DONALDSON COMPANY, INC.
ANNUAL REPORT ON FORM 10-K
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | ||
| Safe Harbor Statement under the Securities Reform Act of 1995 |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Certain Relationships and Related Transactions, and Director Independence |
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Donaldson Company, Inc. (“Donaldson”(Donaldson or the “Company”)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 aircore strengths are leading filtration technology, strong Customer relationships, and liquid filtration systems and exhaust and emission control products.its global presence. Products are manufactured at 39 plants around the world and through three joint ventures. The Company has two reporting segments: Engine Products and Industrial Products. Products in the Engine Products segment consist of air filtration systems, exhaust and emissions systems, liquid filtration systems including hydraulics, fuel, and lube, and replacement filters. The Engine Products segment sells to original equipment manufacturers (“OEMs”)(OEMs) in the construction, mining, agriculture, aerospace, defense, and truck markets, and to independent distributors, OEM dealer networks, independent distributors, private label accounts, and large equipment fleets. Products in the Industrial Products segment consist of dust, fume, and mist collectors, compressed air purification systems, air filtration systems for gas turbines, PTFE membrane-based products, and specialized air and gas filtration systems for applications including computer hard disk drives.drives and semi-conductor manufacturing. The Industrial Products segment sells to various industrial end-users,dealers, distributors, OEMs of gas-fired turbines, and OEMs and end-users requiring clean air.filtration solutions and replacement filters.
The discussion below should be read in conjunction with the risk factors discussed in this report in Part I, Item 1A, “Risk Factors.”
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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| Year Ended July 31, |
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| Year Ended July 31, |
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| 2011 |
| 2010 |
| 2009 |
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| 2014 |
| 2013 |
| 2012 |
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Engine Products segment |
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Off-Road Products |
| 14 | % |
| 12 | % |
| 13 | % |
| 14% |
| 15% |
| 15% |
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Aerospace and Defense Products |
| 5 | % |
| 6 | % |
| 6 | % | |||||||||||
On-Road Products |
| 5 | % |
| 4 | % |
| 4 | % |
| 5% |
| 5% |
| 7% |
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Aftermarket Products* |
| 38 | % |
| 37 | % |
| 30 | % |
| 41% |
| 38% |
| 37% |
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Retrofit Emissions Products |
| 1 | % |
| 1 | % |
| 2 | % | |||||||||||
*includes replacement part sales to the Company’s OEMs customers |
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Aerospace and Defense Products |
| 4% |
| 4% |
| 4% |
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*includes replacement part sales to the Company’s OEM Customers |
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Industrial Products segment |
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Industrial Filtration Solutions Products |
| 22 | % |
| 22 | % |
| 26 | % |
| 23% |
| 22% |
| 22% |
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Gas Turbine Products |
| 7 | % |
| 8 | % |
| 11 | % |
| 6% |
| 9% |
| 7% |
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Special Applications Products |
| 8 | % |
| 10 | % |
| 8 | % |
| 7% |
| 7% |
| 8% |
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FinancialTotal net sales contributed by the principal classes of similar products and financial information about segment operations appearsand geographic regions appear in Note K in the Notes to Consolidated Financial Statements on page 49.54.
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 codeCode of business conductBusiness Conduct and ethics, corporate governance guidelines,Ethics, Corporate Governance Guidelines, Audit Committee charter, Human Resources Committee charter, and Corporate Governance Committee charter. These documents are also available in print, free of charge to any shareholderperson who requests them.them in writing to the attention of Investor Relations, MS 102, Donaldson Company, Inc., 1400 West 94th Street, Minneapolis, Minnesota 55431. 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.
A number of the Company’s end markets are dependent on the construction, agricultural, and power generation industries, which are generally stronger in the second half of the Company’s fiscal year. The first two quarters of the fiscal year also contain the traditional summer and winter holiday periods, which are typically characterized by more Customer plant closures.
Principal methods of competition in both the Engine and Industrial Products segments are technology and innovation, price, geographic coverage, service, and product performance. The Company competes in a number of highly competitive filtration markets in both segments. The Company believes it is a market leader withwithin many of its product lines. The Company believeslines, specifically 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 many 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 and global competitors and a significant number of smaller competitors who compete in a specific geographical region or in a limited number of product applications.
The principal raw materials that the Company uses are steel, filter media, and plastics. Commodity prices generally increased throughoutpetroleum-based products. Purchased raw materials represent approximately 60 to 65 percent of the year, butCompany’s cost of goods sold. Of that amount, steel, including fabricated parts, represents approximately 25 percent. Filter media represents approximately 15 to 20 percent and the impact was moderated by certain long term supply contracts. The Company anticipates a further impact from rising commodity prices in Fiscal 2012, as compared to Fiscal 2011, specifically for steelremainder is primarily made up of petroleum-based products and media, as these supply contracts expired during the latter half of Fiscal 2011. The Company experienced no significant supply problems in the purchase of its major raw materials.other components. The Company typically has multiple sources of supply for the raw materials essential to its business, andbut does rely primarily on two media suppliers. The Company is not required to carry significant amounts of raw material inventory to secure supplier allotments. However, the Company does stock finished goods inventory at its regional distribution centers in order to meet anticipated Customer demand. The Company has not experienced significant supply problems in the purchase of its major raw materials.
The Company owns various patents and trademarks, which it considers in the aggregate to constitute a valuable asset, including patents and trademarks for products 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 2011, 20102014, 2013, or 2009.2012. There were no Customers that accounted for over 10 percent of gross accounts receivable in Fiscal 20112014 or 2010.Fiscal 2013.
At August 31, 2011,2014, the backlog of orders expected to be delivered within 90 days was $423.8$375.1 million. All of this backlog is expected to be shipped during Fiscal 2012. The 90-day backlog at August 31, 2010,2013, was $361.1$351.7 million. Backlog is one of many indicators of business conditions in the Company’s markets. However, it is not always indicative of future results for a number of reasons, including short lead times in the Company’s replacement parts businesses and the timing of orders in many of the Company’s Engine OEM and Industrial markets.
During Fiscal 2011,2014, the Company spent $55.3$61.8 million on research and development activities. 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. The Company spent $44.5$62.6 million and $40.6$59.6 million in Fiscal 20102013 and Fiscal 2009,2012, respectively, on research and development activities. Substantially all commercial research and development is performed in-house.
The Company does not anticipate any material effect on its capital expenditures, earnings, or competitive position during Fiscal 20122015 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 13,00012,500 persons in worldwide operations as of August 31, 2011.2014.
Financial information about geographic areas appears in Note K of the Notes to Consolidated Financial Statements on page 49.54.
There are inherent risks and uncertainties associated with our global operations that involve the manufacturing and sale of products for highly demanding Customer applications throughout the world. These risks and uncertainties could adversely affect our operating performance and financial condition. The following discussion, along with discussions elsewhere in this report, outlinesoutline the risks and uncertainties that we believe are the most material to our business. In light of the global economic slowdown in recent years and the continued uncertainty, webusiness at this time. We want to further highlight the risks and uncertainties associated with: world economic factors and the ongoing global economic uncertainty, that is impacting many regionsthe reduced demand for hard disk drive products with the increased use of the world, the financial condition of our suppliers and Customers,flash memory, the potential for some Customers to increase their reliance on their own filtration capabilities, currency fluctuations, commodity prices, political factors, the Company’sour international operations, the possible reduced demand for hard disk drive products with the increased use of flash memory, highly competitive markets, governmental laws and regulations, including the impact of the various economic stimulus and financial reform measures, being implemented by governments around the world, the implementation of our new information technology systems, information security and data breaches, potential global events resulting in market instability and unpredictability in the world’s markets, including financial bailouts and defaults of sovereign nations, political changes, military and terrorist activities, including political unrest in the Middle East and Ukraine, other political changes, health outbreaks, natural disasters, and other factors discussed below. The Company undertakesWe undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Operating internationally carries risks which could negatively affect our financial performance.
We have sales and manufacturing operations throughout the world, with the heaviest concentrations in North America,the Americas, 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:
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| • | political and military events, |
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| • | legal and regulatory requirements, including import, export, defense regulations, anti-corruption laws, and foreign exchange controls, |
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| • | tariffs and trade barriers, |
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| • | potential difficulties in staffing and managing local operations, |
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| • | credit risk of local Customers and distributors, |
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| • | difficulties in protecting intellectual property, |
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| • | local economic, political, and social conditions, specifically in the Middle East, Ukraine, China, Thailand, and |
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| • | potential global health |
• | natural disasters. |
Due to the international scope of our operations, we are subject to a complex system of import- and export-related laws and regulations. Any alleged or actual violations may subject us to government scrutiny, investigation, and civil and criminal penalties, and may limit our ability to import or export our products or to provide services outside the United States (U.S.). In addition, the U.S. Foreign Corrupt Practices Act and
similar foreign anti-corruption laws generally prohibit companies and their intermediaries from making improper payments or providing anything of value to improperly influence foreign government officials for the purpose of obtaining or retaining business, or obtaining an unfair advantage. Recent years have seen a substantial increase in the global enforcement of anti-corruption laws. Violations of these laws may result in severe criminal or civil sanctions, could disrupt our business, and result in an adverse effect on our reputation, business, and results of operations or financial condition.
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 expect our competitors to continue improving the design and performance of their products and to introduce new products that could 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 make investments in new technologies that address increased performance and regulatory requirements 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 few of our major OEM Customers also manufacture filtration systems. Although these OEM Customers rely on us and other suppliers for some of their filtration systems, they sometimes choose to manufacture additional filtration 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. These risks include:
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| • | breakthroughs in technology which provide a viable alternative to diesel engines |
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| • | reduced demand for disk drive products by flash memory or a similar technology, which would |
• | other breakthroughs in filtration technologies that could displace our products |
Difficulties with our information technology systems and security could adversely affect our results.
We have many information technology systems that are important to the operation of our businesses, some of which are managed by third parties. These systems are used to process, transmit, and store electronic information, and to manage or support a variety of business processes and activities. We could encounter difficulties in developing new systems, maintaining and upgrading existing systems, and preventing information security breaches. There may be other challenges and risks as we continue to upgrade and standardize our multi-year implementation of a global enterprise resource planning system (Global ERP Project) on a worldwide basis. Such difficulties could lead to significant additional expenses and/or disruption in business operations that could adversely affect our results. Additionally, information technology security threats are increasing in frequency and sophistication. These threats pose a risk to the security of our systems and networks and the confidentiality, availability, and integrity of our data. Should such an attack succeed, it could lead to the compromising of confidential information, manipulation and destruction of data, defective products, production downtimes, and operations disruptions. The occurrence of any of these events could adversely affect our reputation, and could result in litigation, regulatory action, potential liability, and increased costs and operational consequences of implementing further data protection matters.
