Filtration Solutions for a Cleaner World
INNOVATIVE TECHNOLOGY. STRONG RELATIONSHIPS. GLOBAL PRESENCE.
2016 Annual Report
W H Y D O N A L D S O N ?
Donaldson is a technology-led filtration company with
a diversified portfolio of global businesses. We partner
with our customers, including some of the world’s largest
original equipment manufacturers, to solve complex filtration
challenges. With our reach, capabilities and diversity, we are
able to provide the extensive resources of an international
company and the personalized service of a local firm.
TOTAL REVENUE
dollars in millions
2,493
2,473
2,437
2,371
2,220
EARNINGS PER SHARE*
$1.73
$1.73
$1.64
$1.58
$1.52
2012
2013
2014
2015
2016
2012
2013
2014* 2015* 2016*
* The fiscal years 2014, 2015 and 2016 reflect
Adjusted EPS, which is a non-GAAP measure.
For reference, the annual report on Form 10-K for
the fiscal year ended in July 31, 2016, includes
reconciliation of GAAP to non-GAAP measures.
TOTAL REVENUE BY GEOGRAPHIC REGIONS
DEAR SHAREHOLDERS,
(Dollars in Millions)
Other
9%
Asia Pacific
20%
$2,220
United States
42%
Europe
29%
TOTAL SALES BY SEGMENT
(Dollars in Millions)
Industrial Products
Segment
37%
$2,220
Engine Products
Segment
63%
TOTAL ENGINE
(Dollars in Millions)
Aftermarket
68%
Aerospace & Defense
7%
$1,391
Off Road
16%
On Road
9%
TOTAL INDUSTRIAL
(Dollars in Millions)
Gas Turbine Systems
18%
$829
Industrial Filtration
Solutions
62%
Special Applications
20%
The past fiscal year was a difficult one for our company,
but we found pockets of success by focusing on things
under our control. We were governed by an unwavering
commitment to our customers, focused on enhancing
operational efficiency, and dedicated to advancing our
strategic priorities. During the year, we made progress
on these priorities, which include growing our core
business and technologies, continued geographic
expansion and growth through acquisitions.
Our core offering, including replacement parts and
innovative products, helped us offset a portion of the
end-market headwinds. Replacement part sales, which
represent more than 55% of total sales, were flat
with the prior year, despite market pressures. In fiscal
2016, we added distributors, increased our global parts
offering and continued to push forward with innovative
products as we sought to grow our business in a flat
environment.
Another key area of growth is engine liquid. Beyond
winning new programs in fiscal 2016, we generated
a year-over-year sales increase of several percentage
points from fiscal 2015. Our success was due in part
to Synteq XP, an advanced technology solution that
effectively handles the complexities associated with bio-
and low-sulfur diesels and high fuel injector pressures.
We are excited about the long-term prospects as we
further penetrate the first-fit liquid business.
In addition to pursuing sales growth opportunities,
we intensified our focus on operational efficiency. As
has always been the case, we exercised day-to-day
discipline in managing expenses, and we also made the
difficult decision to restructure parts of the company.
This process reflected our need to protect the bottom
line without sacrificing future growth opportunities. It
was not easy, but I am confident we struck the right
balance, and we are pleased to have increased our fiscal
2016 operating margin from the prior year.
As we head into fiscal 2017, market conditions will likely
remain stagnant. Given the lack of economic tailwinds,
we are pursuing business-specific growth opportunities
“
The past fiscal year was a difficult one for our company, but we found
pockets of success by focusing on things under our control. We were
governed by an unwavering commitment to our customers, focused
on enhancing operational efficiency, and dedicated to advancing our
strategic priorities.
“
Tod E. Carpenter, President and CEO
and remaining focused on operational efficiency. We
for their contributions to our success. Every day they
also plan to leverage recent investments in the business
put our customers first, and I am grateful for their focus,
to help offset end-market pressures.
commitment and resilience.
Our most notable investments are related to capacity
I am also very thankful for our customers, who continue
expansion, growth through acquisitions and system
letting us earn the opportunity to solve problems with
capabilities. Over the past several years we expanded
them. I am confident that our work last year built upon
distribution in Latin America, and in fiscal 2016 we
our already-strong relationships; we are always working
began producing both air and liquid filters at a new
to maintain these relationships because they are critical
facility in Poland. These investments extend our reach in
to our success.
these important markets, giving us near- and long-term
sales and profit benefits.
Finally, I thank all of you, our shareholders, for your
continued support of our company. We remain focused
We completed the acquisition of Engineered Products
on creating shareholder value, and I embrace that
Company, or EPC, in fiscal 2016, and we finalized the
opportunity.
Partmo transaction at the beginning of fiscal 2017.
The acquisition of EPC gives us access to sensors and
This culture of putting our stakeholders first was
indicators that monitor filter life, which is becoming
exemplified by our recently retired Chairman, Bill
increasingly important to our customers. Partmo will
Cook. During his 11 years as president and CEO,
strengthen our aftermarket business in Latin America
his commitment to building and maintaining strong
while also giving us our first production facility for engine
relationships with our customers while aligning our
liquid in that region.
perspective with that of our shareholders continues to
drive us today. I am appreciative of all that he has done
We also recently completed our four-year ERP
for our company and we all wish him the best in his
implementation. I am incredibly proud of how our team
retirement.
executed this project. We maintained a customer-first
approach, and we delivered on our commitments. This
new global system will give us better visibility into our
Sincerely,
business than we have ever had before, and we are
excited to begin capturing the benefits.
I am very proud of our employees and their ability to
manage the business responsibly in such a complicated
and uncertain environment, and I want to thank them
Tod E. Carpenter
President and CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(cid:20364) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended
July 31, 2016 or
(cid:20362) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period
from __________ to __________
Commission File Number: 1-7891
DONALDSON COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1400 West 94th Street, Minneapolis, Minnesota
(Address of principal executive offices)
41-0222640
(I.R.S. Employer
Identification No.)
55431
(Zip Code)
Registrant’s telephone number, including area code: (952) 887-3131
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $5 Par Value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:20364) Yes (cid:20362) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. (cid:20362) Yes (cid:20364) No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. (cid:20364) Yes (cid:20362) No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). (cid:20364) Yes (cid:20362) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (cid:20364)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:20364)
Non-accelerated filer (cid:20362) (Do not check if a smaller reporting company)
Accelerated filer (cid:20362)
Smaller reporting company (cid:20362)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).(cid:20362) Yes (cid:20364) No
As of January 31, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of voting and non-
voting common stock held by non-affiliates of the registrant was $3,714,825,006 (based on the closing price of $28.18 as reported on the New York Stock Exchange
as of that date).
As of September 21, 2016, there were approximately 132,675,711 shares of the registrant’s common stock outstanding.
Documents Incorporated by Reference
Portions of the registrant’s Proxy Statement for its 2016 annual meeting of stockholders (the “2016 Proxy Statement”) are incorporated by reference in Part III,
as specifically set forth in Part III.
DONALDSON COMPANY, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Seasonality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Raw Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patents and Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Major Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Geographic Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . .
Safe Harbor Statement under the Securities Reform Act of 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Page
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Item 1. Business
General
PART I
Donaldson Company, Inc. (Donaldson or the Company) was founded in 1915 and organized in its present corporate form
under the laws of the State of Delaware in 1936.
The Company is a worldwide manufacturer of filtration systems and replacement parts. The Company’s core strengths are
leading filtration technology, strong customer relationships and its global presence. Products are manufactured at 42 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 systems as well as replacement filters. The Engine Products segment sells to original equipment manufacturers (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 in the Industrial Products segment consist of dust, fume and mist
collectors, compressed air purification systems, air filtration systems for gas turbines, polytetrafluoroethylene (PTFE) membrane-
based products and specialized air and gas filtration systems for applications including computer hard disk drives and semi-
conductor manufacturing. The Industrial Products segment sells to various industrial dealers, distributors, OEMs of gas-fired
turbines and OEMs and end-users requiring clean filtration solutions and replacement filters.
The discussion below should be read in conjunction with the risk factors discussed in Part I, Item 1A, “Risk Factors” in
this Annual Report on Form 10-K (Annual Report).
The table below shows the percentage of total net sales contributed by the principal classes of similar products for each of
the years ended July 31, 2016, 2015 and 2014:
Year Ended July 31,
2016
2015
2014
Engine Products segment
Off-Road Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
On-Road Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aftermarket Products* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aerospace and Defense Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10%
6%
43%
4%
11%
6%
41%
5%
14%
5%
41%
4%
Industrial Products segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial Filtration Solutions Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gas Turbine Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special Applications Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23%
7%
7%
22%
8%
7%
23%
6%
7%
___________
*
Includes replacement part sales to the Company’s OEM customers
Total net sales contributed by the principal classes of similar products and financial information about segment operations
and geographic regions appear in Note 18 in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report.
The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy
statements and other information (including amendments to those reports) available free of charge through its website at
www.donaldson.com, as soon as reasonably practicable after it electronically files such material with (or furnishes such material to)
the Securities and Exchange Commission. Also available on the Company’s website are corporate governance documents, including
the Company’s Code of Business Conduct and Ethics, Corporate Governance Guidelines, Audit Committee charter, Human
Resources Committee charter and Corporate Governance Committee charter. These documents are also available in print, free of
charge, to any person who requests them in writing to the attention of Investor Relations, MS 102, Donaldson Company, Inc., 1400
West 94th Street, Bloomington, Minnesota 55431. The information contained on the Company’s website is not incorporated by
reference into this Annual Report and should not be considered to be part of this report.
Seasonality
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.
1
Competition
Principal methods of competition in both the Engine and Industrial Products segments are technology, 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 within many of its product lines, specifically within 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.
Raw Materials
The principal raw materials that the Company uses are steel, filter media, and petroleum-based products including plastics,
rubber, and adhesives. Purchased raw materials represent approximately 60% to 65% of the Company’s cost of goods sold. Of that
amount, steel, including fabricated parts, represents approximately 20%. Filter media represents approximately 20% and the
remainder is primarily made up of petroleum-based products and other raw material components.
The cost the Company paid for steel during fiscal 2016 varied by grade, but in aggregate, decreased during the fiscal year.
The steel costs decrease was largely related to the decline in market prices but was also affected by continuous improvement efforts.
The Company’s cost of filter media also varies by type and decreased slightly year over year. The cost of petroleum-based products
was also down in relation to lower costs for petrochemicals and continuous improvement efforts. The Company anticipates a
moderately favorable impact from commodity prices in fiscal 2017, as compared to fiscal 2016, specifically for petroleum-based
products. On an ongoing basis, the Company enters into selective supply arrangements with certain of its suppliers that allow the
Company to reduce volatility in its costs. The Company strives to recover or offset all material cost increases through selective
price increases to its customers and the Company’s cost reduction initiatives, which include material substitution, process
improvement, and product redesigns.
Patents and Trademarks
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,
the Company does not regard the validity of any one patent or trademark as being of material importance.
Major Customers
The Company had no customers that accounted for over 10% of net sales in the years ended July 31, 2016, 2015 and 2014.
The Company had no customers that accounted for over 10% of gross accounts receivable at July 31, 2016 or July 31, 2015.
Backlog
At August 31, 2016, the backlog of orders expected to be delivered within 90 days was $323.0 million. The 90-day backlog
at August 31, 2015, was $331.0 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 Products OEM and Industrial Products
markets.
Research and Development
During the years ended July 31, 2016, 2015 and 2014, the Company spent $55.5 million, $60.2 million and $61.8 million,
respectively, 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. Substantially all commercial
research and development is performed in-house.
Environmental Matters
The Company does not anticipate any material effect on its capital expenditures, earnings or competitive position during
fiscal 2017 due to compliance with government regulations regulating the discharge of materials into the environment or otherwise
relating to the protection of the environment.
Employees
The Company employed approximately 11,700 people in its worldwide operations as of July 31, 2016.
2
Geographic Areas
Both of the Company’s segments serve customers in all geographic regions worldwide. The United States represents the
largest current individual market for the Company’s products. Germany is the single largest market outside the United States.
Financial information by geographic areas appears in Note 18 in the Notes to Consolidated Financial Statements included in Item
8 in this Annual Report.
Item 1A. Risk Factors
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,
outlines the risks and uncertainties that we believe are the most material to our business at this time. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Economic Environment - the demand for our products relies on economic and industrial conditions worldwide.
Changes in economic or industrial conditions could impact our results or financial condition in any particular period as
our business can be sensitive to varying conditions in all major geographies and markets.
Products - 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. In addition, we may be adversely impacted by changes in
technology that could reduce or eliminate the demand for our products. These risks include wider adoption of technologies providing
alternatives to diesel engines.
Competition - we participate in highly competitive markets with pricing pressure.
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 price, technology, geographic coverage, product performance, and customer service. Our customers
continue to seek productivity gains and lower prices from us and their other suppliers. If we are not able to compete effectively, our
margins and results of operations could be adversely affected.
Intellectual Property - demand for our products may be affected by new entrants who copy our products and/or infringe on
our intellectual property.
The ability to protect and enforce intellectual property rights varies across jurisdictions. An inability to preserve our
intellectual property rights may adversely affect our financial performance.
Competitors and others may also initiate litigation to challenge the validity of our intellectual property or allege that we
infringe their intellectual property. We may be required to pay substantial damages if it is determined our products infringe on their
intellectual property. We may also be required to develop an alternative, non-infringing product that could be costly and time-
consuming, or acquire a license on terms that are not favorable to us.
Protecting or defending against such claims could significantly increase our costs, divert management’s time and attention
away from other business matters, and otherwise adversely affect our results of operations and financial condition.
Global Operations - operating globally carries risks which could negatively affect our financial performance.
We have sales and manufacturing operations throughout the world, with the heaviest concentrations in the Americas,
Europe, and Asia. Our stability, growth, and profitability are subject to a number of risks of doing business globally that could harm
our business, including:
(cid:120)(cid:3)
(cid:120)(cid:3)
political and military events,
legal and regulatory requirements, including import, export, defense regulations, anti-corruption laws, and foreign
exchange controls,
3
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
tariffs, trade barriers and other trade restrictions,
potential difficulties in staffing and managing local operations,
credit risk of local customers and distributors,
difficulties in protecting our intellectual property, and
local economic, political, and social conditions, including in the Middle East, Ukraine, China, Thailand, and other
emerging markets where we do business.
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.).
The enforcement of bribery, corruption and trade laws and regulations is increasing in frequency and complexity on a
global basis. The continued geographic expansion of our business increases our exposure to, and cost of complying with, these laws
and regulations. If our compliance programs do not adequately prevent or deter our employees, agents, distributors, suppliers and
other third parties with whom we do business from violating anti-corruption laws, we may incur defense costs, fines, penalties,
reputational damage and business disruptions.
Customer Concentration - a number of our customers operate in similar cyclical industries. Economic conditions in these
industries could have a negative impact on our financial performance.
No customer accounted for ten percent or more of our net sales in fiscal 2016, 2015 or 2014. However, a number of our
customers are concentrated in similar cyclical industries (construction, agriculture, and mining), resulting in additional risk based
on industrial conditions in those sectors. A decline in the economic conditions of these industries could result in reduced demand
for our products and difficulty in collecting amounts due from our customers.
Supply Chain - unavailable or higher cost materials could impact our financial performance.
We obtain raw materials including steel, filter media, 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. An increase in commodity prices could also result in lower
operating margins.
Technology Investments and Security Risks - 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 business, 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 our existing systems, and preventing information security breaches. There may be other risks as we finalize our multi-
year implementation of an 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.
Currency - an unfavorable fluctuation in foreign currency exchange rates could adversely impact our result of operations.
We have operations in many countries, with more than one-half of our annual revenue coming from countries outside of
the U.S. Each of our subsidiaries reports its results of operations and financial position in its relevant functional currency, which is
then translated into U.S. dollars. This translated financial information is included in our consolidated financial statements.
Strengthening of the U.S. dollar in comparison to the foreign currencies of our subsidiaries has a negative impact on our results and
financial position. In addition, decreased value of local currency may make it difficult for some of our customers, distributors and
end users to purchase our products.
4
Legal and Regulatory - costs associated with lawsuits, investigations or complying with laws and regulations may have an
adverse effect on our results of operations.
We are subject to many 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.
Income Tax - changes in our effective tax rate could adversely impact our net income.
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 our provision for income taxes and cash tax liability.
Personnel - our success may be affected if we are not able to attract, develop and retain qualified personnel.
Our success depends in large part on our ability to identify, recruit, develop and retain qualified personnel worldwide. If
we are unable to meet this challenge, it may be difficult for us to execute our strategic objectives and grow our business, which
could adversely affect our results of operations and financial condition.
Liquidity - changes in the capital and credit markets may negatively affect our ability to access financing.
Disruption of the global financial and credit markets may have an effect on our long-term liquidity and financial condition.
During fiscal 2016, credit in the global credit markets was accessible and market interest rates remained low. We believe that our
current financial resources, together with cash generated by operations, are sufficient to continue financing our operations for the
next twelve months. There can be no assurance, however, that the cost or availability of future borrowings will not be impacted by
future capital market disruptions.
The majority of our cash and cash equivalents are held by our foreign subsidiaries as over half of our earnings occur outside
the U.S. Most of these funds are considered permanently reinvested outside the U.S., as the cash generated from U.S. operations
plus our short-term debt facilities are anticipated to be sufficient for our U.S operation’s cash needs. If additional cash is required
for our operations in the U.S., it may be subject to additional U.S. taxes if funds are repatriated from certain foreign subsidiaries.
Acquisitions - the execution of our acquisition strategy may not provide the desired return on investment.
We have made and continue to pursue acquisitions, including our acquisitions of Industrias Partmo S.A. (Partmo) in August
2016, Engineered Products Company in fiscal 2016 and Northern Technical L.L.C. (Northern Technical) and IFIL USA L.L.C.
(IFIL USA) in fiscal 2015. 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 including the potential loss of key customers, difficulties in assimilating the acquired
operations, the loss of key employees and the diversion of management’s time and attention away from other business matters.
Impairment - if our operating units do not meet performance expectations, assets could be subject to impairment.
Our total assets reflect goodwill and identifiable intangibles from acquisitions. We test annually whether goodwill has
been impaired, or more frequently if events or changes in circumstances indicate the goodwill may be impaired. If future operating
performance at one or more of our operating units were to fall significantly below forecast levels or if market conditions for one or
more of our acquired businesses were to decline, we could be required to incur a non-cash charge to operating income for
impairment. Any impairment in the value of our goodwill or other intangibles would have an adverse non-cash impact on our results
of operations and reduce our net worth.
5
Restructuring - if we do not successfully execute our restructuring plans and realize the expected benefits, our financial
performance may be adversely affected.
From time to time we have initiated restructuring programs related to our business strategy to, among other things, reduce
operating expenses and align manufacturing capacity to demand. We may not be able to realize the expected benefits and cost
savings if we do not successfully execute these plans. If difficulties are encountered or such cost savings are otherwise not realized,
it could adversely impact our results of operations.
Internal Controls - if we fail to maintain an effective system of internal control over financial reporting, we may
not be able to accurately report our financial results and prevent material fraud, which could adversely affect the value of
our common stock. Failure to maintain an effective system of internal control over financial reporting resulted in a material
weakness during fiscal 2015.
Effective internal control over financial reporting is necessary for us to provide reliable financial reports and effectively
prevent and detect material fraud. If we cannot provide reliable financial reports or prevent or detect material fraud, our operating
results could be misstated. Failure to maintain an effective system of internal control over financial reporting resulted in a material
weakness during fiscal 2015. Although we completed our remedial actions in response to this matter, there can be no assurances
that we will be able to prevent future control deficiencies from occurring and which could cause us to incur unforeseen costs,
negatively impact our results of operations, cause the market price of our common stock to decline, or have other potential adverse
consequences.
Item 1B. Unresolved Staff Comments
None.
6
Item 2. Properties
The Company’s principal administrative office and research facilities are located in Bloomington, 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 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 as of
July 31, 2016.
Americas
Auburn, Alabama (E)
Riverbank, California (I)*
Valencia, California (E)*
Dixon, Illinois
Frankfort, Indiana
Cresco, Iowa
Waterloo, Iowa (E)
Nicholasville, Kentucky
Bloomington, Minnesota
Chesterfield, Missouri (E)*
Chillicothe, Missouri (E)
Harrisonville, Missouri (I)
Philadelphia, Pennsylvania (I)
Greeneville, Tennessee
Baldwin, Wisconsin
Stevens Point, Wisconsin
Sao Paulo, Brazil (E)*
Brockville, Canada (E)*
Aguascalientes, Mexico
Monterrey, Mexico (I)
Distribution Centers
Wyong, Australia
Brugge, Belgium
Sao Paulo, Brazil*
Rensselaer, Indiana
Jakarta, Indonesia
Aguascalientes, Mexico
Lozorno, Slovakia
Johannesburg, South Africa
Seoul, South Korea*
Joint Venture Facilities
Most, Czech Republic
Champaign, Illinois (E)
Europe/Africa/Middle East
Kadan, Czech Republic (I)
Klasterec, Czech Republic
Domjean, France (E)
Paris, France (E)*
Dulmen, Germany (E)
Haan, Germany (I)
Ostiglia, Italy (E)
Skarbimierz, Poland
Cape Town, South Africa
Johannesburg, South Africa*
Abu Dhabi, United Arab Emirates
Hull, United Kingdom
Leicester, United Kingdom (I)
Asia/Pacific
Wyong, Australia
Wuxi, China
New Delhi, India
Gunma, Japan
Rayong, Thailand (I)
Third-Party Logistics Providers
Santiago, Chile
Wuxi, China
Bogotá, Colombia
Cartagena, Colombia
Mumbai, India
Chennai, India
Plainfield, Indiana (I)
Gunma, Japan
Auckland, New Zealand
Lima, Peru
Singapore
Greeneville, Tennessee (I)
Laredo, Texas
Jakarta, Indonesia
Dammam, Saudi Arabia (I)
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.
