | ||||||||||
Long Term Compensation | 203,676 | $ | 29.0820 | See Note 1 | ||||||||||
Subtotal for plans approved by security holders: | 6,081,779 | $ | 22.8734 | |||||||||||
Equity compensation plans not approved by security holders | ||||||||||||||
Nonqualified Stock Option Program for Non-Employee Directors | 483,098 | $ | 23.4392 | See Note 2 | ||||||||||
ESOP Restoration | 35,852 | $ | 11.6868 | See Note 3 | ||||||||||
Subtotal for plans not approved by security holders: | 518,950 | $ | 22.6273 | |||||||||||
Total: | 6,600,729 | $ | 22.8541 | |||||||||||
|
|
|
|
|
|
53
|
The information under the caption “Policy and Procedures Regarding Transactions with Related Persons” of the Company’s proxy statement for the 20072009 annual shareholders meeting is incorporated here by reference.
Principal Accounting Fees and Services |
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information under “Audit Committee Report” of the Company’s proxy statement for the 20072009 annual shareholders meeting is incorporated herein by reference.
Exhibits, Financial Statement Schedules |
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents filed with this report:
(1) | Financial Statements | |
Consolidated Statements of Earnings — years ended July 31, | ||
Consolidated Balance Sheets — July 31, | ||
Consolidated Statements of Cash Flows — years ended July 31, | ||
Consolidated Statements of Changes in Shareholders’ Equity — years ended July 31, | ||
Notes to Consolidated Financial Statements | ||
Report of Independent Registered Public Accounting Firm | ||
(2) | Financial Statement Schedules — | |
Schedule II Valuation and qualifying accounts | ||
All other schedules (Schedules I, III, IV and V) for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instruction, or are inapplicable, and therefore have been omitted. | ||
(3) | Exhibits | |
The exhibits listed in the accompanying index are filed as part of this report or incorporated by reference as indicated therein. |
54
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DONALDSON COMPANY, INC.
DONALDSON COMPANY, INC. | ||||||
Date: | September | By: | ||||
William M. Cook | ||||||
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on September 28, 2007.25, 2009.
President, Chief Executive Officer and Chairman | ||
William M. Cook | ||
Vice President and Chief Financial Officer | ||
Thomas R. VerHage | ||
Controller | ||
James F. Shaw | ||
* | Director | |
F. Guillaume Bastiaens | ||
* | Director | |
Janet M. Dolan | ||
* | Director | |
Jack W. Eugster | ||
* | Director | |
John F. Grundhofer | ||
* | Director | |
Michael J. Hoffman | ||
* | Director | |
Paul David Miller | ||
* | Director | |
Jeffrey Noddle | ||
* | Director | |
Willard D. Oberton | ||
* | Director | |
John P. Wiehoff | ||
*By: | ||
Norman C. Linnell | ||
As attorney-in-fact |
55
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
(thousands of dollars)
Additions | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Description | Balance at Beginning of Period | Charged to Costs and Expenses | Charged to Other Accounts (A) | Deductions (B) | Balance at End of Period | ||||||||||||||||||
Year ended July 31, 2007: | |||||||||||||||||||||||
Allowance for doubtful accounts deducted from accounts receivable | $ | 8,398 | $ | 914 | $ | 358 | $ | (2,902 | ) | $ | 6,768 | ||||||||||||
Year ended July 31, 2006: | |||||||||||||||||||||||
Allowance for doubtful accounts deducted from accounts receivable | $ | 8,409 | $ | 1,981 | $ | (399 | ) | $ | (1,593 | ) | $ | 8,398 | |||||||||||
Year ended July 31, 2005: | |||||||||||||||||||||||
Allowance for doubtful accounts deducted from accounts receivable | $ | 8,741 | $ | 2,832 | $ | 93 | $ | (3,257 | ) | $ | 8,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additions |
|
|
|
|
|
|
| ||||
Description |
| Balance at |
| Charged to |
| Charged to |
| Deductions |
| Balance at |
| |||||
Year ended July 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts deducted from accounts receivable |
| $ | 7,509 |
| $ | 1,240 |
| $ | (534 | ) | $ | (828 | ) | $ | 7,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended July 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts deducted from accounts receivable |
| $ | 6,768 |
| $ | 1,126 |
| $ | 537 |
| $ | (922 | ) | $ | 7,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended July 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts deducted from accounts receivable |
| $ | 8,398 |
| $ | 914 |
| $ | 358 |
| $ | (2,902 | ) | $ | 6,768 |
|
Note B — Bad debts charged to allowance, net of reserves and changes in estimates.