Demand for our products relies on economic and industrial conditions worldwide.
Changes in economic or industrial conditions could impact our results of operations or financial condition in any particular period as our business can be sensitive to varying conditions by region across the globe.
While sales to Caterpillar accounted for slightly less than 10 percent of our net sales in Fiscal 2014, 2013, and 2012, an adverse change in Caterpillar’s financial performance or a material reduction in our sales to Caterpillar could negatively impact our operating results.
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, geographic coverage, product performance, and Customer service. Large Customers continue to seek productivity gains and lower prices from us and their other suppliers. We may lose business or negatively impact our margins if we are unable to deliver the best value to our Customers.
Demand for our products relies on economic and industrial conditions worldwide.
Demand for our products tends to respond to varying levels of economic, construction, agricultural, mining, and industrial activity in the United States and in other industrialized nations.
Sales to Caterpillar accounted for slightly less than 10 percent of our net sales in Fiscal 2011, 2010 and 2009. An adverse change in Caterpillar’s financial performance or a material reduction in our sales to Caterpillar could negatively impact our operating results.
Changes in our product mix impactsimpact our financial performance.
We sell products that have varying profit margins. Our financial performance can be impacted depending on the mix of products we sell during a given period. Our outlook assumes a certain geographic mix of sales as well as a product mix of sales. If actual results vary from this projected geographic and product mix of sales, our results could be negatively impacted.
Unavailable or higher cost materials could impact our financial performance.
We obtain raw materials including steel, filter media, plastics,petroleum-based products, and other components from third-party suppliers and tend to carry limited raw material inventories. An unanticipated delay in delivery by our suppliers could result in the inability to deliver on-time and meet the expectations of our Customers. This could negatively affect our financial performance. An increase in commodity prices could also result in lower operating margins.
Difficulties with the Company’s information technology systems could adversely affect our 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 and financial position.
We have operations in many countries. Each of our subsidiaries reports its results of operations and financial position in its relevant foreignfunctional currency, which is then translated into U.S. dollars. This translated financial information is included in our consolidated financial statements. The strengthening of the U.S. dollar in comparison to the foreign currencies of our subsidiaries could have a negative impact on our results and financial position.
Acquisitions may have an impact on our results.
We have made and continue to pursue 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. We could lose key existing Customers, have difficulties in assimilating the acquired operations, assume unanticipated legal liabilities, or lose key employees.
ComplianceCosts associated with environmental and product laws and regulations can be costly.lawsuits or investigations may have an adverse effect on our results of operations.
We are subject to many environmental laws and regulations in the jurisdictions in which we operate. We routinely incur costs in order to comply with these laws and regulations. We may be adversely impacted by new or changing laws and regulations that affect both our operations and our ability to develop and sell products that meet our Customers’ requirements. We are involved in various product liability, product warranty, intellectual property, environmental claims, and other legal proceedings that arise in and outside of the ordinary course of our business. It is not possible to predict the outcome of investigations and lawsuits, and we could incur judgments, fines, or penalties or enter into settlements of lawsuits and claims that could have an adverse effect on our business, results of operations, and financial condition in any particular period.
Additional tax expense or tax exposure could impact our financial performance.
We are subject to income taxes in various jurisdictions in which we operate. Our tax liabilities are dependent upon the location of earnings among these different jurisdictions. Our provision for income taxes and cash tax liability could be adversely affected by numerous factors, including income before taxes being lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws and regulations. We are also subject to the continuous examination of our income tax returns by tax authorities. The results of audits and examinations of previously filed tax returns and continuing
assessments of our tax exposures may have an adverse effect on the Company’s provision for income taxes and cash tax liability.
Compliance with environmental and product laws and regulations can be costly.
We are subject to many environmental and product laws and regulations in the jurisdiction we operate. We routinely incur costs in order to comply with these laws and regulations. We may be adversely impacted by new or changing laws and regulations that affect both our operations and our ability to develop and sell products that meet our Customers’ requirements.
Item 1B.Item1B. Unresolved Staff Comments
None.
The Company’s principal administrative office and research facilities are located in Bloomington, a suburb of Minneapolis, Minnesota. The Company’s principal European administrative and engineering offices are located in Leuven, Belgium. The Company also has extensive operations in the Asia-Pacific region.and Latin America regions.
The Company’s principal manufacturing and distribution activities are located throughout the world. The following is a summary of the principal plants and other materially important physical properties owned or leased by the Company.
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Americas | Europe / Middle East / Africa |
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 |
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Grinnell, Iowa (E) |
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Nicholasville, Kentucky |
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| Cape Town, South Africa |
| Johannesburg, South Africa* |
Chesterfield, Missouri (E)* | Hull, United Kingdom |
| Leicester, United Kingdom (I) |
Philadelphia, Pennsylvania (I) | |
Greeneville, Tennessee | Australia |
Baldwin, Wisconsin | Wyong, Australia |
Stevens Point, Wisconsin |
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Sao Paulo, Brazil (E)* | Asia |
Brockville, Canada |
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Aguascalientes, Mexico |
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Monterrey, Mexico (I) | Gunma, Japan |
Rayong, Thailand (I) | |
Joint Venture Facilities | |
Champaign, Illinois (E) | Third-Party Logistics Providers |
Jakarta, Indonesia | Santiago, Chile |
Dammam, Saudi Arabia (I) | Wuxi, China |
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Wyong, Australia |
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| Plainfield, Indiana (I) |
| Gunma, Japan |
| Lima, Peru |
Rensselaer, Indiana | Singapore |
Jakarta, Indonesia | Greeneville, Tennessee (I) |
Aguascalientes, Mexico |
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Johannesburg, South Africa |
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Seoul, South Korea* |
The Company’s properties are utilized for both the Engine and Industrial Products segments except as indicated with an (E) for Engine or (I) for Industrial. The Company leases certain of its facilities, primarily under long-term leases. The facilities denoted with an asterisk (*) are leased facilities. In Wuxi, China, and Bloomington, Minnesota a portion of the activities are conducted in leased facilities. The Company uses third-party logistics providers for some of its product distribution and neither leases nor owns the facilities. The Company considers its properties to be suitable for their present purposes, well-maintained, and in good operating condition.
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 believes the recorded reserves in its consolidated financial statements are adequate in light of the probable and estimable outcomes. Any recorded liabilities were not material to the Company’s financial position, results of operationoperations or liquidity, and the Company does not believe that any of the currently identified claims or litigation will materially affect its financial position, results of operation or liquidity.
The Company has reached a preliminary agreement to settle the class action lawsuits that were previously disclosed in its SEC filings, including most recently the Form 10-Q for the quarter ending April 30, 2011. On March 31, 2008, S&E Quick Lube, a filter distributor, filed a lawsuit alleging that 12 filter manufacturers, including the Company, engaged in a conspiracy to fix prices, rig bids, and allocate U.S. Customers for aftermarket automotive filters. The U.S. cases have been consolidated into a single multi-district litigation in the Northern District of Illinois. The Company denies any liability and has vigorously defended the claims raised in these lawsuits. The settlement will fully resolve all claims brought against the Company in the lawsuits and the Company does not admit any liability or wrongdoing. The settlement is still subject to Court approval and will not have a material impact on the Company’s financial position, results of operations or liquidity.
The Company has reached a preliminary agreement with the Air Resources Board for the State of California (“ARB”) to settle regulatory claims brought by ARB in connection with the sales of our Diesel Multi-Stage Filter System (“DMF”) for an immaterial amount. On May 19, 2010, ARB revoked its verification of the Company’s DMF for use with on-road diesel engines, for which verification was originally issued on December 16, 2005. The Company denies that any sales were made in California without ARB verification. The Company is not currently selling any DMF product and is working with the Environmental Protection Agency to verify the product for any future sales.
Item 4. (Removed and Reserved)Mine Safety Disclosures
Not applicable.
Executive Officers of the Registrant
Current information regarding executive officers is presented below. All terms of office are for one year. There are no arrangements or understandings between individual officers and any other person pursuant to which the officer was selected as an executive officer.
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Name |
| Age |
| Positions and Offices Held |
| First Fiscal Year |
| Age |
| Positions and Offices Held |
| First Fiscal Year | |
Amy C. Becker |
| 49 |
| Vice President, General Counsel and Secretary |
| 2014 | |||||||
Tod E. Carpenter | Tod E. Carpenter |
| 52 |
| Vice President, Europe and Middle East |
| 2008 |
| 55 |
| Chief Operating Officer |
| 2008 |
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William M. Cook | William M. Cook |
| 58 |
| Chairman, President and Chief Executive Officer |
| 1994 |
| 61 |
| Chairman, President and Chief Executive Officer |
| 1994 |
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Sandra N. Joppa | Sandra N. Joppa |
| 46 |
| Vice President, Human Resources |
| 2005 |
| 49 |
| Vice President, Human Resources |
| 2006 |
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Norman C. Linnell |
| 52 |
| Vice President, General Counsel and Secretary |
| 1996 | |||||||
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Charles J. McMurray |
| 57 |
| Senior Vice President, Industrial Products |
| 2003 | |||||||
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Mary Lynne Perushek | Mary Lynne Perushek |
| 53 |
| Vice President and Chief Information Officer |
| 2006 |
| 56 |
| Vice President and Chief Information Officer |
| 2007 |
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David W. Timm |
| 58 |
| Vice President, Asia-Pacific |
| 2007 | |||||||
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Thomas R. VerHage |
| 58 |
| Vice President and Chief Financial Officer |
| 2004 | |||||||
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Thomas R. Scalf |
| 48 |
| Senior Vice President, Engine Products |
| 2014 | |||||||
James F. Shaw |
| 45 |
| Vice President and Chief Financial Officer |
| 2012 | |||||||
Wim Vermeersch |
| 48 |
| Vice President, Europe and Middle East |
| 2012 | |||||||
Jay L. Ward | Jay L. Ward |
| 47 |
| Senior Vice President, Engine Products |
| 2006 |
| 50 |
| Senior Vice President, Industrial Products |
| 2006 |
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Debra L. Wilfong |
| 56 |
| Vice President and Chief Technology Officer |
| 2007 | |||||||
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Eugene X. Wu |
| 46 |
| Vice President, Asia Pacific |
| 2012 | |||||||
Ms. Becker joined the Company in 1998 as Senior Counsel and Assistant Corporate Secretary and was appointed to Vice President, General Counsel and Secretary in August 2014. Prior to joining the Company, Ms. Becker was an attorney for Dorsey and Whitney, LLP from 1991 to 1995 and was a Project Manager and Corporate Counsel for Harmon, Ltd. from 1995 to 1998.