7
Item 3. Legal Proceedings
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 estimated liability in its consolidated
financial statements is adequate in light of the probable and estimable outcomes. Any recorded liabilities were not material to the
Company’s financial position, results of operations 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 operations or liquidity.
Item 4. Mine Safety Disclosures
Not applicable.
Executive Officers of the Registrant
Current information as of August 31, 2016, regarding executive officers is presented below. All officers hold office until
their successors are elected and qualify, or their earlier death, resignation or removal. There are no arrangements or understandings
between individual officers and any other person pursuant to which the officer was selected as an executive officer.
Name
Amy C. Becker . . . . . . . . . .
Tod E. Carpenter . . . . . . . .
Sheila G. Kramer . . . . . . . .
Scott J. Robinson . . . . . . . .
Thomas R. Scalf . . . . . . . . .
Jeffrey E. Spethmann . . . .
Wim Vermeersch . . . . . . . .
Age
51
57
57
49
50
51
50
Positions and Offices Held
Vice President, General Counsel and Secretary
President and Chief Executive Officer
Vice President, Human Resources
Vice President and Chief Financial Officer
Senior Vice President, Engine Products
Senior Vice President, Industrial Products
Vice President, Europe, Middle East and Africa
First Fiscal Year
Appointed as an
Executive Officer
2014
2008
2015
2015
2014
2016
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 (GTS) General
Manager from 2002 to 2004; General Manager, Industrial Filtration Systems (IFS) Sales from 2004 to 2006; General Manager, IFS
Americas in 2006; Vice President, Global IFS from 2006 to 2008; Vice President, Europe and Middle East from 2008 to 2011; and
Senior Vice President, Engine Products from 2011 to 2014. In April 2014, Mr. Carpenter was appointed Chief Operating Officer.
On April 1, 2015, Mr. Carpenter was appointed President and Chief Executive Officer.
Ms. Kramer was appointed Vice President, Human Resources in October 2015. Prior to joining the Company, Ms. Kramer
was Vice President, Human Resources for Taylor Corporation, a print and graphics media company, from 2013 until September
2015. From 1991 to 2013, Ms. Kramer was with Lifetouch, Inc., a photography company, where she held various human resources
roles including Corporate Vice President, Human Resources from 2009 to 2013.
Mr. Robinson joined the Company and was appointed Vice President and Chief Financial Officer in December 2015. Prior
to joining the Company, Mr. Robinson was the Chief Financial Officer for Imation Corp. a global scalable storage and data security
company, a position he held since August 2014. During his 11 years with Imation, he also served as the Investor Relations Officer,
Corporate Controller and Chief Accounting Officer. Prior to that, he held positions at Deluxe Corporation and
PricewaterhouseCoopers LLP.
Mr. Scalf joined the Company in 1989 and has held various positions, including Director of Global Operations from 2003
to 2006; General Manager of Exhaust & Emissions from 2006 to 2008; General Manager of Industrial Filtration Solutions from
2008 to 2012; and Vice President of Global Industrial Air Filtration from 2012 to 2014. Mr. Scalf was appointed Senior Vice
President, Engine Products, in April 2014.
Mr. Spethmann joined the Company in 2013 and has held various positions, including Vice President of the Exhaust &
Emissions business unit from 2013 to 2014 and Vice President, Global Industrial Air Filtration from 2014 to 2016. Mr. Spethmann
was appointed Senior Vice President of Industrial Products in April 2016. Prior to joining the Company, from 1999 to 2012, Mr.
Spethmann held positions of General Manager and President of Blow Molded Specialties, Inc., a manufacturing company focused
on the extrusion of blow molded parts and assemblies.
8
Mr. Vermeersch joined the Company in 1992 and has held various positions, including Director, GTS, Asia Pacific from
2000 to 2005; Manager, Aftermarket and Service Industrial Filtration Solutions, Belgium from 2005 to 2006; Manager, Industrial
Filtration Solutions, Belgium from 2006 to 2007; Director, GTS, 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.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock, par value $5.00 per share, is traded on the New York Stock Exchange under the symbol
“DCI.” The Company’s dividend payout ratio target is approximately 35% to 45% of the average earnings per share for the last
three years. This guidance is expected to be used for future dividend payouts. As of September 21, 2016, there were 1,615
shareholders of record of common stock.
The high and low sales prices for the Company’s common stock for each quarterly period during the years ended July 31,
2016 and 2015 were as follows:
Year Ended July 31,
2016 . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . .
First Quarter
$34.38 - 26.36
$42.63 - 36.47
Second Quarter
$31.88 - 25.21
$43.31 - 36.04
Third Quarter
$33.57 - 27.33
$38.46 - 36.16
Fourth Quarter
$37.08 - 31.52
$37.79 - 31.62
The quarterly dividends paid for the years ended July 31, 2016 and 2015 were as follows:
Year Ended July 31,
2016 . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . .
$
$
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
0.170 $
0.165 $
0.170 $
0.165 $
0.170 $
0.165 $
0.175
0.170
The following table summarizes 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 three months ended July 31, 2016.
Period
May 1 - May 31, 2016. . . . . . . . .
June 1 - June 30, 2016. . . . . . . . .
July 1 - July 31, 2016 . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . .
___________
Total Number of
Shares Purchased(1)
Average Price
Paid per Share
—
290,877
200,000
490,877
$
$
$
$
—
35.07
34.23
34.73
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
—
270,000
200,000
470,000
10,974,199
10,704,199
10,504,199
10,504,199
(1) On May 29, 2015, the Board of Directors authorized the repurchase of up to 14.0 million shares of the Company’s common stock. This repurchase authorization
is effective until terminated by the Board of Directors. There were 470,000 repurchases of common stock made outside of the Company’s current repurchase
authorization during the three months ended July 31, 2016. However, the “Total Number of Shares Purchased” column of the table above includes 20,877
shares of previously owned shares tendered by option holders in payment of the exercise price of options during the quarter. While not considered repurchases
of shares, the Company does at times withhold shares that would otherwise be issued under equity-based awards to cover the withholding of taxes due as a
result of exercising stock options or payment of equity-based awards.
The table set forth in Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters,” of this Annual Report is also incorporated herein by reference.
9
The graph below compares the cumulative total shareholder 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
Donaldson Company, Inc. . . . . . . . . . . . . $
S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P Industrial Machinery . . . . . . . . . . . .
100.00 $
100.00
100.00
124.48 $
109.13
105.26
133.75 $
136.41
147.68
145.16 $
159.52
173.36
127.96 $
177.40
184.07
140.61
187.36
213.16
2011
2012
2013
2014
2015
2016
Year Ended July 31,
10
Item 6. Selected Financial Data
The following table summarizes selected financial data for each of the fiscal years in the five-year period ended July 31,
2016 (in millions, except per share data):
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per share . . . . . . . . . . . . . .
Cash dividends paid per share . . . . . . . . . . . . . . . . . .
Year Ended July 31,
2016
2,220.3 $
190.8
1.43
1.42
1,788.6
351.8
0.690
0.685
2015
2,371.2 $
208.1
1.51
1.49
1,809.5
389.2
0.670
0.665
2014
2,473.5 $
260.2
1.79
1.76
1,942.4
243.7
0.610
0.575
2013
2,436.9 $
247.4
1.67
1.64
1,743.6
102.8
0.450
0.410
2012
2,493.3
264.3
1.76
1.73
1,730.1
203.5
0.335
0.320
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is
intended to help the reader understand the Company’s results of operations and financial condition for the three years ended July 31,
2016. The MD&A should be read in conjunction with the Company’s Consolidated Financial Statements and Notes included in
Item 8 of this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. The
Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of various
factors, including those discussed elsewhere in this Annual Report, particularly Item 1A. Risk Factors and in the Safe Harbor
Statement under the Securities Reform Act of 1995 statement below.
Throughout this MD&A, the Company refers to measures used by management to evaluate performance, including a
number of financial measures that are not defined under accounting principles generally accepted in the United States of America
(GAAP). Net sales and net earnings excluding foreign currency translation are not measures of financial performance under GAAP,
however the Company believes they are useful in understanding its financial results and provide comparable measures for
understanding the operating results of the Company between different fiscal periods. Reconciliations within this MD&A provide
more details on the use and derivation of these measures.
Overview
Donaldson 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 for hydraulics, fuel, lube applications as well as replacement filters. As a worldwide business, the
Company’s results of operations are affected by conditions in the global economic environment. Under most economic conditions,
the Company’s market diversification between its OEM and replacement parts customers, its diesel engine and industrial end
markets and its global end markets has helped to limit the impact of weakness in any one product line, market or geography on the
consolidated operating results of the Company.
Net sales for the year ended July 31, 2016 were $2,220.3 million as compared to $2,371.2 million in the prior year, a
decrease of $150.9 million or 6.4%. Net sales were negatively impacted by foreign currency translation which decreased sales by
$74.2 million. On a constant currency basis, net sales for the year ended July 31, 2016 decreased 3.2% from the prior fiscal year.
Net earnings for the year ended July 31, 2016 were $190.8 million, a decrease of $17.3 million or 8.3%, from $208.1 million
in fiscal 2015. The Company’s net earnings were negatively impacted by foreign currency translation, which decreased net earnings
by approximately $7.9 million. Excluding the current year impact of foreign currency translation, net earnings decreased 4.5%
Diluted earnings per share were $1.42 for the year ended July 31, 2016, a 4.7% decrease from $1.49 in the prior year.
Outlook
(cid:120)(cid:3) The Company forecasts its fiscal 2017 diluted earnings per share to be between $1.50 and $1.66.
(cid:120)(cid:3) The Company forecasts its total fiscal 2017 net sales to be between 2% decline and 2% increase compared with fiscal
2016, and the impact on total sales from foreign currency translation is expected to be immaterial.
(cid:120)(cid:3) The Company’s fiscal 2017 operating margin is forecast to be 13.3% to 13.9%.
11
(cid:120)(cid:3) The Company’s fiscal 2017 tax rate is anticipated to be between 26.7% and 28.7%.
(cid:120)(cid:3) The Company expects to repurchase between 2.0% and 3.0% of its outstanding shares in fiscal 2017.
Consolidated Results of Operations
The following table summarizes consolidated results of operations for each of the three fiscal years ended July 31, 2016
(in millions, except per share data):
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . .
Research and development . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . .
Earnings before income taxes . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings per share – diluted . . . . . . . . .
Net Sales
2014
2016
Year Ended July 31,
2015
$ 2,220.3 $ 2,371.2 $ 2,473.5
1,595.7
877.8
460.3
61.8
355.7
(15.2)
10.2
360.7
100.5
260.2
1,562.6
808.6
460.1
60.2
288.3
(15.5)
15.2
288.6
80.5
208.1 $
1,465.5
754.8
425.1
55.5
274.2
(3.9)
20.7
257.4
66.6
190.8 $
$
2016
100.0 %
66.0 %
34.0 %
19.1 %
2.5 %
12.3 %
(0.2)%
0.9 %
11.6 %
3.0 %
8.6 %
Percent of Net Sales
2015
100.0 %
65.9 %
34.1 %
19.4 %
2.5 %
12.2 %
(0.7)%
0.6 %
12.2 %
3.4 %
8.8 %
2014
100.0 %
64.5 %
35.5 %
18.6 %
2.5 %
14.4 %
(0.6)%
0.4 %
14.6 %
4.1 %
10.5 %
$
1.42 $
1.49 $
1.76
Consolidated net sales for the years ended July 31, 2016, 2015 and 2014 were $2,220.3 million, $2,371.2 million and
$2,473.5 million, respectively. Net sales by operating segment are as follows (in millions):
2016
Year Ended July 31,
2015
2014
2016
Percent of Net Sales
2015
Engine Products . . . . . . . . . . . . . . . $
Industrial Products . . . . . . . . . . . . .
Net sales . . . . . . . . . . . . . . . . . . . . . $
1,391.3 $
829.0
2,220.3 $
1,484.1 $
887.1
2,371.2 $
1,584.0
889.5
2,473.5
62.7%
37.3%
100.0%
62.6%
37.4%
100.0%
2014
64.0%
36.0%
100.0%
Consolidated net sales by geographical region for the years ended July 31, 2016, 2015 and 2014 are as follows (in millions):
2016
Year Ended July 31,
2015
2014
2016
Percent of Net Sales
2015
United States . . . . . . . . . . . . . . . . . $
Europe . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . $
937.3 $
632.7
449.9
200.4
2,220.3 $
1,007.3 $
671.3
470.7
221.9
2,371.2 $
1,019.9
728.6
517.3
207.7
2,473.5
42.2%
28.5%
20.3%
9.0%
100.0%
42.5%
28.3%
19.9%
9.3%
100.0%
2014
41.2%
29.5%
20.9%
8.4%
100.0%
Although net sales excluding foreign currency translation is not a measure of financial performance under GAAP, the
Company believes that it is useful in understanding its financial results and provide comparable measures for understanding the
operating results of the Company between different fiscal periods. The following is a reconciliation to the most comparable GAAP
financial measure of this non-GAAP financial measure for the years ended July 31, 2016, 2015 and 2014 (in millions):
Prior year net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Change in net sales excluding translation . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of foreign currency translation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current year net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,220.3
___________
$
2016
2,371.2
$
(76.7)
(74.2)
Year Ended July 31,
2015
2,473.5
32.5
(134.8)
2,371.2
$
$
2014
2,436.9
48.0
(11.4)
2,473.5
(1) The impact of foreign currency translation is calculated by translating current period foreign currency revenue into U.S. dollars using the average foreign
currency exchange rates for the prior fiscal year period rather than actual current period foreign currency exchange rates.
12
The fiscal 2016 sales decrease of $150.9 million compared to fiscal 2015 was primarily driven by a $74.2 million impact
of foreign currency translation and a decline in the Company’s first-fit portions of the Engine and Industrial segments. Fiscal 2016
sales decreased $92.8 million in the Engine Products segment and $58.1 million in the Industrial Products segment. Unfavorable
foreign currency exchange rates decreased sales in the Engine Products and Industrial Products segments by $43.4 million and
$30.8 million, respectively. In addition to the impacts of foreign currency, the Engine Products segment experienced a decline in
the Off-Road product business driven by a continued weakness in the global agricultural, mining and construction equipment
markets with decreased build rates in all regions. The Industrial Products segment experienced it’s most significant sales decrease
in the Gas Turbine Systems business. Historically, GTS sales were driven by large systems and, as a result, the Company’s
shipments and revenues fluctuated from period to period. Beginning in fiscal 2016, the Company made a strategic shift in the GTS
business to be more selective in bidding of large projects and shifting the strategy to grow the GTS replacement part business. In
contrast to fiscal 2015, the Company experienced more typical seasonality in fiscal 2016 with sales improving the second half of
the year.
Backlog
At August 31, 2016, the backlog of orders expected to be delivered within 90 days was $323.0 million. The 90-day backlog
at August 31, 2015, was $331.0 million. The backlog of orders expected to be delivered within 90 was increased 3.0% for the
Engine Products segment and increased 1.6% for the Industrial Products segment. 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.
Cost of Sales
The principal raw materials that the Company uses are steel, filter media, and petroleum-based products including plastics,
rubber, and adhesives. Purchased raw materials represent approximately 60% to 65% of the Company’s cost of goods sold. Of that
amount, steel, including fabricated parts, represents approximately 20%. Filter media represents approximately 20% and the
remainder is primarily made up of petroleum-based products and other raw material components.
The cost the Company paid for steel during fiscal 2016 varied by grade, but in aggregate, decreased during the fiscal year.
The steel costs decrease was largely related to the decline in market prices but was also affected by continuous improvement efforts.
The Company’s cost of filter media also varies by type and decreased slightly year over year. The cost of petroleum-based products
were also down in relation to lower costs for petrochemicals and continuous improvement efforts. The Company anticipates a
moderately favorable impact from commodity prices in fiscal 2017, as compared to fiscal 2016, specifically for petroleum-based
products. On an ongoing basis, the Company enters into selective supply arrangements with certain of its suppliers that allow the
Company to reduce volatility in its costs. The Company strives to recover or offset all material cost increases through selective
price increases to its customers and the Company’s continuous improvement cost reduction initiatives, which include material
substitution, process improvement, and product redesigns.
Gross Margin
Gross margin for the year ended July 31, 2016 was 34.0%, or a 0.1 point decrease from 34.1% in the prior year. The gross
margin percentage was flat year over year with favorable impacts from restructuring actions offset by lower fixed cost absorption
due to a decrease in sales.
Gross margin for fiscal 2015 was 34.1%, or a 1.4 point decrease from 35.5% in the year ended July 31, 2014. The decrease
in gross margin was driven primarily by lower fixed cost absorption due to a decrease in sales and the negative mix impacts from
more GTS and IFS project shipments. Restructuring and asset impairment charges of $8.4 million also negatively impacted gross
margin in fiscal 2015.
Operating Expenses
Operating expenses for the year ended July 31, 2016 were $480.6 million or 21.6% of net sales, as compared to $520.3
million or 21.9% in the prior fiscal year. The decrease in operating expenses as a percentage of sales was primarily driven by expense
savings from previous restructuring actions combined with the Company’s efforts to control expenses in fiscal 2016 compared to
fiscal 2015. Restructuring and asset impairment charges included in operating expenses were $10.4 million in fiscal 2016.
Operating expenses for fiscal 2015 were $520.3 million or 21.9% of net sales, as compared to $522.1 million or 21.1% in
the year ended July 31, 2014. The decrease in operating expenses was primarily due to a reduction in incentive compensation
expense accruals. Restructuring included in operating expenses were $8.5 million and included severance costs related to a reduction
in workforce of $4.6 million and the Company recorded a $3.9 million lump sum pension settlement.
13
Non-Operating Items
Interest expense for the year ended July 31, 2016 was $20.7 million, an increase of $5.5 million from $15.2 million in
fiscal 2015. The increase was due to $150.0 million of debt issued in April 2015 that was outstanding for all of fiscal 2016. Other
income, net was $3.9 million in fiscal 2016 compared to $15.5 million in the prior fiscal year. The decrease in other income, net for
fiscal 2016 was primarily driven by $6.8 million of higher losses on foreign exchange compared to fiscal 2015.
Interest expense was $15.2 million for fiscal 2015, an increase of $5.0 million from $10.2 million in the prior year. The
increase was due to $150.0 million debt issued in April 2015, as well as higher balances on the Company’s revolving line of credit.
Other income, net totaled $15.5 million in fiscal 2015, up from $15.2 million in the prior year.
Income Taxes
The effective tax rate for fiscal 2016 was 25.9% compared to 27.9% during the year ended July 31, 2015. The effective
tax rate in the current year was favorably impacted by the settlement of tax audits and the mix of earnings between tax jurisdictions.
The effective tax rate for the year ended July 31, 2015 was 27.9%, unchanged from the prior fiscal year. The effective tax
rate in fiscal 2015 was favorably impacted by the reinstatement of the Research and Experimentation Credit in the U.S. for calendar
year 2014, non-recurring tax costs associated with foreign dividend distributions recorded during the prior year and an increase in
tax benefits from international operations. The effective tax rate in fiscal 2014 was favorably impacted by the settlement of a tax
audit and the remeasurement of certain deferred tax assets due to a change in tax rates in certain foreign jurisdictions.
Net Earnings
For the year ended July 31, 2016, net earnings was $190.8 million as compared to $208.1 million in fiscal 2015, a decrease
of $17.3 million or 8.3%. Diluted net earnings was $1.42 per share, a decrease of 4.7% from diluted net earnings of $1.49 for the
year ended July 31, 2015.
Net earnings for the year ended July 31, 2015 was $208.1 million, a decrease of $52.1 million or 20.0%, from fiscal 2014
net earnings of $260.2 million. Diluted net earnings per share in fiscal 2015 was $1.49 compared to $1.76 for the year ended July
31, 2014, a decrease of 15.3%.
Although net earnings excluding foreign currency translation is not a measure of financial performance under GAAP, the
Company believes that 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. The following is a reconciliation to the most comparable GAAP
financial measure of this non-GAAP financial measure for the years ended July 31, 2016, 2015 and 2014 (in millions):
Prior year net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in net earnings excluding translation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current year net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Restructuring Activities
Year Ended July 31,
2016
2015
2014
208.1
(9.4)
(7.9)
190.8
$
$
260.2
(37.8)
(14.3)
208.1
$
$
247.4
13.8
(1.0)
260.2
The Company has taken numerous actions to align its operating and manufacturing cost structure with current and projected
customer and end-market demand.