56
EXHIBIT INDEX
ANNUAL REPORT ON FORM 10-K
* 3-A | — | Restated Certificate of Incorporation of Registrant as currently in effect (Filed as Exhibit 3-A to Form 10-Q Report for the First Quarter ended October 31, 2004) | ||
* | — | Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of Registrant, dated as of March 3, 2006 (Filed as Exhibit 3-B to Form 10-Q Report filed for the first quarter ended October 31, 2006) | ||
* 3-C | — | Amended and Restated Bylaws of Registrant (as of January 30, 2009) (Filed as Exhibit 3-C to Form 10-Q for the second quarter ended January 31, 2009) | ||
* 4 | — | ** | ||
* 4-A | — | Preferred Stock Amended and Restated Rights Agreement between Registrant and Wells Fargo Bank, N.A., as Rights Agent, dated as of January 27, 2006 (Filed as Exhibit 4.1 to Form 8-K Report filed February 1, 2006) | ||
*10-A | — | Officer Annual Cash Incentive Plan (Filed as Exhibit 10-A to 2006 Form 10-K Report)*** | ||
* | — | 1980 Master Stock Compensation Plan as Amended (Filed as Exhibit | ||
*10-C | — | Form of Performance Award Agreement under 1991 Master Stock Compensation Plan (Filed as Exhibit | ||
10-D | — | ESOP Restoration Plan (2003 Restatement) | ||
*10-E | — | Deferred Compensation Plan for Non-employee Directors as amended (Filed as Exhibit | ||
*10-F | — | Independent Director Retirement and Benefit Plan as amended (Filed as Exhibit | ||
10-G | — | Excess Pension Plan (2003 Restatement) | ||
10-H | — | Supplementary Executive Retirement Plan (2003 Restatement) | ||
*10-I | — | 1991 Master Stock Compensation Plan as amended (Filed as Exhibit | ||
*10-J | — | Form of Restricted Stock Award under 1991 Master Stock Compensation Plan (Filed as Exhibit | ||
*10-K | — | Form of Agreement to Defer Compensation for certain Executive Officers (Filed as Exhibit | ||
*10-L | — | Stock Option Program for Non-employee Directors (Filed as Exhibit | ||
*10-M | — | Note Purchase Agreement among Donaldson Company, Inc. and certain listed Insurance Companies | ||
*10-N | — |
57
Second Supplement and First Amendment to Note Purchase Agreement among Donaldson Company, Inc. and certain listed Insurance Companies dated as of September 30, 2004 (Filed as Exhibit 10-A to Form 10-Q Report for the Second Quarter ended January 31, 2005) | ||||
10-O | — | 2001 Master Stock Incentive Plan |
* | — | Form of Officer Stock Option Award Agreement under the 2001 Master Stock Incentive Plan (Filed as Exhibit 10-A to Form 10-Q Report for the First Quarter ended October 31, 2004)*** | ||
*10-Q | — | Form of Non-Employee Director Non-Qualified Stock Option Agreement under the 2001 Master Stock Incentive Plan (Filed as Exhibit 10-B to Form 10-Q Report for the First Quarter ended October 31, 2004)*** | ||
*10-R | — | Agreement dated August 29, 2005, by and between Donaldson Company, Inc. and William G. Van Dyke (Filed as Exhibit 99.1 to Form 8-K Report filed August 29, 2005)*** | ||
*10-S | — | Restated Compensation Plan for Non-Employee Directors dated July 28, 2006 (Filed as Exhibit 99.1 to Form 8-K Report filed | ||
*10-T | — | Restated Long-Term Compensation Plan dated May 23, 2006 (Filed as Exhibit 99.2 to Form 8-K Report filed August 4, 2006)*** | ||
*10-U | — | Qualified Performance-Based Compensation Plan (Filed as Exhibit 10-DD to 2006 Form 10-K Report)*** | ||
*10-V | — | Deferred Compensation and 401(k) Excess Plan (2005 Restatement) (Filed as Exhibit 10-EE to 2006 Form 10-K Report)*** | ||
*10-W | — | Deferred Stock Option Gain Plan (2005 Restatement) (Filed as Exhibit 10-FF to 2006 Form 10-K Report)*** | ||
*10-X | — | Excess Pension Plan (2005 Restatement) (Filed as Exhibit 10-GG to 2006 Form 10-K Report)*** | ||
*10-Y | — | Supplemental Executive Retirement Plan (2005 Restatement) (Filed as Exhibit 10-HH to 2006 Form 10-K Report)*** | ||
*10-Z | — | Form of Management Severance Agreement for Executive Officers (Filed as Exhibit 10-A to Form 10-Q Report for the Third Quarter ended April 30, 2008)*** | ||
11 | — | Computation of net earnings per share (See “Earnings Per Share” in “Summary of Significant Accounting Policies” in Note A in the Notes to Consolidated Financial Statements on page | ||
21 | — | Subsidiaries | ||
23 | — | Consent of PricewaterhouseCoopers LLP | ||
24 | — | Powers of Attorney | ||
31-A | — | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31-B | — | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32 | — | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Exhibit has previously been filed with the Securities and Exchange Commission and is incorporated herein by reference as an exhibit. |
** | Pursuant to the provisions of Regulation S-K Item 601(b)(4)(iii)(A) copies of instruments defining the rights of holders of certain long-term debts of the Company and its subsidiaries are not filed and in lieu thereof the Company agrees to furnish a copy thereof to the Securities and Exchange Commission upon request. |
*** | Denotes compensatory plan or management contract. |
Note: Exhibits have been furnished only to the Securities and Exchange Commission. Copies will be furnished to individuals upon request. |
5862