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’)(IFS) Sales from 2004 to 2006; General Manager, IFS Americas in 2006; and Vice President, Global IFS from 2006 to 2008. Mr. Carpenter was appointed2008; Vice President, Europe and Middle East in August 2008. Mr. Carpenter has been appointedfrom 2008 to 2011; and Senior Vice President, Engine Products effective October 1, 2011.from 2011 to 2014. In April 2014, Mr. Carpenter was appointed Chief Operating Officer.
Mr. Cook joined the Company 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. 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 the Company in 1996 as General Counsel and Secretary and was appointed Vice President, General Counsel and Secretary in 2000.
Mr. McMurray joined the Company in 1980 and has held various positions, including Director, Global Information Technology from 2001 to 2003; Vice President, Human Resources 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 in September 2006. Mr. McMurray has been appointed Senior Vice President and Chief Administrative Officer, effective October 1, 2011.Table of Contents
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. TimmScalf joined the Company in 19831989 and has held various positions, including Director of Global Operations from 2003 to 2006; General Manager Disk Driveof Exhaust & Emissions from 19952006 to 2005 and2008; General Manager Gas Turbine Systems Productsof Industrial Filtration Solutions from 20052008 to 2006.2012; and Vice President of Global Industrial Air Filtration from 2012 to 2014. Mr. TimmScalf was appointed Senior Vice President, Asia-PacificEngine Products, in December 2006. The Company has announced that Mr. Timm will retire from the Company at the end of 2011, with his replacement to be announced at a later date.April 2014.
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. The Company has announced that Mr. VerHage is leavingShaw joined the Company on October 31, 2011in 2004 and that James F. Shaw, age 42, currentlyhas held various positions, including Director, Corporate Compliance/Internal Audit, and Corporate Controller and Principal Accounting Officer for the Company, has beenfrom 2004 to 2011. Mr. Shaw was appointed Vice President and Chief Financial Officer effective November 1, 2011. Prior to joining Donaldson, Mr. Shaw held various positions at Deloitte & Touche, LLP and Arthur Andersen, LLP.
Mr. Vermeersch joined the Company in 1992 and has held various positions, including Director, Gas Turbine Systems, Asia Pacific from 2000 to 2005; Manager, Aftermarket and Service IFS, Belgium from 2005 to 2006; Manager, IFS, Belgium from 2006 to 2007; Director, Gas Turbine Systems, Europe, Middle East and North Africa, from 2007 to 2010; and Director, Engine, Europe, Middle East and North Africa from 2010 to 2011. Mr. Vermeersch was appointed Vice President, Europe and Middle East in January 2012.
Mr. Ward joined the Company in 1998 and has held various positions, including Director, Operations from 2001 to 2003; Director, Product and Business Development, IFS Group from 2003 to 2004; Managing Director, Europe from 2004 to 2006; and Vice President, Europe and Middle East from 2006 to 2008. Mr. Ward was appointed Senior Vice President, Engine Products in August 2008. Mr. Ward has been2008 and was appointed Senior Vice President, Industrial Products, effectivein October 1, 2011.
Ms. WilfongMr. Wu was appointed Vice President, and Chief Technology OfficerAsia Pacific in May 2007.January 2012. Prior to that time, Ms. WilfongMr. Wu was Director, Researchthe Global Vice President and DevelopmentPresident of Asia Pacific at 3M Company, an international consumerGreif, Inc., a global leader in industrial packaging products company,and services, from 20002005 to 2007, most recently as Director, Research2010; and Development forChief Advisor to Chairman of the 3M Automotive DivisionBoard of Wanhua Industrial Group, a global chemical industry leader, from 20062010 to 2007.2011.
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 Fiscal 20112014 and 20102013 appear in Note PO of the Notes to Consolidated Financial Statements on page 54.58. The Company’s dividend payout ratio target is 20approximately 30 percent to 3040 percent of the average earnings per share of the last three years. This guidance is expected to be used for future dividend payouts. As of September 22, 2011,24, 2014, there were 1,9501,779 shareholders of record of common stock.
The low and high sales prices for the Company’s common stock for each full quarterly period during Fiscal 20112014 and 20102013 were as follows:
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|
| First Quarter |
| Second Quarter |
| Third Quarter |
| Fourth Quarter |
Fiscal |
| $ |
| $ |
| $ |
| $ |
43.00 | ||||||||
Fiscal |
| $ |
| $ |
| $ |
| $ |
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, 2011.2014.
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Period |
| Total Number of |
| Average Price |
| Total Number of |
| Maximum Number |
| ||||
May 1 - May 31, 2011 |
|
| — |
| $ | — |
|
| — |
|
| 6,187,240 |
|
June 1 - June 30, 2011 |
|
| 900,000 |
| $ | 56.35 |
|
| 900,000 |
|
| 5,287,240 |
|
July 1 - July 31, 2011 |
|
| 291,558 |
| $ | 59.23 |
|
| 256,648 |
|
| 5,030,592 |
|
Total |
|
| 1,191,558 |
| $ | 57.06 |
|
| 1,156,648 |
|
| 5,030,592 |
|
The Company initiated the purchase of an additional 162,900 shares for $9.2 million in July 2011 that are not included in Fiscal 2011 repurchases as the transactions did not settle until after fiscal year end. These repurchases will be included in Fiscal 2012 activity.
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Period |
| Total Number of |
| Average Price |
| Total Number of |
| Maximum Number |
| ||||
May 1 - May 31, 2014 |
|
| 756,257 |
| $ | 41.35 |
|
| 756,257 |
|
| 10,544,144 |
|
June 1 - June 30, 2014 |
|
| 1,204,889 |
| $ | 41.29 |
|
| 1,204,889 |
|
| 9,339,255 |
|
July 1 - July 31, 2014 |
|
| 801,028 |
| $ | 40.86 |
|
| 795,545 |
|
| 8,543,710 |
|
Total |
|
| 2,762,174 |
| $ | 41.18 |
|
| 2,756,691 |
|
| 8,543,710 |
|
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|
| |
(1) | On | ||
On January 27, 2012, the Company announced that its Board of Directors declared a two-for-one stock split effected in the form of a 100 percent stock dividend. The stock split was distributed March 23, 2012, to stockholders of record as of March 2, 2012. Earnings and dividends per share and weighted average shares outstanding are presented in this Form 10-K after the effect of the 100 percent stock dividend. The two-for-one stock split is reflected in the share amounts in all periods presented in the table above and elsewhere in this annual Form 10-K.
The table set forth in Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” of this report is also incorporated herein by reference.
The graph below compares 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 Industrial Machinery Index. The graph and table assume the investment of $100 in each of the 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
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| Year Ended July 31, |
| ||||||||||||||||
|
| 2011 |
| 2010 |
| 2009 |
| 2008 |
| 2007 |
| 2006 |
| ||||||
Donaldson Company, Inc. |
| $ | 177.91 |
| $ | 150.95 |
| $ | 119.50 |
| $ | 139.95 |
| $ | 111.77 |
| $ | 100.00 |
|
S&P 500 |
|
| 112.56 |
|
| 94.07 |
|
| 82.64 |
|
| 103.25 |
|
| 116.13 |
|
| 100.00 |
|
S&P Industrial Machinery |
|
| 143.55 |
|
| 119.05 |
|
| 90.70 |
|
| 118.06 |
|
| 129.23 |
|
| 100.00 |
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|
| Year Ended July 31, |
| ||||||||||||||||
|
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| ||||||
Donaldson Company, Inc. |
| $ | 100.00 |
| $ | 126.32 |
| $ | 148.88 |
| $ | 185.33 |
| $ | 199.13 |
| $ | 216.11 |
|
S&P 500 |
|
| 100.00 |
|
| 113.83 |
|
| 136.21 |
|
| 148.64 |
|
| 185.80 |
|
| 217.28 |
|
S&P Industrial Machinery |
|
| 100.00 |
|
| 131.25 |
|
| 158.27 |
|
| 166.58 |
|
| 233.72 |
|
| 274.37 |
|
Item 6. Selected Financial Data
The following table sets forth selected financial data for each of the fiscal years in the five-year period ended July 31, 20112014 (in millions, except per share data):
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| |||||
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| Year Ended July 31, |
|
| Year Ended July 31, |
| ||||||||||||||||||||||||||
|
| 2011 |
| 2010 |
| 2009 |
| 2008 |
| 2007 |
|
| 2014 |
| 2013 |
| 2012 |
| 2011 |
| 2010 |
| ||||||||||
Net sales |
| $ | 2,294.0 |
| $ | 1,877.1 |
| $ | 1,868.6 |
| $ | 2,232.5 |
| $ | 1,918.8 |
|
| $ | 2,473.5 |
| $ | 2,436.9 |
| $ | 2,493.2 |
| $ | 2,294.0 |
| $ | 1,877.1 |
|
Income from continuing operations |
| 225.3 |
| 166.2 |
| 131.9 |
| 172.0 |
| 150.7 |
| |||||||||||||||||||||
Net earnings |
| 260.2 |
| 247.4 |
| 264.3 |
| 225.3 |
| 166.2 |
| |||||||||||||||||||||
Basic earnings per share |
| 1.79 |
| 1.67 |
| 1.76 |
| 1.46 |
| 1.07 |
| |||||||||||||||||||||
Diluted earnings per share |
| 2.87 |
| 2.10 |
| 1.67 |
| 2.12 |
| 1.83 |
|
| 1.76 |
| 1.64 |
| 1.73 |
| 1.43 |
| 1.05 |
| ||||||||||
Total assets |
| 1,726.1 |
| 1,499.5 |
| 1,334.0 |
| 1,548.6 |
| 1,319.0 |
|
| 1,942.4 |
| 1,743.6 |
| 1,730.1 |
| 1,726.1 |
| 1,499.5 |
| ||||||||||
Long-term obligations |
| 205.7 |
| 256.2 |
| 253.7 |
| 176.5 |
| 129.0 |
|
| 243.7 |
| 102.8 |
| 203.5 |
| 205.7 |
| 256.2 |
| ||||||||||
Cash dividends declared per share |
| 0.560 |
| 0.480 |
| 0.460 |
| 0.430 |
| 0.370 |
|
| 0.610 |
| 0.450 |
| 0.335 |
| 0.280 |
| 0.240 |
| ||||||||||
Cash dividends paid per share |
| 0.535 |
| 0.470 |
| 0.455 |
| 0.420 |
| 0.360 |
|
| 0.575 |
| 0.410 |
| 0.320 |
| 0.268 |
| 0.235 |
| ||||||||||
Item 7.Item7. Management’s Discussion and Analysis of Financial Condition and Results of OperationOperations
Results of OperationOperations
The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto and other financial information included elsewhere in this report.