Fiscal 2016 Actions
In the first quarter of fiscal 2016, the Company took actions to further align its operating and manufacturing cost structure
with current and projected customer and end-market demand. These actions consisted of one-time termination benefits from
restructuring the salaried and production workforce in all geographic regions and in both reportable segments. Total charges related
to this action were initially expected to be $7.2 million. These actions have been completed and resulted in a total pre-tax charge of
$6.2 million during the year ended July 31, 2016.
In the third quarter of fiscal 2016, the Company took additional actions consistent with the purpose of the first quarter
actions discussed above. Total charges related to this action were initially expected to be $5.5 million. These actions have been
completed and resulted in a total pre-tax charge of $4.1 million during the year ended July 31, 2016.
14
In the fourth quarter of fiscal 2016, the Company took additional actions including the closure of the Company’s Hong
Kong location. These actions, consisting of lease termination costs and one-time termination benefits have been completed and
resulted in a total pre-tax charge of $3.5 million during the year ended July 31, 2016, which was in line with expectations.
Fiscal 2015 Actions
In fiscal 2015, actions taken by the Company included: rebalancing and reducing the current salaried and production
workforce globally, closing a production facility in Grinnell, Iowa and the write-off of a partially completed facility in Xuzhou,
China. For these actions, the Company recorded pre-tax restructuring and impairment charges of $13.0 million for the year ended
July 31, 2015. In addition, during the year ended July 31, 2015, the Company recorded a $3.9 million charge related to a lump-sum
settlement of its U.S. Pension Plan. The Company recorded an additional $2.3 million related to these actions during the year ended
July 31, 2016.
Restructuring charges for the above actions are summarized as follows (in millions):
Year Ended July 31,
2016
2015
Fiscal 2016 fourth quarter actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2016 third quarter actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2016 first quarter actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2015 actions(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
___________
$
$
3.5
4.1
6.2
2.3
16.1
$
$
(1) Expenses span both fiscal years due to shutdown of Grinnell, Iowa facility.
Restructuring charges for the above actions by segment are summarized as follows (in millions):
Year Ended July 31,
2016
2015
Engine Products segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial Products segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate & Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
8.8 $
7.3
—
16.1 $
Restructuring charges are summarized in the table below by statement of earnings line item (in millions):
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
5.7 $
10.4
16.1 $
Year Ended July 31,
2016
2015
—
—
—
16.9
16.9
9.2
3.8
3.9
16.9
8.4
8.5
16.9
As the restructuring charges were mainly incurred and paid in the same period, there was no material liability balance as
of July 31, 2016 or 2015.
Total savings from the fiscal 2016 actions are estimated to result in approximately $40 million of annual pre-tax savings.
The savings are a result of reduction in workforce and therefore, the savings are expected to commence immediately and will allow
the Company to address its level of profitability and also invest in other strategic initiatives.
Segment Results of Operation
Net sales and earnings before income taxes by operating segment for each of the three years ended July 31, 2016, 2015
and 2014 are summarized as follows (in millions):
Year Ended July 31,
Increase (Decrease)
2016
2015
2014
2016 vs 2015
2015 vs 2014
Net sales
Engine Products segment . . . . . . .
Industrial Products segment . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1,391.3
829.0
2,220.3
$
$
1,484.1
887.1
2,371.2
$
$
1,584.0
889.5
2,473.5
$
$
(92.8) $
(58.1 )
(150.9) $
(99.9)
(2.4)
(102.3)
15
Year Ended July 31,
Increase (Decrease)
2016
2015
2014
2016 vs 2015
2015 vs 2014
Earnings before income taxes
Engine Products segment . . . . . . .
Industrial Products segment . . . . .
Corporate and Unallocated(1) . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
___________
$
$
$
163.5
119.0
(25.1)
257.4
$
$
186.3
123.3
(21.0)
288.6
$
$
233.9
134.0
(7.2)
360.7
$
(22.8) $
(4.3 )
(4.1 )
(31.2) $
(47.6)
(10.7)
(13.8)
(72.1)
(1) Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments such as interest income and interest expense. The
Corporate and Unallocated results were determined on a consistent basis for all periods presented. The change in Corporate and Unallocated from fiscal 2014
to fiscal 2016 was driven by higher interest expense and foreign exchange losses.
Engine Products Segment
The following is a summary of net sales by product within the Company’s Engine Products segment for the years ended
July 31, 2016, 2015 and 2014 (in millions):
Engine Products Segment . . . . . . . . .
Off-Road Products . . . . . . . . . . . . . . . $
On-Road Products . . . . . . . . . . . . . . .
Aftermarket Products* . . . . . . . . . . .
Aerospace and Defense Products . .
Total Engine Products segment . . . . $
___________
Year Ended July 31,
Increase (Decrease)
2016
2015
2014
2016 vs 2015
2015 vs 2014
216.6
127.2
951.5
96.0
1,391.3
$
$
261.1
138.4
980.7
103.9
1,484.1
$
$
342.2
130.0
1,012.2
99.6
1,584.0
$
$
(44.5) $
(11.2 )
(29.2 )
(7.9 )
(92.8) $
(81.1)
8.4
(31.5)
4.3
(99.9)
*
Includes replacement part sales to the Company’s OEM customers
The Engine Products segment sells to OEM customers in the construction, mining, agriculture, aerospace, defense, and
truck end-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 for hydraulics, fuel and lube
application, and replacement filters.
Fiscal 2016 compared to Fiscal 2015
Net sales for the Engine Products segment for the year ended July 31, 2016 were $1,391.3 million as compared to $1,484.1
million in the prior year period, a decrease of $92.8 million or 6.3%. The decrease was driven by declines in all product groups and
the impact of foreign currency translation. The impact of foreign currency translation during fiscal 2016 decreased Engine Products
sales by $43.4 million, or 2.9%. In constant currency fiscal 2016 Engine Products sales decreased $49.4 million, or 3.3%.
Worldwide sales of Off-Road Products were $216.6 million, a decrease of 17.0% from fiscal 2015. In constant currency,
sales decreased $37.3 million, or 14.3%. These decreases were driven by a continued weakness in the global agricultural, mining and
construction equipment markets with decreased build rates in all regions and the negative impacts of foreign currency translation.
Worldwide sales of On-Road Products were $127.2 million, a decrease of 8.1% from fiscal 2015. In constant currency,
sales decreased $8.5 million, or 6.1%. Growth in APAC and continued strength of medium-duty production was not enough to
offset the revenue decreases associated with the slowing production of Class 8 trucks in North America, resulting in a steeper-than-
expected decline in this business.
Worldwide sales of Aftermarket Products were $951.5 million, a decrease of 3.0% from fiscal 2015. In constant currency,
sales increased $2.7 million, or 0.3%. The primary driver of the sales decrease from fiscal 2015 was foreign currency with sales in
local currency remaining relatively flat compared to prior year.
Worldwide sales of Aerospace and Defense Products were $96.0 million, a decrease of 7.6% from fiscal 2015. In constant
currency, sales decreased $6.3 million, or 6.1%. These decreases were due to Aerospace commercial slow down while Defense
ground vehicle has remained relatively flat. The decline in commercial aerospace is primarily in rotary-wing aircraft reflecting a
slowdown in oil exploration resulting in fewer flight hours. Many Defense platforms have been delayed due to funding.
Fiscal 2016 Engine Product’s earnings before income taxes were $163.5 million, or 11.8% of Engine Products’ sales, a
decrease from 12.6% of sales in fiscal 2015. The percentage earnings decrease was driven by lower cost absorption due to a decrease
in production volumes and the impact of foreign currency translation.
16
Fiscal 2015 compared to Fiscal 2014
For the year ended July 31, 2015, net sales for the Engine Products segment were $1,484.1 million, a decrease of 6.3% from
$1,584.0 million in the fiscal prior year. The impact of the changes in foreign currency decreased sales by $82.0 million, or 5.5%.
Worldwide sales of Off-Road Products were $261.1 million, a decrease of 23.7% from $342.2 million in the prior year. The
sales decrease was driven by continued weakness in the mining and agricultural equipment markets. These decreases were partially
offset by an improving construction equipment end-market, particularly in North America, and new program wins in Europe.
Worldwide sales of On-Road Products were $138.4 million, an increase of 6.4% from $130.0 million in the prior year. The
increase overall is due to an increase in customer new Class 8 truck build rates in North America.
Worldwide sales of Aftermarket Products were $980.7 million, a decrease of 3.1% from $1,012.2 million in the prior year.
The overall sales decreases were primarily driven by the impact of the change in foreign currency exchange rates, partially offset
by increases in the utilization rates of equipment fleets, increased sales of the Company’s proprietary replacement filters and
expansion of the Company’s product portfolio and distribution capabilities. Net of foreign currency fluctuations, Aftermarket
products sales increased 2.1% with sales in the Americas increasing by 1.6%, Europe by 3.1% and Asia by 0.8%.
Worldwide sales of Aerospace and Defense Products were $103.9 million, an increase of 4.2% from $99.6 million in the
prior year.
Fiscal 2015 Engine Product’s earnings before income taxes were $186.3 million, or 12.6% of Engine Products’ sales, a
decrease from 14.8% of sales in fiscal 2014. The percentage earnings decrease was driven by lower fixed cost absorption due to a
decrease in sales volumes.
Industrial Products Segment
The following is a summary of net sales by product within the Company’s Industrial Products segment for the years ended
July 31, 2016, 2015 and 2014 (in millions):
Industrial Products segment:
Industrial Filtration
Solutions Products . . . . . . . . . . . . . $
Gas Turbine Products . . . . . . . . . . . .
Special Applications Products . . . . .
Total Industrial Products segment . $
Year Ended July 31,
Increase (Decrease)
2016
2015
2014
2016 vs 2015
2015 vs 2014
517.9
149.6
161.5
829.0
$
$
529.0
186.9
171.2
887.1
$
$
553.4
156.9
179.2
889.5
$
$
(11.1) $
(37.3 )
(9.7 )
(58.1) $
(24.4)
30.0
(8.0)
(2.4)
The Industrial Products segment sells to various industrial distributors, dealers, and end-users, OEM customers 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-based products, and specialized air
and gas filtration systems for various applications including computer hard disk drives and other electronic equipment.
Fiscal 2016 compared to Fiscal 2015
Net sales for the Industrial Products segment for the year ended July 31, 2016 were $829.0 million as compared to $887.1
million in the prior year period, a decrease of $58.1 million or 6.5%. This decrease was driven by a 20.0% decrease in GTS sales and
the impact of foreign currency translation. The impact of foreign currency translation during fiscal 2016 decreased Industrial Products
sales by $30.8 million, or 3.5%. In constant currency fiscal 2016 Industrial Products sales decreased $27.3 million, or 3.1%.
Worldwide sales of Industrial Filtration Solutions were $517.9 million, a 2.1% decrease from fiscal 2015. In constant
currency, fiscal 2016 sales increased $7.7 million, or 1.5%. Sales of both aftermarket and equipment are consistent with fiscal 2015.
Worldwide sales of GTS were $149.6 million, a 20.0% decrease from fiscal 2015. In constant currency, fiscal 2016 sales
decreased $33.9 million, or 18.1%. GTS sales are typically large systems and, as a result, the Company’s shipments and revenues
fluctuate from period to period.
Worldwide sales of Special Application Products were $161.5 million, a 5.7% decrease from fiscal 2015. In constant
currency, fiscal 2016 sales decreased $1.1 million, or 0.6%. These decreases were driven by weakness in disk drive product sales
as the business is in a secular decline as solid-state memory replaces traditional hard disk drives.
17
Fiscal 2016 Industrial Products’ earnings before income taxes were $119.0 million, or 14.4% of Industrial Products’ sales,
an increase from 13.9% in fiscal 2015. The fiscal 2016 earnings before income taxes percentage increase was driven by the benefits
from previous restructuring actions and favorable product mix partially offset by a $3.5 million increase in restructuring charges.
Fiscal 2015 compared to Fiscal 2014
Sales for the Industrial Products segment were $887.1 million, a decrease of 0.3% from $889.5 million in the prior year.
This result was driven by a 4.4% decline in Industrial Filtration Solutions Products and a 4.5% decline in Special Applications
Products, partially offset by a 19.2% sales increase in Gas Turbine Products. The impact of foreign currency decreased net sales by
$52.1 million, or 5.9%.
Worldwide sales of Industrial Filtration Solutions Products were $529.0 million, a 4.4% decrease from $553.4 million in
the prior year. The Company continued to experience soft new equipment sales due to a continued weak global capital investment
environment, partially offset by strong replacement air filter sales due to improved utilization of the equipment already installed in
the field.
Worldwide sales of Gas Turbine Products were $186.9 million, an increase of 19.2% from $156.9 million in the prior year.
Sales of Gas Turbine Products systems were due to increased shipments of large filtration systems used in power generation as well
as the benefit of the acquisition of Northern Technical, which generated sales of $16.3 million.
Worldwide sales of Special Applications Products were $171.2 million, a 4.5% decrease from $179.2 million in the prior
year. The sales decline was the result of a decrease in demand for the Company’s membrane products.
Fiscal 2016 Industrial Products’ earnings before income taxes were $123.3 million, or 13.9% of Industrial Products’ sales,
a decrease from 15.1% in fiscal 2014. The fiscal 2015 percentage earnings decrease was driven by lower fixed cost absorption due
to a decrease in sales volumes and the negative mix impacts from larger projects in the Gas Turbine Systems and Industrial Filtration
Solutions businesses.
Liquidity and Capital Resources
Capital Structure
The Company’s long-term capital structure at July 31, 2016 and July 31, 2015 is summarized as follows (in millions):
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
July 31,
2016
351.8
771.4
1,123.2
$
$
2015
389.2
778.7
1,167.9
Ratio of long-term debt to total long-term capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31.3%
33.3%
As of July 31, 2016, long-term debt represented 31.3% of total long-term capital, defined as long-term debt plus total
shareholders’ equity, compared to 33.3% at July 31, 2015.
Total long-term debt outstanding at July 31, 2016 was $351.8 million compared to $389.2 million at the prior year end, a
decrease of $37.4 million.
On October 28, 2014, the Company entered into a First Amendment (Amendment) to its 5 year, multi-currency revolving
credit facility with a group of banks. The Amendment increased the Company’s borrowing availability up to $400.0 million. The
agreement provides that loans may be made under a selection of currencies and rate formulas including Base Rate Loans or LIBOR
Rate Loans, as defined in the Amendment. The interest rate on each advance is based on certain market interest rates and leverage
ratios. Facility fees and other fees on the entire loan commitment are payable over the duration of this facility. There was $130.0
million outstanding at July 31, 2016, and $160.0 million outstanding at July 31, 2015 and all borrowings which were outstanding
on those dates had maturities which were less than twelve months. At July 31, 2016 and 2015, $262.7 million and $232.2 million,
respectively, were available for further borrowing under such facilities. The amount available for further borrowing reflects a
reduction for issued standby letters of credit, as discussed in Note 6. The Company’s multi-currency revolving facility contains
financial covenants specifically related to maintaining a certain interest coverage ratio and a certain leverage ratio as well as other
covenants that, under certain circumstances, can restrict the Company’s ability to incur additional indebtedness, make investments
and other restricted payments, create liens and sell assets.
18
On April 16, 2015, the Company entered into a First Supplement to Note Purchase Agreement (First Supplement) with a
group of institutional investors which supplements a Note Purchase Agreement, dated March 27, 2014. Pursuant to the First
Supplement, the Company issued $25.0 million of senior unsecured notes due April 16, 2025, and $125.0 million of senior
unsecured notes due June 17, 2030. The debt was issued at face value and bears interest payable semi-annually at an annual rate of
interest of 2.93% and 3.18%, respectively. The proceeds from the notes were primarily used to refinance existing debt and for
general corporate purposes. The notes contain covenants specifically related to maintaining a certain leverage ratio and other
covenants that, under certain circumstances, can restrict the Company’s ability to incur additional indebtedness, make investments
and other restricted payments, create liens and sell assets.
On July 22, 2016, a Japanese Subsidiary of the Company issued a ¥1.0 billion note that was guaranteed by the Company.
The debt was issued at face value of ¥1.0 billion (approximately $9.7 million at July 31, 2016) is due July 15, 2021 and bears
interest payable quarterly at a variable interest rate. The interest rate was 0.25% as of July 31, 2016.
The Company has two uncommitted credit facilities in the U.S., which provide unsecured borrowings for general corporate
purposes. There was $26.8 million outstanding at July 31, 2016, and $15.3 million outstanding at July 31, 2015 and all borrowings
which were outstanding on those dates had maturities which were less than twelve months. The weighted average interest rate on
the short-term borrowings outstanding at July 31, 2016, was 1.25%. At July 31, 2016 and 2015, there was $38.2 million and $49.7
million, respectively, available under these two credit facilities.
The Company has a €100.0 million (approximately $111.1 million at July 31, 2016) program for issuing treasury notes for
raising short-, medium- and long-term financing for its European operations. There were no amounts outstanding under this program
at July 31, 2016 or 2015. Additionally, the Company’s European operations have lines of credit with an available limit of €44.0
million (approximately $48.9 million at July 31, 2016). There was no amount outstanding at July 31, 2016, and there was $10.4
million outstanding on these lines at July 31, 2015, which had a maturity date of less than twelve months.
Other international subsidiaries may borrow under various credit facilities. There was approximately $8.7 million
outstanding under these credit facilities as of July 31, 2016, and $1.6 million as of July 31, 2015 and all borrowings which were
outstanding on those dates had maturities which were less than twelve months. At July 31, 2016 and 2015, there was approximately
$45.5 million and $47.2 million available for use, respectively, under these facilities. The weighted average interest rate on these
short-term borrowings outstanding at July 31, 2016 and July 31, 2015, was 0.32% and 0.41%, respectively.
At July 31, 2016 and 2015, the Company had a contingent liability for standby letters of credit totaling $7.3 million and
$7.8 million, respectively, which have been issued and are outstanding. The letters of credit guarantee payment to third parties in
the event the Company is in breach of insurance contract terms as detailed in each letter of credit. At July 31, 2016 and 2015, there
were no amounts drawn upon these letters of credit.
During fiscal 2016, credit in the global credit markets was accessible and market interest rates remained low. The Company
believes that its current financial resources, together with cash generated by operations, are sufficient to continue financing its
operations for the next twelve months. There can be no assurance, however, that the cost or availability of future borrowings will
not be impacted by future capital market disruptions.
Certain note agreements contain debt covenants related to working capital levels and limitations on indebtedness. As of
July 31, 2016, the Company was in compliance with all such covenants.
Shareholders’ equity decreased $7.3 million to $771.4 million at July 31, 2016 as purchases of treasury stock and payments
of dividends paid were offset by net earnings for the year ended July 31, 2016.
Cash Flow Summary
The Company assesses its liquidity in terms of its ability to generate cash to fund its operating, investing, and financing
activities. Significant factors affecting liquidity are: cash flows generated from operating activities, capital expenditures, acquisitions,
dispositions, dividends, repurchase of outstanding shares, adequacy of available bank lines of credit and the ability to attract long-
term capital with satisfactory terms. The Company generates substantial cash from the operation of its businesses and remains in a
strong financial position, with sufficient liquidity available for reinvestment in existing businesses and strategic acquisitions.
19
Cash flows for the years ended July 31, 2016, 2015 and 2014 are summarized as follows (in millions):
2016
July 31,
2015
2014
Net cash provided by (used in):
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . .
$
$
Operating Activities
$
286.1
(55.6)
(175.0)
(2.2)
53.3
$
$
212.8
(111.7 )
(179.0 )
(28.6 )
(106.5) $
317.8
(124.1)
(120.8)
(0.6)
72.3
Cash provided by operating activities for the year ended July 31, 2016 was $286.1 million compared to $212.8 million
during the prior fiscal year, an increase of $73.3 million. The increase in cash generated by operating activities resulted from a
$99.6 million higher cash inflows from working capital relative to the prior fiscal year, partially offset by lower net earnings of
$17.3 million. The higher cash inflows from working capital was primarily attributable to improvements in inventories and accounts
receivable of $55.3 million and $29.2 million, compared to fiscal 2015 driven by active working capital management.
Cash provided by operating activities for fiscal 2015 was $212.8 million, a decrease of $105.0 million from fiscal 2014.
The decrease in cash generated from operating activities of $105.0 million was primarily attributable to a decrease in net income of
$52.1 million combined with higher cash outflows from working capital relative to fiscal 2014. The higher cash outflow from
working capital was primarily attributable to $76.9 million increase in cash used for trade accounts payable and accrued expenses
compared to fiscal 2014.
Accounts receivable at July 31, 2016 was $452.4 million, a decrease of $7.6 million from the balance of $460.0 million at
July 31, 2015. Days sales outstanding was 67.5 days as of July 31, 2016, compared to 64.1 days as of July 31, 2015. The increase
in days sales outstanding reflects delayed payments and longer payment terms associated with some large GTS projects during
fiscal 2016. The Company’s days sales outstanding is also impacted by the mix of foreign sales, particularly in countries where
extended payment terms are customary. Days sales outstanding is calculated using the count back method, which calculates the
number of days of most recent revenue that is reflected in the net accounts receivable balance.