Overview
The Company is a worldwide manufacturer of filtration systems and replacement parts. The Company’s core strengths are leading filtration technology, strong Customer relationships, and its global presence. The Company operates through two reporting segments, Engine Products and Industrial Products, and has a product mix including air filtration systems, exhaust and emission systems, liquid filtration systems including hydraulics, fuel, and exhaustlube, and emission control products.replacement filters. As a worldwide business, the Company’s results of operations are affected by conditions in the global economic environment. Under normalmost economic conditions, the Company’s market diversification between its OEM and replacement parts Customers, its diesel engine and industrial end markets, and its North American and internationalglobal end markets has helped to limit the impact of weakness in any one product line, market, or geography on the consolidated results of the Company.
�� The Company reported record sales in Fiscal 20112014 of $2,294.0$2,473.5 million, up 22.21.5 percent from $1,877.1$2,436.9 million in the prior year. The Company’s results were positivelynegatively impacted by foreign currency translation, which increaseddecreased sales by $49.8$11.4 million. Excluding the current year impact of foreign currency translation, worldwide sales increased 19.62.0 percent.
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 between different fiscal periods excluding the impact of foreign currency translation. The following is reconciliation to the most comparable GAAP financial measure of this non-GAAP financial measure (in millions):
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|
|
| Year Ended July 31, |
| ||||
|
| 2011 |
| 2010 |
| ||
Net sales, excluding foreign currency translation |
| $ | 2,244.2 |
| $ | 1,833.9 |
|
Foreign currency translation impact |
|
| 49.8 |
|
| 43.2 |
|
Net sales |
| $ | 2,294.0 |
| $ | 1,877.1 |
|
The Company also reported record net earnings in Fiscal 20112014 of $225.3$260.2 million, an increase of 35.65.2 percent from $166.2$247.4 million in the prior year. The Company’s net earnings were also positivelynegatively impacted by foreign currency translation, which increaseddecreased net earnings by $6.1$1.0 million. Excluding the current year impact of foreign currency translation, net earnings increased 31.95.6 percent.
Although net sales and net earnings excluding foreign currency translation isare not a measuremeasures of financial performance under GAAP,generally accepted accounting principles in the United States of America (U.S. GAAP), the Company believes it isthey are useful in understanding its financial results and provides aprovide comparable measuremeasures for understanding the operating results of the Company between different fiscal periods excluding the impact of foreign currency translation. The following is a reconciliationperiods. Following are reconciliations to the most comparable U.S. GAAP financial measuremeasures of thisthese non-GAAP financial measuremeasures (in millions):
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|
|
| Year Ended July 31, |
| ||||
|
| 2011 |
| 2010 |
| ||
Net earnings, excluding foreign currency translation |
| $ | 219.2 |
| $ | 162.6 |
|
Foreign currency translation impact, net of tax |
|
| 6.1 |
|
| 3.6 |
|
Net earnings |
| $ | 225.3 |
| $ | 166.2 |
|
|
|
|
|
|
|
|
|
|
| Net Sales |
| Percent |
| ||
Year ended July 31, 2012 |
| $ | 2,493.2 |
|
| NA |
|
Net sales change, excluding foreign currency translation impact |
|
| (24.1 | ) |
| (1.0 | )% |
Foreign currency translation impact |
|
| (32.2 | ) |
| (1.3 | )% |
Year ended July 31, 2013 |
| $ | 2,436.9 |
|
| (2.3 | )% |
Net sales change, excluding foreign currency translation impact |
|
| 48.0 |
|
| 2.0 | % |
Foreign currency translation impact |
|
| (11.4 | ) |
| (0.5 | )% |
Year ended July 31, 2014 |
| $ | 2,473.5 |
|
| 1.5 | % |
|
|
|
|
|
|
|
|
|
| Net Earnings |
| Percent |
| ||
Year ended July 31, 2012 |
| $ | 264.3 |
|
| NA |
|
Net earnings change, excluding foreign currency translation impact |
|
| (14.8 | ) |
| (5.6 | )% |
Foreign currency translation impact |
|
| (2.1 | ) |
| (0.8 | )% |
Year ended July 31, 2013 |
| $ | 247.4 |
|
| (6.4 | )% |
Net earnings change, excluding foreign currency translation impact |
|
| 13.8 |
|
| 5.6 | % |
Foreign currency translation impact |
|
| (1.0 | ) |
| (0.4 | )% |
Year ended July 31, 2014 |
| $ | 260.2 |
|
| 5.2 | % |
The Company reported diluted earnings per share of $2.87,$1.76, a 36.77.3 percent increase from $2.10$1.64 in the prior year.
As discussed above, the Company recorded full year records forFollowing are net sales and net earnings. In addition, operating margin was a record of 13.7 percent for the year. The Company’s manufacturing plants and distribution centers executed very well and continued to make both capital and operating investments which, along with the Company’s Continuous Improvement initiatives, resulted in a record year and puts the Company in a position to profitably support its Customers’ global growth plans. These improvements were slightly offset by increases in purchased raw material and freight costs.
Following is financial information forproduct within the Company’s Engine and Industrial Products segments.segments and a comparison of earnings before income taxes. Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments, andsuch as interest income and interest expense. See further discussion of segment information in Note K of the Company’s Notes to Consolidated Financial Statements.
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|
|
| Engine |
| Industrial |
| Corporate & |
| Total |
| ||||
|
| (thousands of dollars) |
| ||||||||||
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 1,440,495 |
| $ | 853,534 |
| $ | — |
| $ | 2,294,029 |
|
Earnings before income taxes |
|
| 211,255 |
|
| 123,871 |
|
| (22,863 | ) |
| 312,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 1,126,007 |
| $ | 751,057 |
| $ | — |
| $ | 1,877,064 |
|
Earnings before income taxes |
|
| 155,833 |
|
| 91,084 |
|
| (16,741 | ) |
| 230,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 1,027,685 |
| $ | 840,944 |
| $ | — |
| $ | 1,868,629 |
|
Earnings before income taxes |
|
| 85,896 |
|
| 87,427 |
|
| (11,898 | ) |
| 161,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2014 |
| 2013 |
| 2012 |
| |||
|
| (thousands of dollars) |
| |||||||
Engine Products segment: |
|
|
|
|
|
|
|
|
|
|
Off-Road Products |
| $ | 342,205 |
| $ | 358,834 |
| $ | 376,870 |
|
On-Road Products |
|
| 130,029 |
|
| 128,446 |
|
| 163,934 |
|
Aftermarket Products* |
|
| 1,012,165 |
|
| 912,717 |
|
| 922,660 |
|
Aerospace and Defense Products |
|
| 99,628 |
|
| 104,191 |
|
| 106,676 |
|
Total Engine Products segment |
|
| 1,584,027 |
|
| 1,504,188 |
|
| 1,570,140 |
|
Industrial Products segment: |
|
|
|
|
|
|
|
|
|
|
Industrial Filtration Solutions Products |
|
| 553,356 |
|
| 529,751 |
|
| 553,453 |
|
Gas Turbine Products |
|
| 156,860 |
|
| 232,922 |
|
| 180,669 |
|
Special Applications Products |
|
| 179,223 |
|
| 170,087 |
|
| 188,986 |
|
Total Industrial Products segment |
|
| 889,439 |
|
| 932,760 |
|
| 923,108 |
|
Total Company |
| $ | 2,473,466 |
| $ | 2,436,948 |
| $ | 2,493,248 |
|
* Includes replacement part sales to the Company’s OEM Customers | |
|
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|
|
|
|
|
|
|
|
|
|
| Engine |
| Industrial |
| Corporate & |
| Total |
| ||||
|
| (thousands of dollars) |
| ||||||||||
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 1,584,027 |
| $ | 889,439 |
| $ | — |
| $ | 2,473,466 |
|
Earnings before income taxes |
|
| 233,920 |
|
| 133,978 |
|
| (7,195 | ) |
| 360,703 |
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 1,504,188 |
| $ | 932,760 |
| $ | — |
| $ | 2,436,948 |
|
Earnings before income taxes |
|
| 220,892 |
|
| 139,108 |
|
| (11,819 | ) |
| 348,181 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 1,570,140 |
| $ | 923,108 |
| $ | — |
| $ | 2,493,248 |
|
Earnings before income taxes |
|
| 227,941 |
|
| 149,249 |
|
| (6,410 | ) |
| 370,780 |
|
ForThe Company’s overall sales increased compared to the twelve months ended July 31, 2010 and 2009, net sales reflect the reclassification of $31,636 and $25,724, respectively, earnings before income taxes reflect a reclassification of $5,360 and $2,099, respectively, as a result of an internal reorganization of Industrial Hydraulics from Industrial Products to Engine Products, which became effective August 1, 2010.
prior year period. Many factors contributed to the Company’s results for each of the Company’s reportingits reportable segments for Fiscal 2011, including an improvement2014. The Company saw mixed conditions in global economic conditions,its OEM first-fit equipment end markets with some improving, some stable, and some weakening. Conditions were better for aftermarket sales as the Company saw continued strength in demand for replacement filters in both its Engine and Industrial end markets. These sales increases were partially offset by a 32.7 percent decrease in its Gas Turbine sales from Fiscal 2013 sales of $232.9 million. As the Company has discussed previously, there was a large increase in the Company’s program of Continuous Improvement initiatives, new product introductions, emerging market growth,gas turbine shipments in Fiscal 2013, and the expansion ofoverall industry is now absorbing that new electrical generation capacity, resulting in the Fiscal 2014 decrease over the prior year period. The Company’s distribution capabilities.sales increased in Europe by $49.6 million, or 7.3 percent, and in the Americas by $27.3 million, or 2.4 percent, compared to Fiscal 2013, partially offset by a $29.1 million, or 5.3 percent, decrease in Asia.
In the Engine Products segment, the Company experienced increasedmixed results in its end-markets. Off-Road Product sales in all end-markets and regions with the exception of Aerospace and Defense Products. The earnings improvement for the current fiscal year was primarilydecreased by 4.6 percent driven by better absorption of fixed costs due to improved volumes at our manufacturing plants,weakness in mining and Continuous Improvement initiatives. Theagricultural equipment markets, which was partially offset by an improving construction equipment market. Aftermarket Products sales increases wereincreased 10.9 percent, driven by continued improvementincreases in equipment utilization rates in the mining, construction, and transportation industries globally. The Off-Road Product sales increase is driven by higher demand for agriculture and miningof equipment due to continued strong commodity prices and improvedfleets, increased sales of heavy construction equipment, which was duethe Company’s proprietary replacement filters, and expansion of the Company’s product portfolio and distribution. PowerCore brand replacement filter sales contributed $15.4 million to increased global infrastructure spending, especially in developing economies.the increase over the prior year. On-Road Products sales improvedincreased by 1.2 percent, primarily due to growth after the Euro VI diesel emissions regulations went into effect January 1, 2014. Earnings before income taxes as North America and Europe heavy truck build rates continued rebounding.a percentage of Engine Products segment sales of 14.8 percent increased slightly from 14.7 percent in the prior year.
In the Industrial Products segment, where many product lines are later economic cycle businesses, sales increaseddecreased primarily due to improving global economies leadinga 32.7 percent decrease in Gas Turbine Systems products due to greater Customer demand. Infewer shipments of large systems used in power generation. Earnings before income taxes as a percentage of Industrial Products segment sales of 15.1 percent increased from 14.9 percent in the prior year. Industrial Filtration Solutions Products sales of new dust collection equipment and replacement filters continued to grow. Gas Turbine Products sales remained slowincreased 4.5 percent due to static Customer demand for large gas turbine power generation projects as a result of unchanged global power generation requirements. The increasestrong replacement air filter sales and improved manufacturing activity. This was partially offset by continued soft new equipment sales, due to the continued weak capital spending environment, particularly in salesthe Americas. Sales in Special Applications Products isincreased by 5.4 percent due to strong salesan increase in certain product lines servingdemand for the membrane,Company’s disk drive, semiconductor, imaging, and venting end markets.
Following are net salesproducts, partially offset by weakness in industrial end-markets impacting the Company’s membrane product within both the Engine and Industrial Products segments:sales.
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| 2011 |
| 2010 |
| 2009 |
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Engine Products segment: |
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Off-Road Products |
| $ | 327,557 |
| $ | 222,329 |
| $ | 243,691 |
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Aerospace and Defense Products |
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| 104,883 |
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| 111,977 |
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| 119,094 |
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On-Road Products |
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| 127,107 |
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| 81,874 |
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| 71,958 |
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Aftermarket Products* |
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| 861,393 |
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| 691,899 |
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| 561,846 |
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Retrofit Emissions Products |
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| 19,555 |
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| 17,928 |
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| 31,096 |
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Total Engine Products segment |
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| 1,440,495 |
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| 1,126,007 |
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| 1,027,685 |
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Industrial Products segment: |
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Industrial Filtration Solutions Products |
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| 507,646 |
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| 423,050 |
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| 477,908 |
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Gas Turbine Products |
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| 154,726 |
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| 150,131 |
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| 206,760 |
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Special Applications Products |
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| 191,162 |
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| 177,876 |
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| 156,276 |
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Total Industrial Products segment |
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| 853,534 |
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| 751,057 |
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| 840,944 |
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Total Company |
| $ | 2,294,029 |
| $ | 1,877,064 |
| $ | 1,868,629 |
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Outlook
The Company forecasts continued expansionfollowing Outlook excludes the impact of the Company’s pending acquisition of Northern Technical L.L.C., which is expected to close in manySeptember 2014. See Note P of its end markets, with higher growth in emerging economies. The Company forecasts its full year Fiscal 2012 EPSthe Company’s Notes to be between $3.15 and $3.45.Consolidated Financial Statements.
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| • | The Company |
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• | The Company’s Fiscal 2015 tax rate is anticipated to be between 27 and 30 percent. | |
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| • | The |
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| • | The Company projects that cash generated by its operating activities will be between |
Engine Products – The Company forecasts full year sales to increase 8 to 15 percent, including the impact of foreign currency translation.
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Industrial Products - The Company forecasts full year FY12 sales to increase 7 to 15 percent, including the impact of foreign currency translation.
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Fiscal 20112014 Compared to Fiscal 20102013
Engine Products SegmentThe Engine Products segment sells to OEMs in the construction, mining, agriculture, aerospace, defense, and truck markets, and to independent distributors, OEM dealer networks, private label accounts, and large equipment fleets. Products include air filtration systems, exhaust and emissions systems, liquid filtration systems including hydraulics, fuel and lube, and replacement filters.
Sales for the Engine Products segment were $1,440.5$1,584.0 million, an increase of 27.95.3 percent from $1,126.0 million in the prior year. Engine Products sales in the United States increased by 25.9 percent in$1,504.2 million. Fiscal 2011 compared to Fiscal 2010. International2014 Engine Products sales increased 29.8by 11.6 percent fromin Europe and 5.3 percent in the prior year.Americas, partially offset by a decrease of 0.5 percent in Asia, compared to Fiscal 2013. The impact of foreign currency increaseddecreased total sales by $31.5$13.7 million, or 2.80.9 percent. Earnings before income taxes as a percentage of Engine Products segment sales of 14.7 percent increased from 13.8 percent in the prior year. The earnings improvement for the current fiscal year was driven by better absorption of fixed costs due to improved volumes and the Company’s ongoing Continuous Improvement initiatives, partially offset by increased commodity costs compared to the prior year. There were $1.9 million in restructuring expenses for the Engine Products segment in the prior year.
Worldwide sales of Off-Road Products were $327.6$342.2 million, an increasea decrease of 47.34.6 percent from $222.3$358.8 million in the prior year. Sales in the United States increased 35.8declined 13.6 percent over the prior fiscal year. Internationally, sales of Off-Road Products were up 56.0 percent from the prior year, with sales increasing in Asia and Europe6.4 percent in the Americas, partially offset by 58.2growth of 2.7 percent and 55.6 percent, respectively.in Europe. The Company’s overall increase wassales decreases were driven by higher demand for agriculture, construction, andcontinued weakness in mining equipment markets and a decline in the agricultural equipment market, driven by anticipated lower farm cash receipts in key grain producing regions moderating agricultural sales. These decreases were partially offset by an improving construction equipment market, particularly in North America, and new program wins in Europe.
Worldwide sales of On-Road Products were $130.0 million, an increase of 1.2 percent from $128.4 million in the prior year. Sales increased 37.5 percent in Europe, partially offset by sales decreases of 4.2 percent in the Americas and 2.7 percent in Asia. The increase in Europe was due primarily to growth after the Euro VI diesel emissions regulations went into effect January 1, 2014. Sales decreased in the Americas primarily due to continued strong commodity prices and improvedlower emissions sales in that region for an OEM program the Company no longer supplies, totaling $6.3 million.
Worldwide sales of heavy construction equipment, which was due to increased global infrastructure spending, especially in developing economies. Off-RoadAftermarket Products saleswere $1,012.2 million, an increase of 10.9 percent from $912.7 million in the U.S. also benefited from market share gains on new platforms that began production during calendar year 2011. Theseprior year. Sales increased 14.8 percent in Europe, 12.3 percent in the Americas, and 6.6 percent in Asia. The overall sales increases were slightly offsetprimarily driven by U.S. residential and non-residential construction markets, which showed continued weakness, resultingincreases in lowerutilization rates of equipment fleets, increased sales of the Company’s products into those markets.proprietary replacement filters, and expansion of the Company’s product portfolio and distribution. PowerCore brand replacement filter sales contributed $15.4 million to the increase over the prior year period.
Worldwide sales of Aerospace and Defense Products were $104.9$99.6 million, a 6.3decrease of 4.4 percent decrease from $112.0$104.2 million in the prior year. Sales of Aerospace and Defense Products decreased 10.2 percent in the United States decreased 8.7Americas, partially offset by sales increases of 16.6 percent over the prior year as a result of slowdownsin Europe. The sales decrease was due to the continued slowdown in U.S. military activity,ground vehicle spending, which is causing an associated slowdown in government procurement spending for major programs. Internationally,forecasted to continue into Fiscal 2015, partially offset by higher helicopter air filter sales, of Aerospace and Defense Productswhich increased 3.0 percent$2.9 million over the prior year. The international sales increased primarily due to market share gains resulting from improving the Company’s Aerospace distribution capabilities in Europe.
Worldwide sales of On-Road Products were $127.1 million, an increase of 55.2 percent from $81.9 million in the prior year. On-Road Products sales in the United States increased 86.0 percent from the prior year. Class 8 build rates increased 47.8 percent and medium duty truck build rates increased 37.1 percent over the prior year. International On-Road Products sales increased 27.4 percent from the prior year, driven by increased sales in Europe of 45.6 percent. This increase is consistent with the increase in European build rates. The overall sales increase was a result of an increase in Customer truck build rates, higher content per truck, and a slightly higher market share.
Worldwide Engine Aftermarket Products sales of $861.4 million increased 24.5 percent from $691.9 million in the prior year. Sales in the United States increased 26.3 percent over the prior year. International sales increased 23.1
percent from the prior year, primarily driven by sales increases in Asia, Latin America and Europe of 37.8 percent, 25.7 percent, and 13.5 percent, respectively. The sales increases in the U.S. and internationally were attributable to improved On-Road and Off-Road equipment utilization rates from a year ago, the Company’s increased distribution and market share growth, and the continued increase in the percentage of equipment in the field that uses the Company’s proprietary filtration systems.
Worldwide sales of Retrofit Emissions Products were $19.6 million, an increase of 9.1 percent from $17.9 million in the prior year. The Company’s Retrofit Emissions Products sales are solely in the United States. Sales of Retrofit Emissions Products increased overall, but challenges still remain in the supply chain for certain components and delays in regulatory approval for certain of the Company’s products have impacted the Company’s sales.
Industrial Products SegmentThe Industrial Products segment sells to various industrial distributors, dealers, and end-users, OEMs of gas-fired turbines, and OEMs and end-users requiring clean air. Products include dust, fume, and mist collectors, compressed air purification systems, air filtration systems for gas turbines and compressors, PTFE membrane basedmembrane-based products, and specialized air and gas filtration systems for various applications including computer hard disk drives.drives and other electronic equipment.
Sales for the Industrial Products segment were $853.5$889.4 million, an increasea decrease of 13.64.6 percent from $751.1$932.8 million in the prior year. InternationalThis result was driven by a 32.7 percent sales decline in Gas Turbine Products, partially offset by sales increases in Special Applications Products and Industrial Filtration Solutions Products of 5.4 percent and 4.5 percent, respectively. Industrial Products sales increased 8.5decreased by 9.8 percent in Asia and sales4.9 percent in the United States increased 27.2Americas, and grew by 2.0 percent from the prior year.in Europe compared to Fiscal 2013. The impact of foreign currency increaseddecreased total sales by $18.3$2.3 million, or 2.40.3 percent. Earnings before income taxes as a percentage of Industrial Products segment sales of 14.5 percent increased from 12.1 percent in the prior year. The improvement in earnings as a percent of sales over the prior year was driven by better leverage of fixed operating costs and better plant utilization. Restructuring expenses in Fiscal 2011 were $0.7 million, a decrease from $8.3 million in Fiscal 2010.