Inventory was $234.1 million at July 31, 2016 as compared to $265.0 million at July 31, 2015. The $30.9 million decrease
in inventory was the result of increased sales in the fourth quarter of fiscal 2016 and an effort to reduce inventory levels in line with
demand. Inventory turns were 4.0 times per year as of July 31, 2016, compared to 4.3 times per year as of July 31, 2015. Inventory
turns are calculated by taking the inventoriable portion of cost of goods sold for the trailing twelve month period divided by the
average gross inventory value over the prior thirteen month period.
Investing Activities
Cash utilized for investing activities for the year ended July 31, 2016 was $55.6 million, a decrease of $56.1 million from
the cash used in fiscal 2015 of $111.7 million. Cash used in investing activities are cash outflows for capital expenditures and
acquisitions, partially offset by proceeds from sales of short-term investments. Capital expenditures for property, plant and
equipment during fiscal 2016 totaled $72.9 million compared to $93.8 million during fiscal 2015, a decrease of $20.9 million. Fiscal
2016 and fiscal 2015 expenditures primarily related to the Company’s Global ERP Project, global plant capacity additions,
information and lab technology equipment, productivity-enhancing investments at manufacturing sites and tooling to manufacture
new products.
Capital spending in fiscal 2017 is estimated to be between $70 and $80 million. It is anticipated that fiscal 2017 capital
expenditures will be financed primarily by cash on hand, cash generated from operations, and lines of credit.
Cash utilized for acquisitions in fiscal 2016 was $12.9 million compared to $105.6 million during the year ended July 31,
2015. The Company acquired Engineered Products Company (EPC), a leading designer and manufacturer of indicators, gauges,
switches and sensors for engine air and liquid filtration systems in fiscal 2016.
Financing Activities
Cash used for financing activities was $175.0 million, $179.0 million and $120.8 million for the years ended July 31, 2016,
2015 and 2014, respectively. Cash flows used in financing activities generally relate to the use of cash for repurchases of the Company’s
common stock and payment of dividends, offset by net borrowing activity and proceeds from the exercise of stock options.
20
The Company’s dividend policy is to maintain a payout ratio which allows dividends to increase with the long-term growth
of earnings per share. The Company’s dividend payout ratio target is 35% to 45% of the prior three years average earnings per share.
Dividends paid for the years ended July 31, 2016, 2015 and 2014 were $91.2 million, $91.2 million and $83.1 million, respectively.
The Board of Directors authorized the repurchase of 14.0 million shares of common stock under the stock repurchase plan
dated May 29, 2015. This repurchase authorization, which is effective until terminated by the Board of Directors, replaced the
Company’s previous stock repurchase plan dated September 27, 2013 that authorized the repurchase of 15.0 million shares of
common stock. The September 27, 2013 authorization replaced a March 26, 2010 authorization for the purchase of 16.0 million
shares. Under the various authorizations, shares repurchased were 2.5 million, 6.7 million and 6.8 million shares for the years ended
July 31, 2016, 2015 and 2014, respectively. As of July 31, 2016, the Company had remaining authorization to repurchase 10.5
million shares under the current authorization.
During the year ended July 31, 2016, the Company reduced short-term borrowings and long-term debt, including current
maturities, by $15.4 million as debt repayments exceeded proceeds from long-term debt of $9.6 million. Short-term borrowings at
July 31, 2016 were reduced by $23.6 million from July 31, 2015.
As of July 31, 2015, short-term borrowings and long-term debt, including current maturities, were $578.3 million, an
increase of $147.6 million from the prior fiscal year end. This increase is primarily due to the issuance of $150.0 million of senior
unsecured notes during in April 2015.
Cash and Cash Equivalents
At July 31, 2016 and 2015, cash and cash equivalents were $243.2 million and $189.9 million, respectively. The Company
did not hold any short-term investments at July 31, 2016. Short-term investments may change year to year based on maturity dates
of existing investments, the Company’s outlook for cash requirements and available access to other sources of liquidity.
The majority of the Company’s cash and cash equivalents are held by its foreign subsidiaries as nearly half of the
Company’s earnings occur outside the U.S. Most of these funds are considered permanently reinvested outside the U.S., as the cash
generated from U.S. operations plus the Company’s short-term debt facilities are anticipated to be sufficient for the Company’s
U.S. operation’s cash needs. If additional cash was required for the Company’s operations in the U.S., it may be subject to additional
U.S. taxes if funds were repatriated from certain foreign subsidiaries.
The Company expects that cash generated by operating activities will be between $260.0 million and $300.0 million in
fiscal 2017. At July 31, 2016, the Company had cash and cash equivalents of $243.2 million and $506.4 million available under
existing lines of credit. The Company believes that the combination of existing cash, available credit under existing credit facilities
and the expected cash generated by operating activities will be adequate to meet cash requirements for fiscal 2017, including debt
repayments, payment of anticipated dividends, possible share repurchase activity, potential acquisitions and capital expenditures.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements, with the exception of the guarantee of 50% of certain
debt of its joint venture with Caterpillar, Advanced Filtration Systems Inc. (AFSI). As of July 31, 2016, the joint venture had $24.8
million of outstanding debt, of which the Company guarantees half. The Company does not believe that this guarantee will have a
current or future effect on its financial condition, results of operations, liquidity, or capital resources.
Contractual Obligations
The following table summarizes the Company’s contractual obligations as of July 31, 2016, for the years indicated
(in millions):
Long-term debt obligations . . . . . . . . . . . . . . . . . . . . . $
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . .
Interest on long-term debt obligations . . . . . . . . . . . .
Operating lease obligations . . . . . . . . . . . . . . . . . . . . .
Purchase obligations(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and deferred compensation(2) . . . . . . . . . . . .
Total(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
___________
Less than
1 year
Payments Due by Period
1 - 3
years
3 - 5
years
More than
5 years
50.0
0.8
13.6
10.0
120.2
15.8
210.4
$
$
65.9
1.0
21.7
12.6
5.2
11.9
118.3
$
$
9.7
0.2
18.7
2.6
0.2
11.4
42.8
$
$
275.0
—
52.8
0.2
0.6
52.2
380.8
Total
400.6
2.0
106.8
25.4
126.2
91.3
752.3
$
$
(1) Purchase obligations consist primarily of inventory, tooling, and capital expenditures. The Company’s purchase orders for inventory are based on expected
customer demand, and as a result quantities and dollar volumes are subject to change.
21
(2) Pension and deferred compensation consists of long-term pension liabilities and salary and bonus deferrals elected by certain executives under the Company’s
Deferred Compensation Plan. Deferred compensation balances earn interest based on a treasury bond rate as defined by the plan (10-year treasury bond STRIP
rate plus two percent for deferrals prior to January 1, 2011 and 10-year treasury bond rates for deferrals after December 31, 2010) are approved by the Human
Resources Committee of the Board of Directors, and are payable at the election of the participants.
(3)
In addition to the above contractual obligations, the Company may be obligated for additional cash outflows of $17.5 million for potential tax obligations,
including accrued interest and penalties. The payment and timing of any such payments is affected by the ultimate resolution of the tax years that are under
audit or remain subject to examination by the relevant taxing authorities. Therefore, quantification of an estimated range and timing of future payments cannot
be made at this time.
Critical Accounting Policies
The Company’s consolidated financial statements are prepared in conformity with GAAP. The preparation of these
financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented.
Management bases these estimates on historical experience and various other assumptions that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments about the recorded values of certain assets and
liabilities. The Company believes its use of estimates and underlying accounting assumptions adheres to GAAP and is consistently
applied. Valuations based on estimates and underlying accounting assumptions are reviewed for reasonableness on a consistent
basis throughout the Company. The Company’s Critical Accounting Policies are those that require more significant judgments and
estimates used in the preparation of its consolidated financial statements and that are the most important to aid in fully understanding
its financial results. The Company’s Critical Accounting Policies are the following:
Revenue recognition The Company sells a wide range of filtration solutions into many industries around the globe.
Revenue is recognized when both product ownership and the risk of loss have transferred to the customer, the Company has no
remaining obligations, the selling price is fixed and determinable, and collectability is reasonably assured. The vast majority of the
Company’s sales agreements are for standard products with product ownership and risk of loss transferring to the customer when
the product has shipped, at which point revenue is recognized. Although less common, the Company does have sales agreements
with customers requiring product ownership and risk of loss to transfer at the customer’s location. For these non-standard terms,
the Company defers revenue on these product sales until the product has been delivered.
For the Company’s GTS sales, which typically consist of multiple shipments of components that will comprise the entire
GTS project, it must carefully monitor the transfer of title related to each portion of a system sale. The Company defers revenue
recognition until product ownership and risk of loss has transferred to the customer for all components and when all terms specified
in the contract are met which may include requirements such as the requirement for the Company to deliver technical documentation
to the customer or a quality inspection which may be required to be approved by the customer.
In limited circumstances, the Company enters into sales agreements that involve multiple elements (such as equipment,
replacement filter elements, and installation services). In these instances, the Company determines if the multiple elements in the
arrangement represent separate units of accounting. If separate units of accounting exist, the price of the entire arrangement is
allocated to the separate units of account using the Company’s best estimate of relative selling price if the unit of account was sold
separately. Revenue is then recognized separately for each unit of account when the criteria for revenue recognition have been met.
Additionally, the Company records estimated discounts and rebates offered to customers as a reduction of sales in the same
period revenue is recognized
Goodwill Goodwill is assessed for impairment annually, or more frequently if events or changes in circumstances indicate
that the asset may be impaired. The Company performed an impairment assessment during the third quarter of fiscal 2016. The
results of this assessment showed that the estimated fair values of the reporting units to which goodwill is assigned continued to
exceed the corresponding carrying values of the respective reporting units resulting in no goodwill impairment. Of the Company’s
five reporting units that contain goodwill, the estimated fair values during the Company’s annual third quarter fiscal 2016
impairment tests exceeded the respective carrying values by at least 34%.
During the second quarter of fiscal 2016, the Company revised its forecast associated with its GTS reporting unit. While
the previous forecast for this reporting unit called for a year-over-year decline in sales, the Company continued to face deferrals
and softening demand for large-turbine projects. Given the challenges facing this business, the Company revisited its strategic focus
and priorities. The Company will continue to focus on innovative products while growing the aftermarket business but will be more
selective in taking on large-turbine projects, which resulted in the revised forecast associated with its GTS reporting unit.
As a result of the strategic shift and actions taken in the second quarter of fiscal 2016, the Company concluded that an
interim goodwill triggering event had occurred for the GTS reporting unit. Goodwill associated with the GTS reporting unit was
$60.2 million as of January 31, 2016 and is included in the Industrial Products segment. The Company completed its goodwill
impairment assessment using a discounted cash flow model based on management’s judgments and assumptions to determine the
22
estimated fair value of the reporting unit. Based on the results of this assessment, the Company concluded the estimated fair value
of the GTS reporting unit exceeded the respective carrying amount of the reporting unit by approximately 38%. Therefore, the
second step of the impairment test was not necessary for this reporting unit.
In determining the estimated fair value of the reporting unit, the Company used the income approach, a valuation technique
using an estimate of future cash flows from the reporting unit’s financial forecast. A terminal growth rate of 3.0% and a discount
rate of 12.0% were used reflecting the relative risk of achieving cash flows as well as any other specific risks or factors related to
the GTS reporting unit. The Company believes the assumptions used in its discounted cash flow analysis are appropriate and result
in reasonable estimate of the reporting unit’s fair value. The Company performed a sensitivity analysis to determine how the
assumptions made impact the results of the impairment test. Holding all other assumptions constant, an unfavorable change in
projected cash flows of 25.0% or more would potentially result in an indication of impairment. Additionally, a decrease in the
residual growth rate of 4.5 percentage points or more or an increase in the discount rate of 1.2 percentage points or more would
potentially result in an indication of impairment. While these projections supported no impairment of this reporting unit as of
January 31, 2016, given that the Company’s second quarter 2016 results fell below expectations and the sensitivities to the
assumptions used in the calculations of the estimated cash flows, it is possible that an impairment could be incurred in the future.
The Company will continue to monitor results and expected cash flows in the future to assess whether goodwill impairment in the
GTS reporting unit may be necessary.
Income taxes As part of the process of preparing the Company’s Consolidated Financial Statements, management is
required to estimate income taxes in each of the jurisdictions in which the Company operates. This process involves estimating
actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and
book accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company’s
Consolidated Balance Sheet. These assets and liabilities are evaluated by using estimates of future taxable income streams and the
impact of tax planning strategies. Reserves are also estimated for uncertain tax positions that are currently unresolved. The Company
routinely monitors the potential impact of such situations and believes that it was properly reserved at July 31, 2016. As of July 31,
2016, the liability for unrecognized tax benefits, accrued interest, and penalties was $17.5 million.
Defined Benefit Pension Plans The Company incurs expenses relating to employee benefits such as non-contributory
defined benefit pension plans. In accounting for these defined benefit pension plans, management must make a variety of
assumptions and estimates including mortality rates, discount rates, overall Company compensation increases, expected return on
plan assets, and health care cost trend rates. The Company considers historical data as well as current facts and circumstances and
uses a third-party specialist to assist management in determining these estimates.
To develop the assumption regarding the expected long-term rate of return on assets for its U.S. pension plans, the
Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset
allocation of the pension portfolio. The expected long-term rate of return on assets assumption for the plans outside the U.S. reflects
the investment allocation and expected total portfolio returns specific to each plan and country. Reflecting the relatively long-term
nature of the U.S. plans’ obligations, approximately 65% of the plans’ assets are invested in equity securities, 30% in fixed income,
and 5% in real assets (investments into funds containing commodities and real estate). In fiscal 2016, the Company plans to continue
investing in liability-driven investment funds, which will change the asset allocations for the U.S. plans. The Company selected a
6.90% long-term rate of return on assets as of July 31, 2016, which will also be used to develop the fiscal 2017 expense for the
Company’s U.S. pension plans and selected a long-term rate of return on assets for its non-U.S. plans of 3.98%. A one percent
change in the expected long-term rate of return on plan assets would have changed the fiscal 2016 annual pension expense by
approximately $4.6 million.
The Company’s objective in selecting a discount rate for its pension plans is to select the best estimate of the rate at which
the benefit obligations could be effectively settled on the measurement date, taking into account the nature and duration of the
benefit obligations of the plan. In making this best estimate, the Company looks at the rates of return on high-quality fixed-income
investments currently available and expected to be available during the period to maturity of the benefits. This process includes
assessing the universe of bonds available on the measurement date with a quality rating of Aa or better. Similar appropriate
benchmarks are used to determine the discount rate for the non-U.S. plans. This resulted in a weighted average discount rate for the
U.S. plans of 3.65% down from 4.33% in the prior year and decreased the weighted average discount rate used for its non-U.S.
plans from 3.14% to 2.08%. Effective August 1, 2016, the Company changed to the split/spot rate method to estimate the service
and interest costs for its U.S., United Kingdom, and Belgium plans. The new method utilizes a full yield curve approach to estimate
service and interests costs by applying specific spot rates along the yield curve used to determine the benefit obligation of relevant
projected cash outflows.
In fiscal 2016, the Company’s global pension expense was $17.8 million. Effective August 1, 2016, participants in the
U.S. salaried plan no longer continue to accrue Company contribution credits under the plan but are eligible for a 3.0% annual
Company retirement contribution in addition to the Company’s match to their 401(k) accounts.
23
While changes to the Company’s pension assumptions would not be expected to impact its annual pension expense by a
material amount, such changes could significantly impact the Company’s pension liability.
New Accounting Standards Not Yet Adopted
For new accounting standards not yet adopted refer to Note 1 Summary of Significant Accounting Policies included in
Item 8 of this Annual Report.
Safe Harbor Statement under the Securities Reform Act of 1995
The Company, through its management, may make forward-looking statements reflecting the Company’s current views
with respect to future events and financial performance. These forward-looking statements, which may be included in reports filed
under the Securities Exchange Act of 1934, as amended (the Exchange Act), in press releases and in other documents and materials
as well as in written or oral statements made by or on behalf of the Company, are subject to certain risks and uncertainties, including
those discussed in Item 1A Risk Factors of this Annual Report, which could cause actual results to differ materially from historical
results or those anticipated. The words or phrases “will likely result,” “are expected to,” “will continue,” “will allow,” “estimate,”
“project,” “believe,” “expect,” “anticipate,” “forecast” and similar expressions are intended to identify forward-looking statements
within the meaning of Section 21e of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, as enacted by
the Private Securities Litigation Reform Act of 1995 (PSLRA). In particular, the Company desires to take advantage of
the protections of the PSLRA in connection with the forward-looking statements made in this Annual Report, including those
contained in the “Outlook” section of Item 7 Management’s Discussion and Analysis of Financial Condition and Results of
Operations. All statements other than statements of historical fact are forward-looking statements. These statements do not
guarantee future performance.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date
such statements are made. In addition, the Company wishes to advise readers that the factors listed in Item 1A Risk Factors of this
Annual Report, as well as other factors, could affect the Company’s performance and could cause the Company’s actual results for
future periods to differ materially from any opinions or statements expressed. These factors include, but are not limited to, world
economic and industrial market conditions; the Company’s ability to maintain certain competitive advantages over competitors;
pricing pressures; the Company’s ability to protect and enforce its intellectual property rights; the Company’s dependence on global
operations; customer concentration in certain cyclical industries; commodity availability and pricing; the continued implementation
of the Company’s global ERP information technology system and other new information technology systems; information security
and data breaches; foreign currency fluctuations; governmental laws and regulations; changes in tax laws, regulations and results
of examinations; the Company’s ability to attract and retain key personnel; changes in capital and credit markets; execution of the
Company’s acquisition strategy; the possibility of goodwill or intangible asset impairment; execution of restructuring plans; the
Company’s ability to maintain an effective system of internal control over financial reporting and other factors included in Item 1A
Risk Factors of this Annual Report. The Company undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company’s market risk includes the potential loss arising from adverse changes in foreign currency exchange rates
and interest rates. The Company manages foreign currency market risk from time to time through the use of a variety of financial
and derivative instruments. The Company does not enter into any of these instruments for speculative trading purposes. Rather, the
Company’s objective in managing these risks is to reduce fluctuations in earnings and cash flows associated with changes in foreign
currency exchange rates. The Company uses forward exchange contracts and other hedging activities to hedge the U.S. dollar value
resulting from existing recognized foreign currency denominated asset and liability balances and also for anticipated foreign
currency transactions. The Company also naturally hedges foreign currency through its production in the countries in which it sells
its products. The Company’s market risk on interest rates is the potential decrease in fair value of long-term debt resulting from a
potential increase in interest rates. See further discussion of these market risks below.
Foreign Currency During fiscal 2016, the U.S. dollar was generally stronger than in fiscal 2015 compared to many of the
currencies of the foreign countries in which the Company operates. The overall strength of the dollar had a negative impact on the
Company’s international net sales results because the foreign denominated revenues translated into fewer U.S. dollars.
It is not possible to determine the exact impact of foreign currency translation changes. However, the direct effect on
reported net sales and net earnings can be estimated. For the year ended July 31, 2016, the estimated impact of foreign currency
translation resulted in an overall decrease in reported net sales of $74.2 million and a decrease in reported net earnings of
approximately $7.9 million. Foreign currency translation had a negative impact in many regions around the world.
24
The Company maintains significant assets and operations in Europe, Asia-Pacific, Latin America, and South Africa,
resulting in exposure to foreign currency gains and losses. A portion of the Company’s foreign currency exposure is naturally
hedged by incurring liabilities, including bank debt, denominated in the local currency in which the Company’s foreign subsidiaries
are located.
The foreign subsidiaries of the Company generally purchase the majority of their input costs and then sell to many of their
customers in the same local currency. However, the Company still may be exposed to cost increases relative to local currencies in
the markets to which it sells. To mitigate such adverse trends, the Company, from time to time, enters into forward exchange
contracts and other hedging activities. Additionally, foreign currency positions are partially offsetting and are netted against one
another to reduce exposure.
Some products made by the Company in the U.S. are sold internationally. As a result, sales of such products are affected
by the value of the U.S. dollar relative to other currencies. Any long-term strengthening of the U.S. dollar could depress these sales.
Also, competitive conditions in the Company’s markets may limit its ability to increase product pricing in the face of adverse
currency movements.
Interest The Company’s exposure to market risks for changes in interest rates relates primarily to its short-term
investments, short-term borrowings, and interest rate swap agreements, as well as the potential increase in fair value of long-term
debt resulting from a potential decrease in interest rates. The Company has limited earnings or cash flow exposure due to market
risks on its long-term debt obligations as a result of the majority of the debt being fixed-rate. However, interest rate changes would
affect the fair market value of the debt. As of July 31, 2016, the estimated fair value of debt with fixed interest rates was $394.4
million compared to its carrying value of $375.0 million. The fair value is estimated by discounting the projected cash flows using
the rate of which similar amounts of debt could currently be borrowed. As of July 31, 2016, the Company’s financial liabilities with
exposure to changes in interest rates consisted mainly of $165.5 million of short-term debt outstanding and a total of ¥ 2.65 billion,
or $25.7 million, of variable rate long-term debt. Assuming a hypothetical increase of one-half percent in short-term interest rates,
with all other variables remaining constant, interest expense would have increased $1.3 million and interest income would have
increased $1.2 million in fiscal 2016.