Worldwide sales of Industrial Filtration Solutions Products of $507.6were $553.4 million, increased 20.0a 4.5 percent increase from $423.1$529.8 million in the prior year. Sales increased 9.4 percent, 7.9 percent, and 1.7 percent in the United States,Asia, Europe, and Asia increased 25.3 percent, 12.9 percent, and 26.2 percent,the Americas, respectively. The increased sales were due to increased manufacturing activity, higher investment in capital equipment by manufacturers, and the continued strengthening ofStrong replacement air filter sales, due to utilization of existing equipment. North American general industrialimproved manufacturing activity, remained strong as evidencedwere partially offset by a 110 percent increase in machine tool consumptioncontinued soft new dust collector equipment sales, due to the continued weak capital spending environment, particularly in the United States during Fiscal 2011Americas. The externally published durable goods index in the U.S., which has historically been a leading indicator for equipment sales, increased 5.4 percent as compared to Fiscal 2010.last year.
Worldwide sales of Gas Turbine Products were $154.7$156.9 million, an increasea decrease of 3.132.7 percent from $150.1$232.9 million in the prior year. Gas Turbine Products sales are typically large systems and, as a result, the Company’s shipments and revenues fluctuate from period to period. Sales slightly improvedof Gas Turbine Products systems were down for the year, primarily due to additional demand for smallerfewer shipments of large systems used in power generation compared to the oil and gas industry asprior year period. There was a result of higher average oil prices and anlarge increase in Aftermarket sales for replacement filters. These increases were slightly offset by a declinethe Company’s gas turbine shipments in Fiscal 2013, and the sales of air filtration systems for large turbines used for power generation.overall industry is now absorbing that new electrical generation capacity, driving the Fiscal 2014 decrease over the prior year period.
Worldwide sales of Special Applications Products were $191.2$179.2 million, a 7.55.4 percent increase from $177.9$170.1 million in the prior year. International sales of Special Application ProductsSales increased 6.110.6 percent overand 5.9 percent in Europe and Asia, respectively, from the prior year, primarilypartially offset by a sales decrease in Europe, which increased 47.0the Americas of 1.5 percent. Domestic Special Application Products sales increased 17.1 percent. The global sales increases were driven by strong salesa worldwide increase in some of the Company’s product lines serving the membrane, semiconductor, imaging, and venting end markets, partially offset by a slight decline indemand for the Company’s disk drive, filter sales due to soft demandsemiconductor, and venting products, partially offset by weakness in industrial end-markets impacting the global end market for hard disk drives. Overall, the decline in disk drive sales is comparable with published disk drive build rates.Company’s membrane product sales.
Consolidated ResultsThe Company reported net earnings for Fiscal 20112014 of $225.3$260.2 million compared to $166.2$247.4 million in Fiscal 2010,2013, an increase of 35.65.2 percent. Diluted net earnings per share were $2.87,$1.76, up 36.77.3 percent from $2.10$1.64 in the prior year. The Company’s operating income of $315.3$355.7 million increased by 3.6 percent from prior year operating income of $238.2 million by 32.3 percent.$343.3 million.
The table below shows the percentage of total operating income contributed by each segment for each of the last three fiscal years. Corporate and Unallocated includes corporate earnings and expenses determined to be non-allocable to the segments, such as interest income and interest expense:
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| 2011 |
| 2010 |
| 2009 |
| |||
Engine Products |
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| 64.1 | % |
| 63.1 | % |
| 45.7 | % |
Industrial Products |
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| 38.7 | % |
| 37.8 | % |
| 50.6 | % |
Corporate and Unallocated |
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| (2.8 | )% |
| (0.9 | )% |
| 3.7 | % |
Total Company |
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| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
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| 2014 |
| 2013 |
| 2012 |
| |||
Engine Products |
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| 61.5 | % |
| 60.8 | % |
| 59.1 | % |
Industrial Products |
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| 37.9 | % |
| 39.7 | % |
| 40.3 | % |
Corporate and Unallocated |
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| 0.6 | % |
| (0.5 | )% |
| 0.6 | % |
Total Company |
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| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
International operating income, prior to corporate expense allocations, totaled 80.279.7 percent of consolidated operating income in Fiscal 20112014 as compared to 80.374.0 percent in Fiscal 2010.2013. Total international operating income increased 32.111.6 percent from the prior year. This increase is attributable to increased Customer sales and the leverage of fixed costs with the higher volume of sales. The table below shows the percentage of total operating income contributed by each major geographic region for each of the last three fiscal years:
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| 2011 |
| 2010 |
| 2009 |
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| 2014 |
| 2013 |
| 2012 |
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United States |
| 19.8 | % |
| 19.7 | % |
| 22.1 | % |
| 20.3 | % |
| 26.0 | % |
| 30.3 | % | ||
Europe |
| 31.0 | % |
| 24.6 | % |
| 23.3 | % |
| 33.7 | % |
| 31.6 | % |
| 29.9 | % | ||
Asia - Pacific |
| 39.6 | % |
| 45.3 | % |
| 43.5 | % |
| 33.8 | % |
| 30.3 | % |
| 31.1 | % | ||
Other |
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| 9.6 | % |
| 10.4 | % |
| 11.1 | % |
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| 12.2 | % |
| 12.1 | % |
| 8.7 | % |
Total Company |
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| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
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| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
For more information regarding the Company’s net sales by geographic region, see Note K to the Consolidated Financial Statements.
Gross margin for Fiscal 20112014 was 35.5 percent, anor a 0.7 percent increase from 35.134.8 percent in the prior year. The improvedincrease in gross margin is primarily attributable to positive mix impacts from the reduction in large Gas Turbine projects, and a higher percentage of replacement filter sales, which was due to strong utilization of existing equipment in the resultfield and the Company’s focus on innovative products that capture higher levels of better fixed cost absorption andaftermarket sales. Overall, product mix had a positive 50 basis points impact on gross margin. In addition, the Company’s ongoing Continuous Improvement initiatives, which include Lean, Kaizen, Six Sigma, and cost reduction efforts, improved gross margin by 60 basis points. Offsetting these benefits was a 40 basis points reduction in margin from higher engineering costs and lower fixed cost absorption. Within gross profit, the Company incurred $1.7 million in restructuring charges compared to $1.6 million in Fiscal 2013. The Fiscal 2014 expenses were employee severance costs related to reductions in workforce.
The principal raw materials that the Company uses are steel, filter media, and petroleum-based products. Purchased raw materials represents approximately 60 to 65 percent of the Company’s cost of goods sold. Of that amount, steel, including fabricated parts, represents approximately $27 million, which were partially25 percent. Filter media represents approximately 15 to 20 percent and the remainder is primarily made up of petroleum-based products and other components. The cost the Company paid for steel during Fiscal 2014, varied by grade, but in aggregate, it slightly increased during the fiscal year. The Company’s cost of filter media also varies by type and slightly decreased during the fiscal year. The cost of petroleum-based products (plastics, rubber, and adhesives) slightly decreased during the fiscal year. The Company anticipates a moderately unfavorable impact from commodity prices in Fiscal 2015, as compared to Fiscal 2014, specifically for steel and petroleum-based products, based on recent market information for purchased commodities. The Company strives to recover or offset by increases in purchased raw material (steel and petrochemical based raw materials) of approximately $19 million, net ofcost through selective price increases to Customers. Within gross margin,its Customers and through the Company incurred minimal restructuringCompany’s Continuous Improvement initiatives, which include material substitutions, process improvements, and asset impairment charges during the fiscal year, compared to $7.5 million last year. The fiscal 2010 charges were primarily related to a downsizing at a plant in Germany and included severance and asset impairments for the building and inventory.product redesigns.
Operating expenses for Fiscal 20112014 were $498.5$522.1 million or 21.721.1 percent of sales, as compared to $420.5$503.8 million or 22.420.7 percent in the prior year. The decreaseincrease in operating expenses as a percentagepercent of sales is driven bywas primarily due to higher incentive compensation expenses, the higher volume of sales and benefits fromincremental expenses related to the Company’s Continuous Improvement initiatives. In addition, the current year included a $1.9 million reductionGlobal ERP Project and increased travel expenses, which contributed 90 basis points in restructuring expenses compared to Fiscal 2010.total. These benefitsincreases were partially offset by costs for our strategicimproved fixed cost leverage and lower warranty expenses, which reduced the Company’s operating investments totaling $13.9expenses as percent of sales by 50 basis points. Restructuring expenses included in operating expenses were $0.4 million for the fiscal year, and higher compensationwhich were employee severance costs related expenses such as incentive compensationto a reduction in workforce.
Table of $9.2 million and pension expense of $5.1 million over the prior year.Contents
Interest expense of $12.5$10.2 million increased $0.5decreased $0.7 million from $12.0$10.9 million in the prior year. Net otherOther income, net totaled $9.5$15.2 million in Fiscal 2011 up2014, down from $3.9$15.8 million in the prior year. The increasedecrease of $5.6$0.6 million overin other income was driven by $0.9 million of restructuring expenses related to the sale of a facility in Germany. In addition, the prior year is primarily attributable to increased interest incomeincluded the impact of $2.0 million, increased earnings from non-consolidated joint ventures of $2.1 million, and increased royalty income of $1.4 million. Components of other income for Fiscal 2011a favorable insurance recovery. These decreases were as follows: interest income of $3.3 million, earnings from non-consolidated joint ventures of $4.1 million, royalty income of $8.7 million, partially offset by charitable donations of $1.1 million,an increase in foreign exchange lossesgains of $4.5$1.5 million and other miscellaneousan increase of $1.4 million in income and expense items resulting in expenses of $1.0 million.generated from the Company’s joint venture with Caterpillar.
The effective tax rate for Fiscal 20112014 was 27.9 percent compared to 27.829.0 percent in Fiscal 2010.2013. The average underlyingdecrease in the effective tax rate remained at 29.7 percent, while discrete items were alsois primarily due to the favorable settlement of a consistent percentagetax audit, the remeasurement of pre-tax profits. Fiscal 2010 contained $4.3 millioncertain deferred tax assets, and a favorable shift in the mix of discreteearnings between tax benefits fromjurisdictions. This was partially offset by tax costs associated with certain foreign dividend distributions and the expiration of the statute of limitations at foreign subsidiaries. Fiscal 2011 contained $5.8 million of discrete tax benefits primarily fromResearch and Experimentation Credit in the release of reserves afterU.S. in the favorable conclusions of foreign tax audits, the expiration of statutes in various jurisdictions, and the positive impact of dividends from some foreign subsidiaries.current year.
Total backlog at July 31, 2011,2014, was $816.4$748.2 million, up 29.94.5 percent from the same period in the prior year. Backlog is one of many indicators of business conditions in the Company’s markets. However, it is not always indicative of future results for a number of reasons, including short lead times in the Company’s replacement parts businesses and the timing of the receipt of orders in many of the Company’s Engine OEM and Industrial markets. In the Engine Products segment, total open order backlog increased 36.6decreased 1.1 percent from the prior year. In the Industrial Products segment, total open order backlog increased 14.918.4 percent from the prior year. Because some of the change in backlog can be attributed to a change in the ordering patterns of the Company’s Customers and/or the impact of foreign exchange translation rates, it may not necessarily correspond to future sales.