Pensions The Company is exposed to market return fluctuations on its qualified defined benefit pension plans. In fiscal
2016, the Company reduced its long-term rate of return from 6.99% to 6.90% on its U.S. plans and reduced its rate from 4.83% to
3.98% on its non-U.S. plans, to reflect its future expectation for returns. Consistent with published bond indices, the Company
reduced its discount rate from 4.33% to 3.65% on its U.S. plans and reduced its rates from 3.14% to 2.08% for its non-U.S. plans.
The plans were underfunded by $81.8 million at July 31, 2016, since the projected benefit obligation exceeded the fair value of the
plan assets.
25
Item 8. Financial Statements and Supplementary Data
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rule 13a-15(f). Management of the Company has assessed the effectiveness of the Company’s
internal control over financial reporting as of July 31, 2016. In making its assessment of internal control financial reporting,
management used the criteria described in Internal Control - Integrated Framework - version 2013 issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that the
Company’s internal control over financial reporting was effective as of July 31, 2016 based on criteria in Internal Control-Integrated
Framework issued by the COSO. The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP,
has audited the effectiveness of the Company’s internal control over financial reporting as of July 31, 2016, as stated in their report
which appears herein.
Tod E. Carpenter
President and Chief Executive Officer
September 23, 2016
Scott J. Robinson
Chief Financial Officer
September 23, 2016
26
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Donaldson Company, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings,
comprehensive income, changes in shareholders’ equity and cash flows present fairly, in all material respects, the financial position
of Donaldson Company, Inc. and its subsidiaries at July 31, 2016 and July 31, 2015, and the results of their operations and their
cash flows for each of the three years in the period ended July 31, 2016 in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of July 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible
for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in Management’s Report on Internal Control over Financial
Reporting appearing under Item 8A. Our responsibility is to express opinions on these financial statements and on the Company’s
internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
September 23, 2016
27
Donaldson Company, Inc. and Subsidiaries
Consolidated Statements of Earnings
(In millions, except per share amounts)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares – basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares – diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings per share – basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings per share – diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
2,220.3 $
1,465.5
754.8
425.1
55.5
274.2
(3.9 )
20.7
257.4
66.6
190.8 $
Year ended July 31,
2015
2,371.2 $
1,562.6
808.6
460.1
60.2
288.3
(15.5)
15.2
288.6
80.5
208.1 $
2014
2,473.5
1,595.7
877.8
460.3
61.8
355.7
(15.2)
10.2
360.7
100.5
260.2
133.8
134.8
1.43 $
1.42 $
137.8
139.4
1.51 $
1.49 $
145.6
147.6
1.79
1.76
$
$
$
$
Cash dividends declared per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
0.690 $
0.670 $
0.610
The accompanying notes are an integral part of these Consolidated Financial Statements.
28
Donaldson Company, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In millions)
Year ended July 31,
2016
2015
2014
190.8
$
208.1
$
260.2
(18.5 )
(119.1)
(2.1)
(6.3)
0.1
(8.3)
251.9
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and postretirement liability adjustment, net of deferred taxes of $14.4,
$(0.2) and $1.3, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(25.2 )
3.4
Gain (loss) on hedging derivatives, net of deferred taxes of $(0.1), $0.4 and
$(0.1), respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.1
(43.6 )
147.2
$
(0.5)
(116.2)
91.9
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
29
Donaldson Company, Inc. and Subsidiaries
Consolidated Balance Sheets
(In millions, except share amounts)
As of July 31,
2016
2015
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, less allowance of $8.6 and $6.7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaids and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
243.2 $
—
452.4
234.1
29.0
51.0
1,009.7
469.8
229.3
38.5
41.3
1,788.6 $
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued employee compensation and related taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
165.5 $
51.2
143.3
61.0
37.5
85.3
543.8
351.8
3.1
118.5
1,017.2 $
189.9
27.5
460.0
265.0
28.2
60.1
1,030.7
470.6
223.7
37.9
46.6
1,809.5
187.3
1.8
179.2
66.5
42.9
82.9
560.6
389.2
12.5
68.5
1,030.8
Commitments and contingencies (Note 17)
Shareholders’ equity:
Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued . . . . . . . . . . . . . . . . . .
Common stock, $5.00 par value, 240,000,000 shares authorized, 151,643,194 shares issued . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, 18,750,503 and 17,044,950 shares, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
758.2
905.1
4.0
16.7
(205.6)
(707.0)
771.4
1,788.6 $
—
758.2
815.2
3.9
17.9
(162.0)
(654.5)
778.7
1,809.5
The accompanying notes are an integral part of these Consolidated Financial Statements.
30
Donaldson Company, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In millions)
Operating Activities
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings of affiliates, net of distributions . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit of equity plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation plan expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of acquired businesses . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaids and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade accounts payable and other accrued expenses . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing Activities
Purchases of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing Activities
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit of equity plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2016
Year ended July 31,
2015
2014
190.8 $
208.1 $
260.2
74.9
(0.3 )
(3.3 )
(2.7 )
7.3
—
11.7
8.5
29.1
0.8
(30.7 )
286.1
(72.9 )
2.2
—
28.0
(12.9 )
(55.6 )
74.3
(1.1)
(5.6)
(6.8)
10.7
—
25.1
(20.7)
(26.2)
(27.8)
(17.2)
212.8
(93.8)
0.2
(27.0)
114.5
(105.6)
(111.7)
9.6
(1.4 )
(23.6 )
(84.3 )
(91.2 )
2.7
13.2
(175.0 )
(2.2 )
53.3
189.9
243.2 $
150.0
(4.2)
2.8
(256.3)
(91.2)
6.8
13.1
(179.0)
(28.6)
(106.5)
296.4
189.9 $
67.2
(3.4)
(7.8)
(8.8)
11.6
0.9
10.1
(44.8)
(19.3)
(7.8)
59.7
317.8
(97.2)
0.4
(108.8)
81.5
—
(124.1)
125.0
(81.9)
175.4
(279.4)
(83.1)
8.8
14.4
(120.8)
(0.6)
72.3
224.1
296.4
Supplemental Cash Flow Information
Cash paid during the year for:
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
67.8 $
19.7 $
85.6 $
14.7 $
93.1
11.1
The accompanying notes are an integral part of these Consolidated Financial Statements.
31
Donaldson Company, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(In millions, except per share amounts)
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Non-
Controlling
Interest
Stock
Compensation
Plans
Accumulated
Other
Comprehensive
Income (Loss)
$
758.2 $
— $
532.3 $
— $
21.8 $
(37.5) $
Treasury
Stock
(189.6) $ 1,085.2
Total
260.2
(10.5)
(1.8)
(0.5)
9.9
(87.2)
702.4
208.1
(13.1)
(0.7)
(0.1)
9.5
(90.9)
815.2
190.8
(7.0)
(3.1)
(0.4)
10.5
758.2
—
(5.7)
(1.9)
(0.1)
7.7
758.2
—
(2.1)
(6.3)
0.1
(0.5)
(1.7)
(279.4 )
30.5
4.9
1.6
—
19.6
(45.8)
(432.0 )
(119.1)
3.4
(0.5)
3.9
(1.1)
(0.6)
(256.3 )
30.2
3.0
0.6
3.9
17.9
(162.0)
(654.5 )
(18.5)
(25.2)
0.1
(84.3 )
29.0
2.5
0.3
(1.4)
(1.3)
(14.7)
(1.4)
0.1
(0.7)
(0.5)
2.7
6.7
(91.5)
905.1 $
4.0 $
16.7 $
(205.6) $
(707.0) $
260.2
(2.1)
(6.3)
0.1
251.9
(279.4)
13.0
(0.5)
(1.0)
9.9
10.5
(87.2)
1,002.4
208.1
(119.1)
3.4
(0.5)
91.9
3.9
(256.3)
11.4
(0.7)
(0.2)
9.5
7.7
(90.9)
778.7
190.8
(18.5)
(25.2)
0.1
147.2
(84.3)
12.9
(0.8)
(0.2)
6.7
2.7
(91.5)
771.4
Balance July 31, 2013
Comprehensive income . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . .
Pension liability adjustment, net of
deferred taxes . . . . . . . . . . . . . . . . . .
Net gain on cash flow hedging
derivatives, net of deferred taxes . . .
Comprehensive income . . . . . . . . . .
Treasury stock acquired . . . . . . . . . .
Stock options exercised . . . . . . . . . .
Deferred stock and other activity . . .
Performance awards . . . . . . . . . . . . .
Stock option expense . . . . . . . . . . . .
Tax reduction - employee plans . . . .
Dividends ($0.61 per share) . . . . . . .
Balance July 31, 2014 . . . . . . . . . . .
Comprehensive income . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . .
Pension liability adjustment, net of
deferred taxes . . . . . . . . . . . . . . . . . .
Net gain on cash flow hedging
derivatives, net of deferred taxes . . .
Comprehensive income . . . . . . . . . .
Purchase of IFIL . . . . . . . . . . . . . . . .
Treasury stock acquired . . . . . . . . . .
Stock options exercised . . . . . . . . . .
Deferred stock and other activity . . .
Performance awards . . . . . . . . . . . . .
Stock option expense . . . . . . . . . . . .
Tax reduction - employee plans . . . .
Dividends ($0.67 per share) . . . . . . .
Balance July 31, 2015 . . . . . . . . . . .
Comprehensive income . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . .
Pension liability adjustment, net of
deferred taxes . . . . . . . . . . . . . . . . . .
Net gain on cash flow hedging
derivatives, net of deferred taxes . . .
Comprehensive income . . . . . . . . . .
Treasury stock acquired . . . . . . . . . .
Stock options exercised . . . . . . . . . .
Deferred stock and other activity . . .
Performance awards . . . . . . . . . . . . .
Stock option expense . . . . . . . . . . . .
Tax reduction - employee plans . . . .
Dividends ($0.69 per share) . . . . . . .
Balance July 31, 2016 . . . . . . . . . . . $
758.2 $
— $
The accompanying notes are an integral part of these Consolidated Financial Statements.
32
Donaldson Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1. Summary of Significant Accounting Policies
Description of Business Donaldson 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. Products are
manufactured at 42 plants around the world and through three joint ventures. Products are sold to OEMs, distributors, dealers and
directly to end-users.
Principles of Consolidation The Consolidated Financial Statements include the accounts of Donaldson Company, Inc. and
all of its majority-owned subsidiaries along with the majority stake in IFIL.USA. All intercompany accounts and transactions have
been eliminated. The Company’s three joint ventures that are not majority-owned are accounted for under the equity method.
Use of Estimates The preparation of the Consolidated Financial Statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Foreign Currency Translation For substantially all foreign operations, local currencies are considered the functional
currency. Assets and liabilities of non-U.S. dollar functional currency entities are translated to U.S. dollars at year-end exchange
rates and the resulting gains and losses arising from the translation of net assets located outside the U.S. are recorded as a cumulative
translation adjustment, a component of Accumulated Other Comprehensive Income (Loss) in the Consolidated Balance Sheets.
Elements of the Consolidated Statements of Earnings are translated at average exchange rates in effect during the year. Realized
foreign currency transaction gains and losses are included in Other Income, net in the Consolidated Statements of Earnings. Foreign
currency transaction gains (losses) of $(4.7) million, $2.1 million, and $1.7 million are included in Other Income, net in the
Consolidated Statements of Earnings in the years ended July 31, 2016, 2015 and 2014, respectively.
Cash Equivalents The Company considers all highly liquid temporary investments with an original maturity of three
months or less to be cash equivalents. Cash equivalents are carried at cost that approximates market value.
Short-Term Investments The Company’s short-term investments consist exclusively of time deposits with durations longer
than 3 months, but less than one year. These investments are carried at cost, which approximates their estimated fair value.
Classification of the Company’s investments as current or non-current is dependent upon management’s intended holding period,
the investment’s maturity date and liquidity considerations based on market conditions. If management intends to hold the
investments for longer than one year as of the balance sheet date, they are classified as non-current.
Accounts Receivable and Allowance for Doubtful Accounts Trade accounts receivables are recorded at the invoiced amount
and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of credit losses in its
existing accounts receivable. The Company determines the allowance based on historical write-off experience in the industry, regional
economic data and evaluation of specific customer accounts for risk of loss. The Company reviews its allowance for doubtful accounts
monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. All other balances
are reviewed on a pooled basis by type of receivable. Account balances are reserved for when the Company feels it is probable the
receivable will not be recovered. The Company does not have any off-balance sheet credit exposure related to its customers.
Inventories Inventories are stated at the lower of cost or market. U.S. inventories are valued using the last-in, first-out
(LIFO) method while the non-U.S. inventories are valued using the first-in, first-out (FIFO) method. Inventories valued at LIFO
were approximately 29.0% and 34.2% of total inventories at July 31, 2016 and 2015, respectively. For inventories valued under the
LIFO method, the FIFO cost exceeded the LIFO carrying values by $39.8 million and $41.6 million at July 31, 2016 and 2015,
respectively. Results of operations for all periods presented were not materially affected by the liquidation of LIFO inventory.
Property, Plant and Equipment Property, plant and equipment are stated at cost. Additions, improvements or major
renewals are capitalized while expenditures that do not enhance or extend the asset’s useful life are charged to expense as incurred.
Depreciation is computed using the straight-line method. Depreciation expense was $68.8 million, $66.9 million and $62.0 million
in the years ended July 31, 2016, 2015 and 2014, respectively. The estimated useful lives of property, plant and equipment are ten
to forty years for buildings, including building improvements and three to ten years for machinery and equipment.
Internal-Use Software The Company capitalizes direct costs of materials and services used in the development and
purchase of internal-use software. Amounts capitalized are amortized on a straight-line basis over a period of five to seven years
and are reported as a component of machinery and equipment within property, plant and equipment.
33
Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the fair value of net assets
acquired in business combinations under the purchase method of accounting. Other intangible assets, consisting primarily of patents,
trademarks and customer relationships and lists, are recorded at cost and are amortized on a straight-line basis over their estimated
useful lives of three to twenty years. Goodwill is assessed for impairment annually or if an event occurs or circumstances change
that would indicate the carrying amount may be impaired. The impairment assessment for goodwill is done at a reporting unit level.
Reporting units are one level below the operating segment level but can be combined when reporting units within the same operating
segment have similar economic characteristics. An impairment loss generally would be recognized when the carrying amount of
the reporting unit’s net assets exceeds the estimated fair value of the reporting unit.
Recoverability of Long-Lived Assets The Company reviews its long-lived assets, including identifiable intangibles, for
impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If
impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets,
the carrying value is reduced. The Company recorded an impairment charge of $2.9 million in fiscal 2015 for a partially completed
facility in Xuzhou, China. There were no impairment charges recorded in fiscal 2016 or fiscal 2014.
Income Taxes The provision for income taxes is computed based on the pre-tax income reported for financial statement
purposes. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributed to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets
and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets when it is more-likely-than-not
that a tax benefit will not be realized.
Treasury Stock Repurchased common stock is stated at cost (determined on an average cost basis) and is presented as a
reduction of shareholders’ equity.
Research and Development Expense Research and development expenses are charged against earnings in the year incurred.
Research and development costs include basic scientific research and the application of scientific advances to the development of
new and improved products and their uses.
Stock-Based Compensation The Company offers stock-based employee compensation plans, which are more fully
described in Note 10. Stock-based employee compensation costs are recognized using the fair-value based method.
Revenue Recognition The Company sells a wide range of filtration solutions into many industries around the globe.
Revenue is recognized when both product ownership and the risk of loss have transferred to the customer, the Company has no
remaining obligations, the selling price is fixed and determinable, and collectability is reasonably assured. The vast majority of the
Company’s sales agreements are for standard products with product ownership and risk of loss transferring to the customer when
the product has shipped, at which point revenue is recognized. Although less common, the Company does have sales agreements
with customers requiring product ownership and risk of loss to transfer at the customer’s location. For these non-standard terms,
the Company defers revenue on these product sales until the product has been delivered.
For the Company’s Gas Turbine Systems (GTS) sales, which typically consist of multiple shipments of components that
will comprise the entire GTS project, it must carefully monitor the transfer of title related to each portion of a system sale. The
Company defers revenue recognition until product ownership and risk of loss has transferred to the customer for all components
and when all terms specified in the contract are met which may include requirements such as the requirement for the Company to
deliver technical documentation to the customer or a quality inspection which may be required to be approved by the customer.
In limited circumstances, the Company enters into sales agreements that involve multiple elements (such as equipment,
replacement filter elements, and installation services). In these instances, the Company determines if the multiple elements in the
arrangement represent separate units of accounting. If separate units of accounting exist, the price of the entire arrangement is
allocated to the separate units of account using the Company’s best estimate of relative selling price if the unit of account was sold
separately. Revenue is then recognized separately for each unit of account when the criteria for revenue recognition have been met.
Additionally, the Company records estimated discounts and rebates offered to customers as a reduction of sales in the same
period revenue is recognized. Shipping and handling costs of $56.3 million, $63.2 million and $64.2 million are classified as a
component of selling, general and administrative expenses for the years ended July 31, 2016, 2015 and 2014, respectively.
Product Warranties The Company provides for estimated warranty costs at the time of sale and accrues for specific items
at the time their existence is known and the amounts are determinable. The Company estimates warranty costs using standard
quantitative measures based on historical warranty claim experience and evaluation of specific customer warranty issues. For a
reconciliation of warranty reserves, see Note 8.
34
Derivative Instruments and Hedging Activities The Company recognizes all derivatives on the balance sheet at fair value.
Derivatives that are not designated as hedges are adjusted to fair value through income. If the derivative is designated as a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the
hedged assets, liabilities or firm commitments through earnings or recognized in shareholders’ equity through other comprehensive
income until the hedged item is recognized. Gains or losses related to the ineffective portion of any hedge are recognized through
earnings in the current period.
New Accounting Standards Not Yet Adopted In May 2014, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which
amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The
guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects
the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires
expanded disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with
customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and
changes in judgments and assets recognized from the costs to obtain or fulfill a contract. In 2016, the FASB issued ASU 2016-08,
ASU 2016-10, ASU 2016-11, and ASU 2016-12 to clarify, among other things, the implementation guidance related to principal
versus agent considerations, identifying performance obligations, and accounting for licenses of intellectual property. This
accounting guidance is effective for the Company beginning in the first quarter of fiscal 2019. Early application is not permitted.
The amendments in this update are to be applied on a retrospective basis, either to each prior reporting period presented or by
presenting the cumulative effect of applying the update recognized at the date of initial application. The Company is evaluating the
impact that this will have on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs (ASU 2015-03), which amended guidance requiring the issuance of debt costs related to a
recognized debt liability be presented on the balance sheet as a direct deduction from the amount of the debt liability, consistent
with debt discounts and premiums. This accounting guidance is effective for the Company beginning in the first quarter of fiscal
2017. The adoption of ASU 2015-03 will only result in a reclassification of debt issuance costs on the balance sheet.
In May 2015, FASB issued ASU 2015-07, Fair Value Measurement (Topic 850): Disclosures for Investments in Certain
Entities That Calculate Net Asset Value per Share (ASU 2015-07), which amended guidance requiring a company to categorize
investments for which fair values are measured using the net asset value (NAV) per share practical expedient. ASU 2015-07 also
limits the disclosures to investments for which the entity has elected to measure the fair value using the practical expedient. This
accounting guidance is effective for the Company beginning in the first quarter of Fiscal 2017. ASU 2015-07 will only affect the
Company’s disclosures.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU
2015-11), which amended the guidance requiring companies not using the last-in, first-out (LIFO) method to measure inventory at
the lower of cost and net realizable rather than the lower of cost or market. This accounting guidance is effective for the Company
beginning in the first quarter of fiscal 2018. Early adoption is permitted. The Company does not expect the application of ASU
2015-11 to have a significant impact on its consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments,
which amends (Topic 805) Business Combinations. This ASU requires that acquiring entities recognize measurement period
adjustments in the reporting period the amounts are determined, including earnings adjustments that would have been recorded in
previous periods if the adjustments were known at the acquisition date. Acquiring entities are no longer required to retrospectively
adjust amounts in comparative periods. The adjustment amounts and reasons are still disclosed. The Company does not expect the
application of ASU 2015-16 to have a significant impact on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred
Taxes (ASU 2015-17), which amended the guidance requiring companies to separate deferred income tax liabilities and assets into
current and non-current amounts in a classified statement of financial position. This accounting guidance simplifies the presentation
of deferred income taxes, such that deferred tax liabilities and assets be classified as non-current in a classified statement of financial
position. This accounting guidance is effective for the Company beginning in the first quarter of fiscal 2018. Early adoption is
permitted. The Company is adopting this accounting guidance beginning in the first quarter for fiscal 2017.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02), which amends the guidance
requiring companies to recognize assets and liabilities for leases with lease terms of more than twelve months. The new guidance
will require companies to record both capital and operating leases on the balance sheet. This accounting guidance is effective for
the Company beginning in the first quarter of fiscal 2020 on a modified retrospective basis and early adoption is permitted. The
Company is evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.
35
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting. This update simplifies several aspects of the accounting for share-based payment
transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the
statement of cash flows. ASU 2016-09 is effective for the Company beginning in the first quarter of fiscal 2018. Early application
is permitted. If early adopted, an entity must adopt all of the amendments during the same period. The Company is evaluating the
impact of the adoption of ASU 2016-09 on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The new guidance is intended to
reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for
the Company beginning in the first quarter of fiscal 2019. Early adoption is permitted, provided that all of the amendments are
adopted in the same period. The guidance requires application using a retrospective transition method.
NOTE 2. Acquisitions
On August 31, 2016, the Company acquired the net assets of Partmo in Colombia. Partmo is a leading manufacturer of
replacement air, lube and fuel filters in Colombia. The acquisition of Partmo reinforces the Company’s commitment to growth with
a company that is an excellent strategic fit with its existing engine aftermarket business. The acquisition allows the Company to
leverage Partmo’s well-recognized replacement filters brand in South America.
On August 31, 2015, the Company acquired 100% of the shares of Engineered Products Company (EPC), a leading
designer and manufacturer of indicators, gauges, switches and sensors for engine air and liquid filtration systems. The acquisition
of EPC supports the Company’s strategy of maintaining its technical leadership in filtration products for both OEM customers and
end users.
On June 30, 2015, the Company acquired a majority stake in IFIL USA, a manufacturer of pleated bag filters for industrial
dust collection.
On September 30, 2014, the Company acquired 100% of the voting interest of Northern Technical, a manufacturer of gas
turbine inlet air filtration systems and replacement filters. Total consideration for the transaction was $97.1 million after recording
a working capital adjustment in accordance with the share purchase agreement during the three months ended January 31, 2015.
The Company received cash for this adjustment which reduced the purchase price and goodwill. Including the impact of the working
capital adjustment, the Company acquired $6.2 million of intangible assets that had estimated useful lives ranging from six months
to seven years at the time of acquisition, $32.2 million of net tangible assets and $60.3 million of goodwill. The acquired goodwill
is not deductible for tax purposes. Northern Technical’s results of operations are reported as part of the Gas Turbine Products
operating segment in the Industrial Products reporting segment.
Pro forma results of operations for these acquisitions have not been presented because they are not material to the
Company’s consolidated results of operations.
NOTE 3. Supplemental Balance Sheet Information
The components of inventory are as follows (in millions):
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
92.5 $
18.4
123.2
234.1 $
113.4
22.6
129.0
265.0
The components of property, plant and equipment are as follows (in millions):
July 31,
2016
2015
July 31,
2016
2015
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
36
$
20.0
280.4
810.9
39.3
(680.8)
469.8
$
20.0
272.6
783.1
52.4
(657.5)
470.6
NOTE 4. Earnings Per Share
The Company’s basic net earnings per share is computed by dividing net earnings by the weighted average number of
common shares outstanding. The Company’s diluted net earnings per share is computed by dividing net earnings by the weighted
average number of common shares outstanding and common share equivalents related to stock options and stock incentive plans.
Certain outstanding options are excluded from the diluted net earnings per share calculations because their exercise prices are
greater than the average market price of the Company’s common stock during those periods. There were 3,164,159 options, 977,824
options, and 884,138 options excluded from the diluted net earnings per share calculation for the years ended July 31, 2016, 2015
and 2014, respectively.
The following table presents the information necessary to calculate basic and diluted earnings per share (in millions, except
per share amounts):
Weighted average common shares – basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted share equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average common shares – diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings for basic and diluted earnings per share computation . . . . . . . . . . . . . .
Net earnings per share:
$
Year Ended July 31,
2016
2015
2014
133.8
1.0
134.8
137.8
1.6
139.4
145.6
2.0
147.6
190.8 $
208.1 $
260.2
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1.43 $
1.42 $
1.51 $
1.49 $
1.79
1.76
NOTE 5. Goodwill and Other Intangible Assets
The Company has allocated goodwill to reporting units within its Engine Products and Industrial Products segments. The
Company acquired EPC on August 31, 2015, Northern Technical on September 30, 2014 and IFIL.USA on June 30, 2015. See
Note 2 for additional discussion of acquisitions completed during the years ended July 31, 2016 and 2015. There was no disposition
activity during the years ended July 31, 2016 and 2015.
Goodwill is assessed for impairment annually, or more frequently if events or changes in circumstances indicate that the
asset may be impaired. The Company performed an impairment assessment during the third quarter of fiscal 2016. The results of
this assessment showed that the estimated fair values of the reporting units to which goodwill is assigned continued to exceed the
corresponding carrying values of the respective reporting units resulting in no goodwill impairment. Of the Company’s five
reporting units that contain goodwill, the estimated fair values during its annual third quarter fiscal 2016 impairment tests exceeded
the respective carrying values by at least 34%.
During the second quarter of fiscal 2016, the Company revised its forecast associated with its GTS reporting unit. While the
previous forecast for this reporting unit called for a year-over-year decline in sales, the Company continued to face deferrals and
softening demand for large-turbine projects. Given the short-term challenges facing this business, the Company revisited its strategic
focus and priorities. The Company will continue to focus on innovative products while growing the aftermarket business but will be
more selective in taking on large-turbine projects, which resulted in the revised forecast associated with its GTS reporting unit.
As a result of the strategic shift and actions taken in the second quarter of fiscal 2016, the Company concluded that an
interim goodwill triggering event had occurred for the GTS reporting unit. Goodwill associated with the GTS reporting unit was
$60.2 million as of January 31, 2016 and is included in the Industrial Products segment. The Company completed its goodwill
impairment assessment using a discounted cash flow model based on management’s judgments and assumptions to determine the
estimated fair value of the reporting unit. Based on the results of this assessment, the Company concluded the estimated fair value
of the GTS reporting unit exceeded the respective carrying amount of the reporting unit by approximately 38%. Therefore, the
second step of the impairment test was not necessary for this reporting unit.
In determining the estimated fair value of the reporting unit, the Company used the income approach, a valuation technique
using an estimate of future cash flows from the reporting unit’s financial forecast. A terminal growth rate of 3.0% and a discount
rate of 12.0% were used reflecting the relative risk of achieving cash flows as well as any other specific risks or factors related to
the GTS reporting unit. The Company believes the assumptions used in its discounted cash flow analysis are appropriate and result
in reasonable estimate of the reporting unit’s fair value. The Company performed a sensitivity analysis to determine how the
assumptions made impact the results of the impairment test. Holding all other assumptions constant, an unfavorable change in
projected cash flows of 25.0% or more would potentially result in an indication of impairment. Additionally, a decrease in the
residual growth rate of 4.5% or more or an increase in the discount rate of 1.2% or more would potentially result in an indication
of impairment. While these projections supported no impairment of this reporting unit as of January 31, 2016, given that the
37
Company’s second quarter 2016 results fell below expectations and the sensitivities to the assumptions used in the calculations of
the estimated cash flows, it is possible that an impairment could be incurred in the future. The Company will continue to monitor
results and expected cash flows in the future to assess whether goodwill impairment in the GTS reporting unit may be necessary.
The following is a reconciliation of goodwill for the years ended July 31, 2016 and 2015 (in millions):
Engine
Products
Industrial
Products
Total
Goodwill
Balance as of July 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Goodwill acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of July 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of July 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
72.4
—
(1.4)
71.0
6.3
—
77.3
$
$
94.0
66.8
(8.1)
152.7
—
(0.7)
152.0
$
166.4
66.8
(9.5)
223.7
6.3
(0.7)
229.3
Intangible assets are comprised of patents, trademarks and customer relationships and lists. The following is a
reconciliation of intangible assets for the years ended July 31, 2016 and 2015 (in millions):
Gross
Carrying
Amount
Accumulated
Amortization
Net
Intangible
Assets
Balance as of July 31, 2014
Intangibles acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of July 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of July 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
81.3
10.0
—
(4.2 )
87.1
6.6
—
3.1
96.8
$
(45.3) $
—
(6.8)
2.9
(49.2)
—
(6.1)
(3.0)
(58.3) $
36.0
10.0
(6.8)
(1.3)
37.9
6.6
(6.1)
0.1
38.5
Net intangible assets consist of patents, trademarks and trade names of $7.8 million and $8.8 million and customer related
intangibles of $30.7 million and $29.1 million as of July 31, 2016 and 2015, respectively. As of July 31, 2016, patents, trademarks,
and trade names had a weighted average remaining life of 7.4 years and customer related intangibles had a weighted average
remaining life of 12.4 years. Expected amortization expense relating to existing intangible assets is as follows (in millions):
Year Ending July 31,
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expected amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NOTE 6. Credit Facilities
$
Amount
$
6.0
4.8
4.5
4.2
4.0
15.0
38.5
On October 28, 2014, the Company entered into an Amendment to its 5 year, multi-currency revolving credit facility with
a group of banks. The Amendment increased the Company’s borrowing availability up to $400.0 million. The agreement provides
that loans may be made under a selection of currencies and rate formulas including Base Rate Loans or LIBOR Rate Loans, as
defined in the Amendment. The interest rate on each advance is based on certain market interest rates and leverage ratios. Facility
fees and other fees on the entire loan commitment are payable over the duration of this facility. There was $130.0 million outstanding
at July 31, 2016, and $160.0 million outstanding at July 31, 2015 and all borrowings which were outstanding on those dates had
maturities which were less than twelve months. At July 31, 2016 and 2015, $262.7 million and $232.2 million, respectively, were
available for further borrowing under such facilities. The amount available for further borrowing reflects a reduction for issued
standby letters of credit, as discussed in Note 16. The Company’s multi-currency revolving facility contains financial covenants
specifically related to maintaining a certain interest coverage ratio and a certain leverage ratio as well as other covenants that, under
certain circumstances, can restrict the Company’s ability to incur additional indebtedness, make investments and other restricted
payments, create liens and sell assets. As of July 31, 2016, the Company was in compliance with all such covenants.
38
The Company has two uncommitted credit facilities in the U.S., which provide unsecured borrowings for general corporate
purposes. There was $26.8 million outstanding at July 31, 2016, and $15.3 million outstanding at July 31, 2015 and all borrowings
which were outstanding on those dates had maturities which were less than twelve months. The weighted average interest rate on
the short-term borrowings outstanding at July 31, 2016, was 1.25%. At July 31, 2016 and 2015, there was $38.2 million and $49.7
million, respectively, available for under these two credit facilities.
The Company has a €100.0 million (approximately $111.1 million at July 31, 2016) program for issuing treasury notes for
raising short-, medium- and long-term financing for its European operations. There were no amounts outstanding under this program
at July 31, 2016 or 2015. Additionally, the Company’s European operations have lines of credit with an available limit of €44.0
million (approximately $48.9 million at July 31, 2016). There were no amounts outstanding at July 31, 2016, and there was $10.4
million amount outstanding on these lines of July 31, 2015, which had a maturity date of less than twelve months.
Other international subsidiaries may borrow under various credit facilities. There was approximately $8.7 million
outstanding under these credit facilities as of July 31, 2016, and $1.6 million as of July 31, 2015 and all borrowings which were
outstanding on those dates had maturities which were less than twelve months. At July 31, 2016 and 2015, there was approximately
$45.5 million and $47.2 million available for use, respectively, under these facilities. The weighted average interest rate on these
short-term borrowings outstanding at July 31, 2016 and July 31, 2015, was 0.32% and 0.41%, respectively.
NOTE 7. Debt
Long-term debt consists of the following (in millions):
July 31,
2016
2015
5.48% Unsecured senior notes, interest payable semi-annually, principal payment of
$50.0 million due June 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
50.0 $
5.48% Unsecured senior notes, interest payable semi-annually, principal payment of
$25.0 million due September 28, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25.0
5.48% Unsecured senior notes, interest payable semi-annually, principal payment of
$25.0 million due November 30, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25.0
50.0
25.0
25.0
3.72% Unsecured senior notes, interest payable semi-annually, principal payment of
$125.0 million due March 27, 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125.0
125.0
2.93% Unsecured senior notes, interest payable semi-annually, principal payment of
$25.0 million due April 16, 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25.0
25.0
3.18% Unsecured senior notes, interest payable semi-annually, principal payment of
$125.0 million due June 17, 2030 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125.0
125.0
Variable Rate Guaranteed senior note, interest payable quarterly, principal payment of
¥1.65 billion due May 19, 2019 and an interest rate of 0.41% as of July 31, 2016 . . . . . . . . . . . .
16.0
Variable Rate Guaranteed senior note, interest payable quarterly, principal payment of
¥1.00 billion due July 15, 2021 and an interest rate of 0.25% as of July 31, 2016 . . . . . . . . . . . .
Capitalized lease obligations and other, with various maturity dates and interest rates . . . . . . . . . .
Terminated interest rate swap contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
9.7
1.9
0.4
403.0
51.2
351.8 $
13.3
—
1.9
0.8
391.0
1.8
389.2
The estimated future maturities of the Company’s long-term debt as of July 31, 2016 are as follows (in millions):
Year Ended July 31,
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total estimated future maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Amount
51.2
50.4
16.5
0.2
9.7
275.0
403.0
Certain note agreements contain debt covenants related to working capital levels and limitations on indebtedness. As of
July 31, 2016, the Company was in compliance with all such covenants.
39
On April 16, 2015, the Company entered into a First Supplement with a group of institutional investors which supplements
a Note Purchase Agreement, dated March 27, 2014. Pursuant to the First Supplement, the Company issued $25.0 million of senior
unsecured notes due April 16, 2025, and $125.0 million of senior unsecured notes due June 17, 2030. The debt was issued at face
value and bears interest payable semi-annually at an annual rate of interest of 2.93% and 3.18%, respectively. The proceeds from
the notes were primarily used to refinance existing debt and for general corporate purposes. The notes contain covenants specifically
related to maintaining a certain leverage ratio and other covenants that, under certain circumstances, can restrict the Company’s
ability to incur additional indebtedness, make investments and other restricted payments, create liens and sell assets. As of July 31,
2016, the Company was in compliance with all such covenants.
On July 22, 2016, a Japanese Subsidiary of the Company issued a ¥1.0 billion note that was guaranteed by the Company.
The debt was issued at face value of ¥1.0 billion (approximately $9.7 million at July 31, 2016), is due July 15, 2021 and bears
interest payable quarterly at a variable interest rate. The interest rate was 0.25% as of July 31, 2016.
NOTE 8. Warranty
The Company provides for warranties on certain products. The following is a reconciliation of warranty reserves for the
years ended July 31, 2016 and 2015 (in millions):
Year Ended July 31,
2016
2015
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accruals for warranties issued during the reporting period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accruals related to pre-existing warranties (including changes in estimates) . . . . . . . . . . . . . . .
Less settlements made during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
8.6
4.6
2.9
(4.2)
11.9
$
9.0
3.7
0.4
(4.5)
8.6
There were no significant specific warranty matters accrued for during the years ended July 31, 2016 and 2015. These
warranty matters are not expected to have a material impact on the Company’s results of operations, liquidity or financial position.
There were no significant settlements made during the years ended July 31, 2016 and 2015.
NOTE 9. Restructuring Charges
The Company has taken numerous actions to align its operating and manufacturing cost structure with current and projected
customer and end-market demand.
Fiscal 2016 Actions
In the first quarter of fiscal 2016, the Company took actions to further align its operating and manufacturing cost structure
with current and projected customer and end-market demand. These actions consisted of one-time termination benefits from
restructuring the salaried and production workforce in all geographic regions and in both reportable segments. Total charges related
to this action were initially expected to be $7.2 million. These actions have been completed and resulted in a total pre-tax charge of
$6.2 million during the year ended July 31, 2016.
In the third quarter of fiscal 2016, the Company took additional actions consistent with the purpose of the first quarter
actions discussed above. Total charges related to this action were initially expected to be $5.5 million. These actions have been
completed and resulted in a total pre-tax charge of $4.1 million during the year ended July 31, 2016.
In the fourth quarter of fiscal 2016, the Company took additional actions including the closure of the Company’s Hong
Kong location. These actions, consisting of lease termination costs and one-time termination benefits have been completed and
resulted in a total pre-tax charge of $3.5 million during the year ended July 31, 2016, which was in line with expectations.
Fiscal 2015 Actions
In fiscal 2015, actions taken by the Company included: rebalancing and reducing the current salaried and production
workforce globally, closing a production facility in Grinnell, Iowa and the write-off of a partially completed facility in Xuzhou,
China. For these actions, the Company recorded pre-tax restructuring and impairment charges of $13.0 million for the year ended
July 31, 2015. In addition, during the year ended July 31, 2015, the Company recorded a $3.9 million charge related to a lump-sum
settlement of its U.S. Pension Plan. The Company recorded an additional $2.3 million related to these actions during the year ended
July 31, 2016.
40
Restructuring charges for the above actions are summarized as follows (in millions):
Year Ended July 31,
2016
2015
Fiscal 2016 fourth quarter actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fiscal 2016 third quarter actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2016 first quarter actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2015 actions(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
___________
3.5 $
4.1
6.2
2.3
16.1 $
(1) Expenses span both fiscal years due to shutdown of Grinnell, Iowa facility.
Restructuring charges for the above actions by segment are summarized as follows (in millions):
Year Ended July 31,
2016
2015
Engine Products segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Industrial Products segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate & Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
8.8 $
7.3
—
16.1 $
Restructuring charges are summarized in the table below by statement of earnings line item (in millions):
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5.7 $
10.4
16.1 $
Year Ended July 31,
2016
2015
—
—
—
16.9
16.9
9.2
3.8
3.9
16.9
8.4
8.5
16.9
As the restructuring charges were mainly incurred and paid in the same period, there was no material liability balance as
of July 31, 2016 or 2015.
NOTE 10. Equity Based Compensation
Employee Incentive Plans In November 2010, the shareholders approved the 2010 Master Stock Incentive Plan (the Plan).
The Plan extends through September 2020 and allows for the granting of nonqualified stock options, incentive stock options,
restricted stock, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards. Options under
the Plan are granted to key employees whereby the option exercise price is equivalent to the market price of the Company’s common
stock at the date of grant. Options are generally exercisable for up to 10 years from the date of grant. The Plan also allows for the
granting of performance awards to a limited number of key executives. As administered by the Human Resources Committee of the
Company’s Board of Directors to date, these performance awards are payable in common stock and are based on a formula which
measures performance of the Company over a three-year period. Performance award expense under these plans totaled $0.3 million,
$0.1 million and $0.7 million in the years ended July 31, 2016, 2015 and 2014, respectively.
Stock options for non-executives are exercisable in equal increments over three years. Stock options issued after fiscal
2010 become exercisable for executives in equal increments over three years. For the years ended July 31, 2016, 2015 and 2014,
the Company recorded pre-tax compensation expense associated with stock options of $6.7 million, $9.5 million and $9.9 million,
respectively. The Company also recorded tax benefit associated with this compensation expense of $2.1 million, $3.1 million and
$3.2 million for the years ended July 31, 2016, 2015 and 2014, respectively.
Stock-based employee compensation cost is recognized using the fair-value based method. The Company determined the
fair value of these awards using the Black-Scholes option pricing model with the following assumptions:
Year Ended July 31,
0.05 - 2.3%
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.8 - 25.9% 18.6 - 26.7%
1.6%
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.7%
2016
1.6 - 2.3%
2015
2014
0.31 - 2.8%
18.2 - 28.0%
1.4 - 1.6%
Expected life:
Director and officer grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-officer original grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reload grants(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8 years
7 years
N/A
8 years
7 years
(cid:148)4 years
8 years
7 years
(cid:148)6 years
41
___________
(1) Grants made to officers or directors who exercised a reloadable option during the fiscal year and made payment of the purchase price using shares of previously
owned Company stock. The reload grant is for the number of shares equal to the shares used in payment of the purchase price and/or withheld for minimum tax
withholding. Options with a reload provision were no longer issued to officers with more than five years of service, and all directors beginning in fiscal 2006. The
Company continued to issue options with a reload provision to officers with less than five years of service until fiscal 2011 when this provision was discontinued.
The weighted average fair value for options granted during the years ended July 31, 2016, 2015 and 2014 was $7.10, $9.94,
and $11.44 per share, respectively, using the Black-Scholes pricing model.
The following table summarizes stock option activity for the years ended July 31, 2016, 2015 and 2014:
Outstanding at July 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at July 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at July 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at July 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options
Outstanding
7,329,820
900,073
(1,008,848)
(23,163)
$
7,197,882
1,023,836
(916,566)
(113,710)
7,191,442
969,450
(916,789)
(421,713)
6,822,390
Weighted
Average
Exercise
Price
23.88
42.17
18.80
34.02
26.84
38.58
18.54
38.67
29.38
28.19
19.39
36.95
30.09
The total intrinsic value of options exercised during the years ended July 31, 2016, 2015 and 2014 was $11.6 million,
$18.8 million, and $21.5 million, respectively.
The number of shares reserved at July 31, 2016 for outstanding options and future grants was 10,731,623. Shares reserved
consist of shares available for grant plus all outstanding options.
The following table summarizes information concerning outstanding and exercisable options as of July 31, 2016:
Range of Exercise Prices
$0.00 to $17.69 . . . . . . . . . . . . . . . . . . . . . . . . . .
$17.70 to $23.69 . . . . . . . . . . . . . . . . . . . . . . . .
$23.70 to $29.69 . . . . . . . . . . . . . . . . . . . . . . . .
$29.70 to $35.69 . . . . . . . . . . . . . . . . . . . . . . . .
$35.70 and above . . . . . . . . . . . . . . . . . . . . . . . .
Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
1.85 $
2.59
7.11
5.85
7.85
5.60
17.14
21.45
28.55
34.23
40.19
30.09
Number
Outstanding
701,940
1,296,206
1,656,585
1,533,036
1,634,623
6,822,390
Number
Exercisable
701,940 $
1,296,206
746,735
1,506,269
808,384
5,059,534
Weighted
Average
Exercise
Price
17.14
21.45
29.13
34.27
40.78
28.89
At July 31, 2016, the aggregate intrinsic value of shares outstanding and exercisable was $47.8 million and
$40.4 million, respectively.
The following table summarizes the status of options which contain vesting provisions:
Non-vested at July 31, 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vested at July 31, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42
Weighted
Average Grant
Date Fair
Value
10.36
7.10
10.19
9.64
8.70
$
Options
1,757,140
969,450
(829,409)
(134,325)
1,762,856
The total fair value of shares vested during years ended July 31, 2016, 2015 and 2014, was $30.0 million, $29.3 million,
and $35.5 million, respectively.
As of July 31, 2016, there was $6.2 million of total unrecognized compensation cost related to non-vested stock options
granted under the Plan. This unvested cost is expected to be recognized during fiscal 2017, fiscal 2018 and fiscal 2019.
NOTE 11. Employee Benefit Plans
Defined Benefit Pension Plans
The Company and certain of its international subsidiaries have defined benefit pension plans for many of their hourly and
salaried employees. There are two types of U.S. plans. The first type of U.S. plan (Hourly Pension Plan) is a traditional defined
benefit pension plan for union production employees. The second is a plan (Salaried Pension Plan) for some salaried and non-union
production employees that provides defined benefits pursuant to a cash balance feature whereby a participant accumulates a benefit
comprised of a percentage of current salary that varies with years of service, interest credits and transition credits. The non-U.S.
plans generally provide pension benefits based on years of service and compensation level.
On July 31, 2013, the Company adopted a sunset freeze on its U.S. Salaried Pension Plan. Effective August 1, 2013, there
are no longer any new entrants into the plan. Then, effective August 1, 2016, employees hired prior to August 1, 2013, no longer
continued to accrue Company contribution credits under the plan. The freeze of the plan resulted in the participants no longer being
active. As a result, actuarial losses will be amortized over the estimated average remaining life expectancy of the inactive
participants, rather than the estimated average remaining service period of the active participants.
Net periodic pension costs and amounts recognized in other comprehensive income for the Company’s pension plans
include the following components (in millions):
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior service cost and transition amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other changes recognized in other comprehensive income . . . . . . . . . . . . . . . . . .
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of asset obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recognized in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recognized in net periodic benefit costs and other
Year Ended July 31,
2016
2015
2014
$
18.4
18.9
(28.8)
0.8
8.5
—
17.8
53.6
(0.4)
(0.4)
(8.5)
44.3
$
20.4
19.1
(29.5)
0.6
7.1
3.9
21.6
3.5
(0.2)
(0.4)
(11.0)
(8.1)
18.8
19.5
(30.8)
0.6
7.4
—
15.5
15.2
(0.2)
(0.4)
(7.4)
7.2
comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
62.1
$
13.5
$
22.7
43
The changes in projected benefit obligations, fair value of plan assets and funded status of the Company’s pension plans
for the years ended July 31, 2016 and 2015 are summarized as follows (in millions):
Year Ended July 31,
2016
2015
Change in projected benefit obligation:
Projected benefit obligation, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Participant contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Projected benefit obligation, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Change in fair value of plan assets:
Fair value of plan assets, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Company contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Participant contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Funded status:
$
498.7
18.4
18.9
1.0
50.0
(17.2)
—
(32.5)
537.3
478.5
22.2
4.2
1.0
(17.9)
—
(32.5)
455.5
$
$
$
498.7
20.4
19.1
1.2
13.1
(18.2)
(9.2)
(26.4)
498.7
489.9
35.0
5.5
1.2
(17.5)
(9.2)
(26.4)
478.5
Projected benefit obligation in excess of plan assets at end of fiscal year . . . . . . . . . . . . . . . . . . . . . . $
(81.8) $
(20.2)
Amounts recognized on the consolidated balance sheets consist of:
Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net recognized liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
1.4
(1.5)
(81.7)
(81.8) $
10.3
(2.9)
(27.6)
(20.2)
The net underfunded status of $81.8 million and $20.2 million at July 31, 2016 and 2015, respectively, is recognized in
the accompanying Consolidated Balance Sheets. The pension-related accumulated other comprehensive loss at July 31, 2016 and
2015 (prior to the consideration of income taxes) was $179.6 million and $135.4 million, respectively, and consisted primarily of
unrecognized actuarial losses. The loss expected to be recognized in net periodic pension expense during the year ending July 31,
2017 is $7.3 million. The accumulated benefit obligation for all defined benefit pension plans was $519.0 million and $484.2 million
at July 31, 2016 and 2015, respectively.
The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess
of plan assets were $433.1 million and $350.0 million, respectively, as of July 31, 2016, and $290.0 million and $259.5 million,
respectively, as of July 31, 2015.
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with
accumulated benefit obligations in excess of plan assets were $375.5 million, $377.4 million, and $304.4 million, respectively, as
of July 31, 2016, and $242.3 million, $241.9 million, and $216.0 million, respectively, as of July 31, 2015.
For the years ended July 31, 2016 and 2015, the two U.S. pension plans represented approximately 65% and 67%,
respectively, of the Company’s total plan assets and approximately 69% of the Company’s total projected benefit obligation and
approximately 81% of the Company’s total pension expense for both years.
44
Assumptions
The weighted-average discount rate and rates of increase in future compensation levels used in determining the actuarial
present value of the projected benefit obligation are as follows:
Projected Benefit Obligation
Weighted average actuarial assumptions
All U.S. plans:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. plans:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended July 31,
2016
2015
3.65%
2.56%
2.08%
2.69%
4.33%
2.56%
3.14%
2.68%
The weighted-average discount rates, expected returns on plan assets and rates of increase in future compensation levels
used to determine the net periodic benefit cost are as follows:
Net Periodic Benefit Cost
Weighted average actuarial assumptions
All U.S. plans:
Year Ended July 31,
2016
2015
2014
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. plans:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.33%
6.99%
2.56%
3.14%
4.83%
2.68%
4.33%
7.14%
2.61%
3.64%
5.41%
2.79%
4.58%
7.50%
2.61%
4.04%
5.48%
2.92%
Discount Rates The Company’s objective in selecting a discount rate is to select the best estimate of the rate at which the
benefit obligations could be effectively settled on the measurement date, taking into account the nature and duration of the benefit
obligations of the plan. In making this best estimate, the Company looks at rates of return on high-quality, fixed-income investments
currently available, and expected to be available, during the period to maturity of the benefits. This process includes looking at the
universe of bonds available on the measurement date with a quality rating of Aa or better. Similar appropriate benchmarks are used
to determine the discount rate for the non-U.S. plans.
Beginning with its July 31, 2016 measurement date, the Company changed the method used to estimate the service and
interest costs for pension and postretirement benefits. The new method utilizes a full yield curve approach to estimate service and
interest costs by applying specific spot rates along the yield curve used to determine the benefit obligation of relevant projected
cash outflows. Historically, the Company utilized a single weighted average discount rate applied to projected cash outflows. The
Company made the change to provide a more precise measurement of service and interest costs by aligning the timing of the plan’s
liability cash flows to the corresponding spot rate on the yield curve. The change does not impact the measurement of the plan’s
obligations but will impact the Company’s pension expense beginning in fiscal 2017. The Company has accounted for this change
as a change in accounting estimate.
Expected Long-Term Rate of Return To develop the expected long-term rate of return on assets assumption, the Company
considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of
the pension portfolio. In fiscal 2014, the Company adopted a plan to adjust the target asset allocation for all U.S. plans and to
employ differing allocation strategies for each plan. These investment changes, which were implemented in the second quarter of
fiscal 2015, enabled the Company to manage or reduce the risk to income statement volatility while continuing to ensure an
appropriate funded status in each plan. Based on portfolio performance, as of the measurement date of July 31, 2016, the Company
reduced its long-term rate of return for the U.S. pension plans to an asset-based weighted average of 6.90%. The expected long-
term rate of return on assets shown in the pension benefit disclosure for non-U.S. plans is an asset-based weighted average of all
non-U.S. plans.
45
Fair Value of Plan Assets
The estimated fair value of U.S. Pension Plan assets and their respective levels in the fair value hierarchy at July 31, 2016,
2015 and 2014 by asset category are as follows (in millions):
Asset Category
July 31, 2016
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
U.S Pension Plans
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Global Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed Income Securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total U.S. Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
July 31, 2015
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Global Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed Income Securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total U.S. Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
July 31, 2014
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Global Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed Income Securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total U.S. Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.2
62.2
72.2
5.9
141.5
1.9
76.6
0.9
6.0
85.4
14.2
107.3
27.0
7.1
155.6
$
$
$
$
$
$
—
83.1
—
—
83.1
—
84.6
64.1
—
148.7
—
87.3
—
—
87.3
$
$
$
$
$
$
—
17.1
47.3
7.9
72.3
—
19.5
54.7
13.0
87.2
—
21.1
58.7
13.5
93.3
$
$
$
$
$
$
1.2
162.4
119.5
13.8
296.9
1.9
180.7
119.7
19.0
321.3
14.2
215.7
85.7
20.6
336.2
Global Equity Securities consists primarily of publicly traded U.S. and non-U.S. equities, Europe, Australasia, Far East
(EAFE) index funds, equity private placement funds, private equity investments and some cash and cash equivalents. Publicly
traded equities are valued at the closing price reported in the active market in which the individual securities are traded. Index funds
are valued at the net asset value (NAV) as determined by the custodian of the fund. The NAV is based on the fair value of the
underlying assets owned by the fund less its liabilities then divided by the number of units outstanding. Private equity consists of
interests in partnerships that invest in U.S. and non-U.S. equity and debt securities. This may include a diversified mix of partnership
interests including buyouts, restructured/distressed debt, growth equity, mezzanine/subordinated debt, real estate, special situation
partnerships and venture capital investments. Partnership interest is valued using the most recent general partner statement of fair
value updated for any subsequent partnership interests’ cash flow.
The target allocation for global equity securities investments was 65% and 35% in the Salaried and Hourly Pension Plans,
respectively. The underlying global equity investment managers within the plan will invest primarily in equity securities spanning
across market capitalization, geography, style (e.g. value, growth, etc.) and other diversifying characteristics. Managers may invest
in common stocks or American Depository Receipts (ADRs), mutual funds, bank or trust company pooled funds, international
stocks, stock options for hedging purposes, stock index futures, financial futures for purposes of replicating a major market index
and private equity partnerships. The Long/short equity managers within global equity may take long or short positions in equity
securities and have the ability to shift exposure from net long to net short. Long/short equity managers made up about 15% of the
global equity portfolio at year-end, and are considered less liquid, as the funds can be partially liquidated on a quarterly basis. Long-
only managers are considered liquid. The long-only investments are typically valued daily, while long/short equity is valued on a
monthly basis. Private equity is considered illiquid and performance is typically valued on a quarterly basis. The underlying assets,
however, may be valued less frequently, such as annually or if and when a potential buyer is identified and has submitted a bid to
similar types of investments.
Fixed Income Securities consists primarily of investment and non-investment grade debt securities and alternative fixed
income-like investments. Corporate and other bonds and notes are valued at either the yields currently available on comparable
securities of issuers with similar credit ratings or valued under a discounted cash flows approach that maximizes observable inputs,
such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable such as credit
and liquidity risks. Alternative fixed income-like investments consist primarily of private partnership interests in hedge funds of
funds. Partnership interests are valued using the NAV as determined by the administrator or custodian of the fund.
46
The target allocation for fixed income securities was 30% and 60% in the Salaried and Hourly Pension Plans respectively.
The Fixed Income class may invest in debt securities issued or guaranteed by the U.S., its agencies or instrumentalities (including
U.S. Government Agency mortgage backed securities), or other investment grade rated debt issued by foreign governments;
corporate bonds, debentures and other forms of corporate debt obligations, including equipment trust certificates; indexed notes,
floaters and other variable rate obligations; bank collective funds; mutual funds; insurance company pooled funds and guaranteed
investments; futures and options for the purpose of yield curve management; and private debt investments. Fixed income risk is
driven by various factors including, but not limited to, interest rate levels and changes, credit risk and duration. Current fixed income
securities are considered liquid, with daily pricing and liquidity. The fixed income class is also invested in a variety of alternative
investments. Alternative investments cover a variety of traditional and non-traditional investments and investment strategies,
spanning various levels of risk and return. These investments can be made in a broad array of non-traditional investment strategies
(including, but not limited to, commodities and futures, distressed securities, short/long—or both—fixed income, international
opportunities and relative value) with multiple hedge fund managers. Alternative investments are considered less liquid to illiquid.
The liquidity ranges from quarterly to semi-annually and illiquid. Alternative investments are typically valued on a quarterly basis.
Real Assets consists of commodity funds, Real Estate Investment Trusts (REITS) and interests in partnerships that invest
in private real estate, commodities and timber investments. Private investments are valued using the most recent partnership
statement of fair value, updated for any subsequent partnership interests’ cash flows. Commodity funds and REITS are valued at
the closing price reported in the active market in which it is traded.
The target allocation for real assets was 5% for both the Salaried and Hourly Pension Plans. The fund invests in real assets
to provide a hedge against unexpected inflation, to capture unique sources of returns and to provide diversification benefits. The
fund pursues a real asset strategy through a fund of funds, private investments and/or a direct investment program that may invest
long, short or both, in assets including, but not limited to, domestic and international properties, buildings and developments, timber
and/or commodities. Real assets range from less liquid to illiquid, with about two-thirds of the real asset allocation having monthly
liquidity and one-third illiquid. Real asset manager performance is typically reported quarterly, though underlying assets may be
valued less frequently.
The following table summarizes the changes in the fair values of the U.S. pension plans’ Level 3 assets for the years ended
July 31, 2016, 2015 and 2014 (in millions):
Global Equity
Fixed Income
Real Assets
Total
U.S. Pension Plans
Ending balance at July 31, 2013 . . . . . . . . . . . . . . . . . . . . . $
Unrealized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance at July 31, 2014 . . . . . . . . . . . . . . . . . . . . . $
Unrealized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance at July 31, 2015 . . . . . . . . . . . . . . . . . . . . . $
Unrealized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance at July 31, 2016 . . . . . . . . . . . . . . . . . . . . . $
$
19.4
1.7
2.4
2.0
(4.4)
21.1
(0.3)
2.8
1.8
(5.9)
19.5
(1.3)
2.5
0.6
(4.2)
17.1
$
$
$
$
60.8
(2.0)
8.9
20.0
(29.0)
58.7
(3.7)
5.1
—
(5.4)
54.7
(2.5)
0.8
—
(5.7)
47.3
$
$
$
$
22.1
—
0.8
2.7
(12.1 )
13.5
0.7
0.6
0.8
(2.6 )
13.0
(2.4 )
0.4
0.1
(3.2 )
7.9
$
$
$
102.3
(0.3)
12.1
24.7
(45.5)
93.3
(3.3)
8.5
2.6
(13.9)
87.2
(6.2)
3.7
0.7
(13.1)
72.3
The following table summarizes the U.S. pension plans’ assets valued at NAV at July 31, 2016 (in millions):
Fair Value
Unfunded
Commitments
Global Equity . . . . . . . . . . . . . . $
Fixed Income . . . . . . . . . . . . . .
Real Assets . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . $
162.4
47.3
13.8
223.5
$
$
2.7
—
2.2
4.9
47
Redemption Frequency
(If Currently Eligible)
Daily, Monthly, Quarterly, Annually
Daily, Quarterly, Semi-Annually
Daily, Quarterly
Redemption
Notice Period
10 - 100 days
60 - 120 days
95 days
The estimated fair values of Non-U.S. Pension Plan assets and their respective levels in the fair value hierarchy at July 31,
2016, 2015 and 2014 by asset category are as follows (in millions):
Asset Category
July 31, 2016
Non-U.S. Pension Plans
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Global Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed Income Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity/Fixed Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Non-U.S. Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
July 31, 2015
Global Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fixed Income Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity/Fixed Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Non-U.S. Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
July 31, 2014
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Global Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed Income Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity/Fixed Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Non-U.S. Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.5 $
69.2
4.6
16.7
91.0 $
71.7 $
4.2
17.2
93.1 $
5.7 $
71.3
4.8
18.0
99.8 $
— $
—
35.8
—
35.8 $
— $
35.9
—
35.9 $
— $
—
23.3
—
23.3 $
— $
0.5
—
69.2
—
40.4
48.5
31.8
31.8 $ 158.6
— $ 71.7
40.1
—
28.2
45.4
28.2 $ 157.2
5.7
— $
71.3
—
28.1
—
30.5
48.5
30.5 $ 153.6
Global Equity Securities consists of publicly traded diversified growth funds invested across a broad range of traditional
and alternative asset classes which may include, but are not limited to: equities, investment grade and high yield bonds, property,
private equity, infrastructure, commodities and currencies. They may invest directly or hold up to 100% of the fund in other
collective investment vehicles and may use exchange traded and over the counter financial derivatives, such as currency forwards
or futures, for both investment as well as hedging purposes.
Fixed Income Securities consists primarily of investment grade debt securities. Corporate bonds and notes are valued at
either the yields currently available on comparable securities of issuers with similar credit ratings or valued under a discounted cash
flows approach that maximizes observable inputs, such as current yields of similar instruments, but can include adjustments for
certain risks that may not be observable such as credit and liquidity risks. These funds may also aim to provide liability hedging by
offering interest rate and inflation protections which replicates the liability profile of a typical defined benefit pension scheme.
Equity/Fixed Income consists of Level 1 assets that are part of a unit linked fund with a strategic asset allocation of 40%
fixed income products and 60% equity type products. Assets are valued at either the closing price reported, if traded on an active
market, or at yields currently available on comparable securities of issuers with similar credit ratings. Index funds are valued at the
net asset value as determined by the custodian of the fund. The Level 3 assets are composed of mathematical reserves on individual
contracts and the Company does not have any influence on the investment decisions as made by the insurer due to the specific
minimum guaranteed return characteristics of this type of contract. European insurers, in general, broadly have a strategic asset
allocation with 80% to 90% fixed income products and 10% to 20% equity type products (including real estate).
48
The following table summarizes the changes in the fair values of the non-U.S. pension plans’ Level 3 assets for the years
ended July 31, 2016, 2015 and 2014 (in millions):
Non-U.S. Pension
Plans
Equity/Fixed
Income
Ending balance at July 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance at July 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance at July 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance at July 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
26.3
4.3
0.1
0.1
3.1
(3.4)
30.5
1.3
—
(5.5)
2.7
(0.8)
28.2
2.7
—
0.3
2.7
(2.1)
31.8
The following table summarizes the non-U.S. pension plans’ assets valued at NAV as of July 31, 2016 (in millions):
Fair Value
Fixed Income . . . . . . . . . . . . . . $
Equity/Fixed Income . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . $
35.8
31.8
67.6
$
$
Unfunded
Commitments
—
—
—
Investment Policies and Strategies
Redemption Frequency
(If Currently Eligible)
Weekly
Yearly
Redemption
Notice Period
7 days
90 days
For the Company’s U.S. Pension Plans, the Company uses a total return investment approach to achieve a long-term return
on plan assets, with what the Company believes to be a prudent level of risk for the purpose of meeting its retirement income
commitments to employees. The plans’ investments are diversified to assist in managing risk. During the year ended July 31, 2016, the
Company’s asset allocation guidelines targeted an allocation of 65% global equity securities, 30% fixed income, and 5% real assets
(investments into funds containing commodities and real estate) for the Salaried Pension Plan and 35% global equity securities, 60%
fixed income, and 5% real assets (investments in funds containing commodities and real estate) for the Hourly Pension Plan. These
target allocation guidelines are determined in consultation with the Company’s investment consultant and through the use of modeling
the risk/return trade-offs among asset classes utilizing assumptions about expected annual return, expected volatility/standard deviation
of returns and expected correlations with other asset classes.
For the Company’s non-U.S. plans, the general investment objectives are to maintain a suitably diversified portfolio of secure
assets of appropriate liquidity which will generate income and capital growth to meet, together with any new contributions from
members and the Company, the cost of current and future benefits. Investment policy and performance is measured and monitored on
an ongoing basis by the Company’s Investment Committee through its use of an investment consultant and through quarterly
investment portfolio reviews.
Estimated Contributions and Future Payments
The Company’s general funding policy for its pension plans is to make at least the minimum contributions as required by
applicable regulations. Additionally, the Company may elect to make additional contributions up to the maximum tax deductible
contribution. The Company made contributions of $0.9 million to its U.S. pension plans during the year ended July 31, 2016. The
estimated minimum funding requirement for the Company’s U.S. plans for the year ending July 31, 2017 is $9.7 million. In accordance
with the Pension Protection Act of 2006, this contribution obligation may be met with existing credit balances that resulted from
payments above the minimum obligation in prior years. As a result, the Company does not anticipate making a contribution in fiscal
49
2017 to its U.S. pension plans. The Company made contributions of $3.3 million to its non-U.S. pension plans during the year ended
July 31, 2016 and estimates that it will contribute approximately $3.4 million in fiscal 2017 based upon the local government prescribed
funding requirements. Future estimates of the Company’s pension plan contributions may change significantly depending on the actual
rate of return on plan assets, discount rates and regulatory requirements.