Fiscal 20102013 Compared to Fiscal 20092012
Engine Products SegmentThe Engine Products segment sells to OEMs in the construction, mining, agriculture, aerospace, defense, and truck markets, and to independent distributors, OEM dealer networks, private label accounts, and large equipment fleets. Products include air filtration systems, exhaust and emissions systems, liquid filtration systems including hydraulics, fuel and lube, and replacement filters.
Sales for the Engine Products segment were $1,126.0$1,504.2 million, an increasea decrease of 9.64.2 percent from $1,027.7$1,570.1 million in the prior year.Fiscal 2012 with decreases across all businesses. Fiscal 2013 Engine Products sales decreased by 11.3 percent in Asia, 3.6 percent in the United States remained relativelyAmericas, and were flat in Fiscal 2010Europe compared to Fiscal 2009, increasing only 0.5 percent in the current fiscal year. International Engine Products sales increased 19.6 percent from the prior year.2012. The impact of foreign currency increaseddecreased total sales by $24.9$23.8 million, or 2.41.6 percent. Earnings before income taxes as a percentage of Engine Products segment sales of 13.8 percent increased from 8.4 percent in the prior year. The earnings improvement for the current fiscal year was driven by a greater mix of higher-margin Aftermarket sales versus lower-margin first-fit product sales, better absorption of fixed manufacturing costs due to the increase in production volumes and benefits related to completed restructuring efforts and other Continuous Improvement initiatives. In addition, restructuring expenses for the Engine Products segment were down $5.3 million over the prior year, but this was more than offset by $6.2 million of increased warranty expenses related to Retrofit Emissions Products.
Worldwide sales of Off-Road Products were $222.3$358.8 million, a decrease of 8.84.8 percent from $243.7$376.9 million in the prior year.Fiscal 2012. Sales declined 18.5 percent in Asia and 7.7 percent in the United States decreased 15.0 percent to $95.1 million for the fiscal year. Internationally, sales of Off-Road Products were down 3.4 percent from the prior year, with sales decreasing in Europe by 10.7 percent, which were slightlyAmericas, partially offset by an increasegrowth of 3.0 percent in Off-RoadEurope. The sales in Asia of 7.4 percent. The Company’s overall decrease wasdecreases were driven by a weakness in the early portion of the fiscal year with a gradual strengthening in end-markets in the last half of the fiscal year. This was evident in the gradual improvement of sales to OEMs during the last months of the fiscal year. The first half of the year was down primarily due to declines in spending in the residential and non-residential construction markets. The latter half of the year saw increasesdecline in the mining industryequipment markets as a result of higher commodity prices moderated and improvementsreductions in worldwidemining investments kept production of new mining equipment below Fiscal 2012 levels. Reductions in large non-residential construction activity.and non-building infrastructure projects led to lower demand for larger construction equipment. These decreases were partially offset by strength in the agriculture equipment market globally.
Worldwide sales of On-Road Products were $81.9$128.4 million, an increasea decrease of 13.821.6 percent from $72.0$163.9 million in the prior year. On-Road Products salesFiscal 2012. Sales decreased 31.4 percent in the United States increased 3.4Americas, 19.7 percent from the prior year, primarily asin Asia, and 6.7 percent in Europe. Sales decreases were a result of a slight market share improvement and higher content per truck. The Company performed better thandecrease in global truck builds, especially in the impact dueU.S., as well as OEM Customer initiatives to the change inreduce inventory. According to published industry data, North American Class 8 truck build rates for the year in Class 8 truck builds, which decreased by 3.719.0 percent and medium dutymedium-duty truck build rates which increased 0.3 percent. International On-Road Products sales increased 25.2 percent from the prior year, driven by increased sales in Asia of 45.2 percent, as a result of increased truck exports by the Company’s Japanese OEM Customers to higher growth emerging markets, and rebounding sales in Europe during the second half of the fiscal year.
Worldwide Engine Aftermarket Products sales of $691.9 million increased 23.1 percent from $561.8 million in the prior year. Sales in the United States increased 14.74.9 percent over the prior year. International sales increased 29.7 percent from the prior year, primarily driven by sales increases in Asia, Latin America and Europe of 36.9 percent, 28.9 percent, and 24.7 percent, respectively. The sales increases in the United States and internationally were driven by rebounds in equipment utilization rates in the mining, construction, and transportation industries. The Company also improved its distribution capabilities to be closer to and better serve its Customers and increased sales due to the Company’s recent market share “wins.”Fiscal 2012.
Worldwide sales of Retrofit EmissionsAftermarket Products were $17.9$912.7 million, a decrease of 42.31.1 percent from $31.1$922.7 million in the prior year. The Company’s Retrofit Emissions ProductsFiscal 2012. Sales in Asia and Europe decreased 4.4 percent and 1.8 percent, respectively, while sales are solely in the United States. SalesAmericas grew 3.4 percent. The overall sales decreases were primarily driven by lower utilization rates of Retrofit Emissions Products decreased as a resultequipment across the on-road and off-road equipment markets along with the negative impacts of continuing postponements in the availability of government grant money and delays and losses of regulatory approval for certain of the Company’s products, including the DMF product.foreign currency translation.
Worldwide sales of Aerospace and Defense Products were $112.0$104.2 million, a 6.0decrease of 2.3 percent decrease from $119.1$106.7 million in the prior year.Fiscal 2012. Sales in the United States decreased 9.0 percent over the prior year as a result of slowdowns in government procurement for major defense programs. Internationally, sales of Aerospace and Defense Products increased 8.0were relatively flat over Fiscal 2012 in Europe, while sales decreased 2.2 percent overin the prior year.Americas. The international sales increased primarily asdecrease was due to a resultcontinued slowdown in U.S. military spending.
Table of the startup of recent defense program wins.Contents
Industrial Products SegmentThe Industrial Products segment sells to various industrial end-users,dealers, distributors, OEMs of gas-fired turbines, and OEMs and end-users requiring clean air. Products include dust, fume, and mist collectors, compressed air purification systems, air filtration systems for gas turbines, PTFE membrane basedmembrane-based products, and specialized air and gas filtration systems for various applications including computer hard disk drives.drives and semi-conductor manufacturing.
Sales for the Industrial Products segment were $751.1$932.8 million, a decreasean increase of 10.71.0 percent from $840.9$923.1 million in the prior year. InternationalFiscal 2012 driven by 28.9 percent sales growth in Gas Turbine Products, partially offset by sales decreases in Special Applications Products and Industrial Filtration Solutions Products of 10.0 percent and 4.3 percent, respectively. Fiscal 2013 Industrial Products sales decreased 9.0increased by 2.9 percent and salesin Asia, 0.9 percent in the United States decreased 15.0 percent from the prior year.Americas, and were flat in Europe compared to Fiscal 2012. The impact of foreign currency increaseddecreased sales by $17.2$8.4 million, or 2.00.9 percent. Despite the 10.7 percent decrease in sales, earnings before income taxes as a percentage of Industrial Products segment sales were 12.1 percent, increasing from 10.4 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, increased plant utilization, improved product mix, and Continuous Improvement initiatives. Restructuring expenses in Fiscal 2010 were $8.3 million, a decrease from $10.1 million in Fiscal 2009.
Worldwide sales of Industrial Filtration Solutions Products of $423.1were $529.8 million, decreased 11.5a 4.3 percent decrease from $478.0$553.5 million in the prior year.Fiscal 2012. Sales decreased 13.5 percent and 6.4 percent in Asia and Europe, respectively, partially offset by a sales increase in the United States, Europe and Asia decreased 11.9Americas of 3.4 percent, 12.0compared to Fiscal 2012. Demand for new filtration equipment was weak due to lower capital investment by manufacturers in most of the Company’s major regions. This was partially offset by increased sales of replacement filters for equipment installed previously. Sales were also negatively impacted by foreign currency translation. The externally published durable goods index in the U.S. increased 2.7 percent and 8.0 percent, respectively. Sales in Mexico decreased 20.9 percent induring Fiscal 20102013 as compared to Fiscal 2009. Overall, the Company experienced weak sales conditions for its Industrial Filtration Solutions Products during the beginning of the fiscal year, with conditions improving towards the end of the fiscal year. The decreased sales in Europe and Asia were due to reduced demand for industrial dust collectors and compressed air purification systems due to the downturn in general manufacturing activity. Domestic sales decreased due to a decline in general industrial activity that did not stabilize until late in the fiscal year, as evidenced by a 19 percent drop in machine tool consumption in the United States during fiscal year 2010 as compared to fiscal year 2009.2012.
Worldwide sales of Gas Turbine Products were $150.1$232.9 million, a decreasean increase of 27.428.9 percent from $206.8$180.7 million in the prior year.Fiscal 2012. Gas Turbine Products sales are typically large systems and, as a result, the Company’s shipments and revenues fluctuate from period to period. Incoming orders declined 9 percent in Fiscal 2010 versus Fiscal 2009, a reflectionSales of the reducedlarge Gas Turbine Products were strong due to high demand for the large systems used in power generation projects globally. Sales remained slow due to a decelerationprimarily in Customerthe Middle East and Asia. The Company also experienced moderate demand for largeits smaller systems used in oil and gas turbine power generation projects as a resultapplications and increased sales of the decrease in global electrical power requirements and also as a result of one Customer’s increased utilization of its own internal filtration businesses.replacement filters for systems previously installed.
Worldwide sales of Special Applications Products were $177.9$170.1 million, a 13.810.0 percent increasedecrease from $156.3$189.0 million in the prior year. Domestic Special Application ProductsFiscal 2012. Sales decreased 13.0 percent and 11.7 percent in Europe and Asia, respectively, from Fiscal 2012, partially offset by a sales increased 5.8 percent, driven by an increase in the Americas of 1.0 percent. The sales decline was primarily due to industrial Customers of PTFE membranes. Internationala global decline in computer sales of Special Application Products increased 15.1 percent over the prior year, primarilywhich resulted in Asia, which increased 18.6 percent. These international sales increases were driven by improvedlower demand for the Company’s Customers’ hard disk drive filters. According to the International Data Corporation, the number of disk drives asproduced in Fiscal 2013 declined 9.2 percent from the end-markets for computers, data storage devices, and other electronic products rebounded. Overall,Fiscal 2012 period. In addition, weakness in industrial end markets resulted in lower sales of the Company’s market growth is comparable with published disk drive build rates.membrane products.
Consolidated ResultsThe Company reported net earnings for Fiscal 20102013 of $166.2$247.4 million compared to $131.9$264.3 million in Fiscal 2009, an increase2012, a decrease of 26.06.4 percent. Diluted net earnings per share were $2.10, up 25.7$1.64, down 5.2 percent from $1.67$1.73 in the prior year.Fiscal 2012. The Company’s operating income of $238.2$343.3 million increaseddecreased from prior yearFiscal 2012 operating income of $170.0$363.0 million by 40.25.4 percent.
The table below shows the percentage of total operating income contributed by each segment for each of the last three fiscal years. Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments such as interest income and interest expense:
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| 2010 |
| 2009 |
| 2008 |
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| 2013 |
| 2012 |
| 2011 |
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Engine Products |
| 63.1 | % |
| 45.7 | % |
| 61.1 | % |
| 60.8 | % |
| 59.1 | % |
| 64.1 | % | ||
Industrial Products |
| 37.8 | % |
| 50.6 | % |
| 42.1 | % |
| 39.7 | % |
| 40.3 | % |
| 38.7 | % | ||
Corporate and Unallocated |
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| (0.9 | )% |
| 3.7 | % |
| (3.2 | )% |
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| (0.5 | )% |
| 0.6 | % |
| (2.8 | )% |
Total Company |
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| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
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| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
International operating income, prior to corporate expense allocations, totaled 80.374.0 percent of consolidated operating income in Fiscal 20102013 as compared to 77.969.7 percent in Fiscal 2009.2012. Total international operating income increased 44.64.3 percent from the prior year. This increase is attributable to increased Customer sales and stronger foreign currencies.Fiscal 2012. The table below shows the percentage of total operating income contributed by each major geographic region for each of the last three fiscal years:
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| 2010 |
| 2009 |
| 2008 |
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| 2013 |
| 2012 |
| 2011 |
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United States |
| 19.7 | % |
| 22.1 | % |
| 10.6 | % |
| 26.0 | % |
| 30.3 | % |
| 19.8 | % | ||
Europe |
| 24.6 | % |
| 23.3 | % |
| 43.3 | % |
| 31.6 | % |
| 29.9 | % |
| 31.0 | % | ||
Asia - Pacific |
| 45.3 | % |
| 43.5 | % |
| 37.9 | % |
| 30.3 | % |
| 31.1 | % |
| 39.6 | % | ||
Other |
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| 10.4 | % |
| 11.1 | % |
| 8.2 | % |
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| 12.1 | % |
| 8.7 | % |
| 9.6 | % |
Total Company |
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| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
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| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
Gross margin for Fiscal 20102013 was 35.134.8 percent, an increaseor a 0.2 percent decrease from 31.635.0 percent in the prior year.Fiscal 2012. The improveddecrease in gross margin wasis primarily attributable to the resultmix impact of improvedlarge Gas Turbine project shipments and the impact of lower absorption of fixed cost absorption, a higher mix of replacement filter sales, savingscosts due to the lower production volumes in the Company’s plants. These decreases were partially offset by the benefits from restructuring actions andthe Company’s ongoing Continuous Improvement initiatives.initiatives, which include Lean, Kaizen, Six Sigma, and cost reduction efforts. Within gross margin,profit, the Company incurred
$7.5 $1.6 million in restructuring charges compared to minimal restructuring charges during Fiscal 2012. The Fiscal 2013 expenses were employee severance costs related to a reduction in workforce.
The principal raw materials that the Company uses are steel, filter media, and asset impairment chargespetroleum-based products. Purchased raw materials represents approximately 60 to 65 percent of the Company’s cost of goods sold. Of that amount, steel, including fabricated parts, represents approximately 25 percent. Filter media represents approximately 15 to 20 percent and the remainder is primarily made up of petroleum-based products and other components. The cost the Company paid for steel during Fiscal 2013, varied by grade, but in aggregate, it slightly decreased during the fiscal year,year. The Company’s cost of filter media also varies by type and slightly increased at the end of the fiscal year. The cost of petroleum-based products (plastics, rubber, and adhesives) was generally flat. Commodity prices in aggregate generally decreased throughout Fiscal 2013 as compared to $10.1 million last year. This year’s charges were primarily relatedFiscal 2012. The Company strives to a downsizing at a plant in Germanyrecover or offset material cost through selective price increases to its Customers and included severancethrough the Company’s Continuous Improvement initiatives, which include material substitutions, process improvements, and asset impairments for the building and inventory.product redesigns.
Operating expenses for Fiscal 20102013 were $420.5$503.8 million or 22.420.7 percent of sales, as compared to $419.8$510.7 million or 22.520.5 percent in Fiscal 2012. Restructuring expenses included in operating expenses were $2.4 million for the prior year. Operating expenses asyear, which were employee severance costs related to a percent of sales was relatively flatreduction in workforce. The Company’s ongoing cost containment actions and included $15.1 million of higherlower incentive compensation expense partiallyhelped to offset by a $5.0 million decrease inthe restructuring costs as comparedexpenses, higher pension expenses, and the incremental expenses related to the prior year. During the fiscal year the Company increased warranty accruals due to specific warranty matters in our Retrofit Emissions Products group, recording an expense of $6.2 million for this matter during the year.its Global ERP Project.
Interest expense of $12.0$10.9 million decreased $5.0$0.6 million from $17.0 million in the prior year as a result of reduced debt levels and lower interest rates throughout the year. Net other income totaled $3.9$11.5 million in Fiscal 20102012. Other income, net totaled $15.8 million in Fiscal 2013, down from $8.5$19.3 million in the prior year. ComponentsFiscal. The decrease of $3.5 million in other income for Fiscal 2010 were as follows:was driven by a $1.7 million decrease in interest income, of $1.3 million, earnings from non-consolidated joint ventures of $2.0 million, royalty income of $7.2 million, charitable donations ofa $1.6 million decrease in foreign exchange losses of $4.6gains, and a $1.0 million and other miscellaneous income and expense items resultingdecrease in expenses of $0.4 million.royalty income.
The effective tax rate for Fiscal 20102013 was 27.829.0 percent compared to 18.328.7 percent in Fiscal 2009.2012. The increase in effective tax rate is primarily due to a decreasethe incremental benefits derived in discreteFiscal 2012 from the favorable settlement of tax benefits. Fiscal 2009 contained $19.6 million of discreteaudits. This was partially offset by an increase in tax benefits which predominantly occurredfrom international operations and the retroactive reinstatement of the Research and Experimentation Credit in the second quarter, and primarily related to changes to uncertain tax position reservesU.S. in connection with the effective settlements of court cases and examinations in various jurisdictions covering various years. Fiscal 2010 contained $4.3 million of discrete tax benefits, primarily recorded in the second quarter, from the expiration of the statute of limitations at foreign subsidiaries and other discrete items. Without consideration of discrete items, the average underlying tax rate improved over the prior year to 29.7 percent from 30.4 percent mainly due to the mix of earnings between tax jurisdictions.2013.
Total backlog at July 31, 2010,2013, was $628.3$715.8 million, up 19.0down 10.4 percent from the same period in the prior year.Fiscal 2012. Backlog is one of many indicators of business conditions in the Company’s markets. However, it is not always indicative of future results for a number of reasons, including short lead times in the Company’s replacement parts businesses and the timing of the receipt of orders in many of the Company’s Engine OEM and Industrial markets. In the Engine Products segment, total open order backlog increased 31.5decreased 6.7 percent from the prior year.Fiscal 2012. In the Industrial Products segment, total open order backlog decreased 1.818.4 percent from the prior year.Fiscal 2012. Because some of the change in backlog can be attributed to a change in the ordering patterns of the Company’s Customers and/or the impact of foreign exchange translation rates, it may not necessarily correspond to future sales.
Liquidity and Capital Resources
Financial ConditionAt July 31, 2011,2014, the Company’s capital structure was comprised of $61.0$187.0 million of current debt, $205.7$243.7 million of long-term debt, and $934.7$1,002.5 million of shareholders’ equity. The Company had cash and cash equivalents of $273.5$296.4 million and short-term investments of $127.2 million at July 31, 2011.2014. The ratio of long-term debt to total capital was 18.019.6 percent and 25.58.7 percent at July 31, 20112014 and 2010,2013, respectively.
Total debt outstanding decreased $45.0increased $220.1 million during the year to $266.7$430.8 million outstanding at July 31, 2011.2014, as a result of increases in short-term and long-term borrowings, offset by a decrease in current maturities of long-term debt. Short-term borrowings outstanding at the end of the year were $36.9increased $176.1 million less thandriven by the prior year, and long-term debt decreased $8.1Company drawing $180.0 million (including current maturities) fromon the prior year.Company’s multi-currency revolving credit facility.
The following table summarizes the Company’s cash obligations as of July 31, 2011,2014, for the years indicated (thousands of dollars):
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| Payments Due by Period |
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| Payments Due by Period |
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Contractual Obligations |
| Total |
| Less than 1 |
| 1 - 3 years |
| 3 - 5 years |
| More than 5 |
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| Total |
| Less than |
| 1 - 3 |
| 3 - 5 |
| More than |
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Long-term debt obligations |
| $ | 247,037 |
| $ | 45,595 |
| $ | 101,442 |
| $ | — |
| $ | 100,000 |
|
| $ | 241,051 |
| $ | — |
| $ | — |
| $ | 116,051 |
| $ | 125,000 |
|
Capital lease obligations |
| 796 |
| 428 |
| 360 |
| 8 |
| — |
|
| 3,177 |
| 1,329 |
| 1,766 |
| 82 |
| — |
| ||||||||||
Interest on long-term debt obligations |
| 49,508 |
| 11,946 |
| 19,752 |
| 10,960 |
| 6,850 |
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| 64,861 |
| 10,294 |
| 20,481 |
| 10,836 |
| 23,250 |
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Operating lease obligations |
| 26,579 |
| 10,546 |
| 12,196 |
| 3,006 |
| 831 |
|
| 31,464 |
| 12,877 |
| 13,504 |
| 4,976 |
| 107 |
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Purchase obligations(1) |
| 246,872 |
| 236,709 |
| 9,339 |
| 824 |
| — |
|
| 162,727 |
| 154,297 |
| 8,412 |
| 2 |
| 16 |
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Pension and deferred compensation(2) |
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| 78,324 |
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| 5,070 |
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| 10,533 |
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| 10,372 |
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| 52,349 |
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| 91,504 |
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| 17,913 |
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| 10,670 |
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| 10,597 |
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| 52,324 |
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Total(3) |
| $ | 649,116 |
| $ | 310,294 |
| $ | 153,622 |
| $ | 25,170 |
| $ | 160,030 |
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| $ | 594,784 |
| $ | 196,710 |
| $ | 54,833 |
| $ | 142,544 |
| $ | 200,697 |
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