The estimated future benefit payments for the Company’s U.S. and non-U.S. plans are as follows (in millions):
Year Ending July 31,
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022-2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated Future Benefit
Payments
26.6
25.1
27.4
25.7
27.6
137.6
Retirement Savings and Employee Stock Ownership Plan
The Company provides a contributory employee savings plan to U.S. Employees that permits participants to make
contributions by salary reduction pursuant to section 401(k) of the Internal Revenue Code. Employee contributions of up to 25% of
compensation are matched at a rate equaling 100% of the first 3% contributed and 50% of the next 2% contributed. In addition, the
Company contributes 3.0% of compensation annually. Total contribution expense for these plans was $8.2 million, $8.6 million, and
$8.1 million for the years ended July 31, 2016, 2015 and 2014, respectively. This plan also includes shares from an Employee Stock
Ownership Plan (ESOP). As of July 31, 2016, all shares of the ESOP have been allocated to participants. Total ESOP shares are
considered to be shares outstanding for diluted earnings per share calculations.
Deferred Compensation and Other Benefit Plans
The Company provides various deferred compensation and other benefit plans to certain executives. The deferred
compensation plan allows these employees to defer the receipt of all of their bonus and other stock related compensation and up to
75% of their salary to future periods. Other benefit plans are provided to supplement the benefits for a select group of highly
compensated individuals which are reduced because of compensation limitations set by the Internal Revenue Code. The Company has
recorded a liability of $8.6 million and $9.1 million as of July 31, 2016 and 2015, respectively, related primarily to its deferred
compensation plans.
NOTE 12. Income Taxes
The components of earnings before income taxes are as follows (in millions):
Earnings before income taxes:
Year Ended July 31,
2015
2014
2016
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90.7 $ 92.4 $ 131.4
229.3
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 257.4 $ 288.6 $ 360.7
196.2
166.7
The components of the provision for income taxes are as follows (in millions):
Income tax provision (benefit):
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended July 31,
2015
2014
2016
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19.9 $ 28.5 $ 49.0
4.7
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54.6
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
108.3
2.9
54.7
86.1
3.1
46.9
69.9
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9.5)
0.4
1.3
(7.8)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66.6 $ 80.5 $ 100.5
(4.2 )
0.1
(1.5 )
(5.6 )
(0.3 )
(0.2 )
(2.8 )
(3.3 )
50
The following table reconciles the U.S. statutory income tax rate with the effective income tax rate:
Year Ended July 31,
2015
2014
2016
Statutory U.S. federal rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.0 % 35.0 % 35.0 %
1.1 %
State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6.1)%
Foreign operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.8)%
Export, manufacturing, and research credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1.1)%
Change in unrecognized tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.2)%
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.9 % 27.9 % 27.9 %
0.8 %
(8.1 )%
(1.6 )%
(1.0 )%
0.8 %
0.9 %
(7.9)%
(1.1)%
1.3 %
(0.3)%
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows (in millions):
July 31,
2016
2015
Deferred tax assets:
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12.1 $ 10.6
39.1
Compensation and retirement plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.3
NOL and tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.9
LIFO and inventory reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.0
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65.9
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2.7)
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63.2
Deferred tax liabilities:
59.5
6.5
5.4
4.0
87.5
(3.3)
84.2
(50.6)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2.4)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(53.0)
Deferred tax liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.4
Net tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29.7 $ 14.6
(57.5)
(1.2)
(58.7)
4.2
As of July 31, 2016 and 2015, deferred income taxes on the consolidated balance sheets include $4.2 million and $4.4
million, respectively, of prepaid tax assets related to intercompany transfers of inventory.
The effective tax rate for fiscal 2016 was 25.9%, compared to 27.9% in fiscal 2015. The effective tax rate in the current
year was favorably impacted by the settlement of tax audits and the mix of earnings between tax jurisdictions.
The Company has not provided for U.S. income taxes on additional undistributed earnings of its non-U.S. subsidiaries of
approximately $982.0 million. The Company currently intends to indefinitely reinvest these undistributed earnings as there are
significant investment opportunities outside the U.S. If any portion were to be distributed, the related U.S. tax liability may be
reduced by foreign income taxes paid on those earnings plus any available foreign tax credit carryovers. Determination of the
unrecognized deferred tax liability related to these undistributed earnings is not practicable. In fiscal 2016, the Company repatriated
$83.0 million of cash held by its foreign subsidiaries in the form of a cash dividend which represented total planned dividends for
the current year and which consisted entirely of current year earnings.
The Company maintains a reserve for uncertain tax benefits. The accounting standard defines the threshold for recognizing
the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authorities
based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized
as the largest amount of tax benefit that in the Company’s judgment is greater than 50% likely to be realized. A reconciliation of
the beginning and ending amount of gross unrecognized tax benefits is as follows (in millions):
2014
Gross unrecognized tax benefits at beginning of fiscal year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18.2 $ 15.0 $ 18.4
2.9
1.7
(7.1)
(0.2)
(0.7)
Gross unrecognized tax benefits at end of fiscal year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15.7 $ 18.2 $ 15.0
Additions for tax positions of the current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions due to lapse of applicable statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.7
3.4
0.1
0.1
(0.6)
(4.9)
(0.1) —
(1.0)
(1.0)
2016
Year Ended July 31,
2015
51
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During
the year ended July 31, 2016, the Company recognized interest expense, net of tax benefit, of approximately $0.4 million. At July 31,
2016 and 2015, accrued interest and penalties on a gross basis were $1.8 million.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few
exceptions, the Company is no longer subject to state and foreign income tax examinations by tax authorities for years before 2008.
The IRS has completed examinations of the Company’s U.S. federal income tax returns through 2013.
If the Company were to prevail on all unrecognized tax benefits recorded, substantially all of the unrecognized tax benefits
would benefit the effective tax rate. With an average statute of limitations of approximately 5 years, up to $1.1 million of the
unrecognized tax benefits could potentially expire in the next 12 month period, unless extended by audit. It is possible that quicker than
expected settlement of either current or future audits and disputes would cause additional reversals of previously recorded reserves in
the next 12 month period. Quantification of an estimated range and timing of future audit settlements cannot be made at this time.
NOTE 13. Fair Value Measurements
Fair value measurements of financial instruments are reported in one of three levels based on the lowest level of significant
input used as follows:
Level 1
Level 2
Level 3
Inputs to the fair value measurement are quoted prices in active markets for identical assets or liabilities.
Inputs to the fair value measurement include quoted prices in active markets for similar assets or liabilities, quoted
prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted prices
that are observable for the asset or liability, either directly or indirectly.
Inputs to the fair value measurement are unobservable inputs or valuation techniques.
At July 31, 2016 and 2015, the carrying values of cash and cash equivalents, short-term investments, accounts receivables,
short-term borrowings and trade accounts payable approximate fair value because of the short-term nature of these instruments and are
classified as Level 1 in the fair value hierarchy. As of July 31, 2016, the estimated fair value of debt with fixed interest rates was $394.4
million compared to its carrying value of $375.0 million. The fair value is estimated by discounting the projected cash flows using the
rate that similar amounts of debt could currently be borrowed, which is classified as Level 2 in the fair value hierarchy.
Derivative contracts are reported at their fair values based on third-party quotes. The fair values of the Company’s financial
assets and liabilities listed below reflect the amounts that would be received to sell the assets or paid to transfer the liabilities in an
orderly transaction between market participants at the measurement date (exit price). The fair values are based on inputs other than
quoted prices that are observable for the asset or liability. These inputs include foreign currency exchange rates and interest rates. The
financial assets and liabilities are primarily valued using standard calculations and models that use as their basis readily observable
market parameters. Industry standard data providers are the primary source for forward and spot rate information for both interest rates
and currency rates.
The following summarizes the Company’s fair value of outstanding derivatives at July 31, 2016 and 2015, included in the
accompanying Consolidated Balance Sheets (in millions):
Significant Other Observable Inputs
(Level 2)*
July 31,
2016
2015
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaids and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forward exchange contracts – net asset (liability) position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
___________
1.1
$
3.6
(2.4)
(1.3)
$
(2.2)
1.4
*
Inputs to the valuation methodology of Level 2 assets include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar
assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or
corroborated by observable market data by correlation or other means.
52
The Company holds equity method investments which are classified in other long-term assets in the accompanying
Consolidated Balance Sheets. The aggregate carrying amount of these investments was $18.7 million and $18.3 million as of July 31,
2016 and 2015, respectively. These equity method investments are measured at fair value on a nonrecurring basis. The fair value of
the Company’s equity method investments has not been estimated as there have been no identified events or changes in circumstance
that would have had an adverse impact on the value of these investments. In the event that these investments were required to be
measured, these investments would fall within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to
determine fair value, as the investments are in privately-held entities or divisions of public companies without quoted market prices.
Goodwill is assessed for impairment annually or more frequently if events or changes in circumstances indicate that the asset
might be impaired. The Company’s goodwill and intangible assets are not recorded at fair value as there have been no events or
circumstances that would have an adverse impact on the value of these assets. In the event that an impairment was recognized, the fair
value would be classified within Level 3 of the fair value hierarchy. Definite lived intangible assets are subject to impairment
assessments as triggering events occur which could indicate that the asset might be impaired. Refer to Note 5 for further discussion of
the annual goodwill impairment analysis and carrying values of goodwill and other intangible assets.
The Company assesses the impairment of property, plant and equipment whenever events or changes in circumstances
indicate that the carrying amount of property, plant and equipment assets may not be recoverable. There were no significant impairment
charges recorded during the years ended July 31, 2016, 2015 and 2014.
NOTE 14. Shareholders’ Equity
Stock Compensation Plans The Stock Compensation Plans in the Consolidated Statements of Changes in Shareholders’ Equity
consist of the balance of amounts payable to eligible participants for stock compensation that was deferred to a Rabbi Trust pursuant
to the provisions of the 2010 Master Stock Incentive Plan, as well as performance awards payable in common stock discussed further
in Note 10.
Treasury Stock The Board of Directors authorized the repurchase, at the Company’s discretion, of up to 14.0 million shares
of common stock under the Company’s stock repurchase plan dated May 29, 2015. This repurchase authorization, which is effective
until terminated by the Board of Directors, replaced the Company’s previous stock repurchase plan dated September 27, 2013. As of
July 31, 2016, the Company had remaining authorization to repurchase 10.5 million shares under this plan. Treasury stock share activity
for the years ended July 31, 2016 and 2015 is summarized as follows:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,044,950 11,237,522
Stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,540,000 6,675,147
(773,385)
Net issuance upon exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(85,611)
Issuance under compensation plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8,723)
Other activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,750,503 17,044,950
(764,756)
(59,787)
(9,904)
NOTE 15. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component for the years ended July 31, 2016 and 2015 are as follows
(in millions):
Year Ended July 31,
2015
2016
Balance as of July 31, 2015, net of tax . . . . . . . $
Other comprehensive loss before
reclassifications and tax . . . . . . . . . . . . . . . . . . . .
Tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss before reclassifications,
net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassifications, before tax . . . . . . . . . . . . . . . .
Tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassifications, net of tax . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income, net of tax .
Balance as of July 31, 2016, net of tax . . . . . . . $
Foreign
currency
translation
adjustment
(a)
(70.8)
Pension
benefits
$
(90.6)
$
(55.4)
19.4
(36.0)
15.8
(5.0)
10.8
(25.2)
(115.8)
$
(18.5)
—
(18.5)
—
—
—
(18.5)
(89.3)
53
$
Derivative
financial
instruments
(0.6)
(0.4)
0.1
Total
(162.0)
$
(74.3 )
19.5
(54.8 )
16.4
(5.2 )
11.2
(43.6 )
(205.6)
(0.3)
0.6
(0.2)
0.4 (b)
0.1
(0.5)
$
Foreign
currency
translation
adjustment
(a)
Pension
benefits
Balance as of July 31, 2014, net of tax . . . . . . . . $
48.3
$
(94.0)
$
Other comprehensive loss before
reclassifications and tax . . . . . . . . . . . . . . . . . . . .
Tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss before reclassifications,
net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassifications, before tax . . . . . . . . . . . . . . . .
Tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassifications, net of tax . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income, net of tax . .
Balance as of July 31, 2015, net of tax . . . . . . . . $
___________
(119.1)
—
(119.1)
—
—
—
(119.1)
(70.8)
$
(5.2)
2.0
(3.2)
8.7
(2.1)
6.6
3.4
(90.6)
$
Derivative
financial
instruments
(0.1)
(1.9)
0.7
Total
$
(45.8)
(126.2 )
2.7
(123.5 )
9.7
(2.4 )
7.3
(116.2 )
(162.0)
(1.2)
1.0
(0.3)
0.7 (b)
(0.5)
(0.6)
$
(a) Taxes are not provided on cumulative translation adjustments as substantially all translation adjustments relate to earnings that are intended to be indefinitely
reinvested outside the U.S.
(b) Relates to foreign currency cash flow hedges that were reclassified from accumulated other comprehensive loss to other income, net (see Note 13).
NOTE 16. Guarantees
The Company and Caterpillar Inc. equally own the shares of AFSI, an unconsolidated joint venture, and guarantee certain
debt of the joint venture. As of July 31, 2016, the joint venture had $24.8 million of outstanding debt, of which the Company
guarantees half. In addition, during years ended July 31, 2016, 2015 and 2014, the Company recorded its equity in earnings (loss)
of this equity method investment of $(0.7) million, $2.3 million, and $3.7 million and royalty income of $5.1 million, $5.8 million,
and $6.8 million, respectively, related to AFSI.
At July 31, 2016 and 2015, the Company had a contingent liability for standby letters of credit totaling $7.3 million and
$7.8 million, respectively, which have been issued and are outstanding. The letters of credit guarantee payment to third parties in
the event the Company is in breach of a specified bond financing agreement and insurance contract terms, as detailed in each letter
of credit. At July 31, 2016 and 2015, there were no amounts drawn upon these letters of credit.
NOTE 17. Commitments and Contingencies
Operating Leases The Company enters into operating leases primarily for office and warehouse facilities, production and
non-production equipment, automobiles and computer equipment. Total expense recorded under operating leases for years ended July
31, 2016, 2015 and 2014, was $25.4 million, $28.1 million, and $28.0 million, respectively.
As of July 31, 2016, the estimated future minimum lease payments under operating leases are as follows (in millions):
Year Ending July 31,
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total future minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating Leases
10.0
8.1
4.5
1.8
0.8
0.2
25.4
Litigation 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 estimated liability in its consolidated
financial statements is adequate in light of the probable and estimable outcomes. The recorded liabilities were not material to the
Company’s results of operations, liquidity or financial position and the Company does not believe that any of the currently identified
claims or litigation will materially affect its results of operations, liquidity or financial position.
54
NOTE 18. Segment Reporting
The Company has identified two reportable segments: Engine Products and Industrial Products. Segment determination was
based on the internal organizational structure, management of operations and performance evaluation by management and the
Company’s Board of Directors.
The Engine Products segment sells to OEMs in the construction, mining, agriculture, aerospace, defense and truck end-
markets and to independent distributors, OEM dealer networks, private label accounts and large equipment fleets. Products include air
filtration systems, exhaust and emissions systems and liquid filtration systems including hydraulics, fuel, lube and replacement filters.
The Industrial Products segment sells to various industrial 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-based products and specialized air and gas filtration systems for applications including computer
hard disk drives and semi-conductor manufacturing.
Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments, such as interest
income and interest expense. Assets included in Corporate and Unallocated are principally cash and cash equivalents, inventory
reserves, certain prepaids, certain investments, other assets and assets allocated to general corporate purposes.
The Company has an internal measurement system to evaluate performance and allocate resources based on earnings before
income taxes. The Company’s manufacturing facilities serve both reporting segments. Therefore, the Company uses an allocation
methodology to assign costs and assets to the segments. A certain amount of costs and assets relate to general corporate purposes and
are not assigned to either segment. The accounting policy applied to inventory for the reportable segments differs from that described
in the summary of significant accounting policies. The reportable segments account for inventory on a standard cost basis, which is
consistent with the Company’s internal reporting.
Segment allocated assets are primarily accounts receivable, inventories, property, plant and equipment and goodwill.
Reconciling items included in Corporate and Unallocated are created based on accounting differences between segment reporting and
the consolidated external reporting as well as internal allocation methodologies.
The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations and sharing
of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the operating profit
and other financial information shown below.
Segment detail is summarized as follows (in millions):
Engine
Products
Industrial
Products
Corporate and
Unallocated
Total
Company
38.5
1.0
163.5
841.4
14.3
37.5
Fiscal 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,391.3 $
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity earnings in unconsolidated affiliates . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments in unconsolidated affiliates . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,484.1 $
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity earnings in unconsolidated affiliates . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments in unconsolidated affiliates . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,584.0 $
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity earnings in unconsolidated affiliates . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments in unconsolidated affiliates . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38.9
5.6
233.9
900.1
17.4
56.3
43.3
4.1
186.3
887.7
15.1
54.6
829.0 $
28.1
1.2
119.0
646.9
4.4
27.3
887.1 $
26.4
1.0
123.3
634.0
3.2
33.4
889.5 $
24.0
0.9
134.0
572.0
4.0
34.7
—
8.3
—
(25.1)
300.3
—
8.1
—
4.6
—
(21.0)
287.8
—
5.8
—
4.3
—
(7.2)
470.3
—
6.2
$ 2,220.3
74.9
2.2
257.4
1,788.6
18.7
72.9
$ 2,371.2
74.3
5.1
288.6
1,809.5
18.3
93.8
$ 2,473.5
67.2
6.5
360.7
1,942.4
21.4
97.2
55
Net sales by product within the Engine Products segment and Industrial Products segment is summarized as follows
(in millions):
Engine Products segment:
Year Ended July 31,
2015
2014
2016
Off-Road Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
On-Road Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aftermarket Products* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aerospace and Defense Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Engine Products segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial Products segment:
216.6 $
127.2
951.5
96.0
1,391.3
261.1 $
138.4
980.7
103.9
1,484.1
342.2
130.0
1,012.2
99.6
1,584.0
553.4
Industrial Filtration Solutions Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
156.9
Gas Turbine Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
179.2
Special Applications Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Industrial Products segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
889.5
Total Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,220.3 $ 2,371.2 $ 2,473.5
___________
529.0
186.9
171.2
887.1
517.9
149.6
161.5
829.0
*
Includes replacement part sales to the Company’s OEM customers.
Net sales by origination and property, plant and equipment by geographic region are summarized as follows (in millions):
Net Sales(1)
Property,
Plant and
Equipment, Net
2016
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
___________
$
$
$
$
$
$
937.3 $
632.7
449.9
200.4
2,220.3 $
1,007.3 $
671.3
470.7
221.9
2,371.2 $
1,019.9 $
728.6
517.3
207.7
2,473.5 $
(1) Net sales by origination is based on the country of the Company’s legal entity where the customer’s order was placed.
192.9
148.1
60.1
68.7
469.8
209.0
141.7
63.8
56.1
470.6
196.7
128.9
72.1
54.0
451.7
Concentrations There were no customers with over 10% of net sales during the years ended July 31, 2016, 2015 and 2014,
respectively. There were no customers over 10% of gross accounts receivable at July 31, 2016 or July 31, 2015.
56
NOTE 19. Quarterly Financial Information (Unaudited)
Unaudited consolidated quarterly financial information for the years ended July 31, 2016 and 2015 is as follows (in
millions, except per share amounts):
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal 2016
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 538.0 $ 517.2 $ 571.3 $ 593.8
209.3
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59.5
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.44
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.44
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.175
Dividends declared per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.175
Dividends paid per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
170.8
38.0
0.28
0.28
0.170
0.170
178.1
38.5
0.29
0.29
0.170
0.170
196.6
54.8
0.41
0.41
0.175
0.170
Fiscal 2015
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 596.5 $ 588.5 $ 575.6 $ 610.6
202.3
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56.4
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.41
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.41
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends declared per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.340
0.170
Dividends paid per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
209.1
55.9
0.40
0.40
—
0.165
203.1
48.0
0.35
0.34
0.330
0.165
194.1
47.8
0.35
0.34
—
0.165
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management of the Company, with the participation of its Chief Executive Officer and the Chief Financial Officer, evaluated
the effectiveness of the Company’s disclosure controls and procedures as of the end of the period. Based on their evaluation, as of the
end of the period covered the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were
effective. The Company’s disclosure controls and procedures are designed so that information required to be disclosed by the issuer in
the reports that it files or submits under the Security Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and
communicated to management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the quarter that ended on July 31, 2016, the Company completed its remediation efforts related to the Company’s
controls over the timing of revenue recognition in the Company’s European Gas Turbine Products business. As a result of the completed
remediation efforts noted below, there were improvements in internal control over financial reporting during the year ended July 31,
2016. Except the remediation in the Company’s European Gas Turbine Products business and the Global ERP Project noted below,
there were no other changes in internal control over financial reporting (as defined by Rules 13a-15(f) under the Exchange Act) that
occurred during the quarter ended July 31, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
The Company has completed a multi-year implementation of a global enterprise resource planning system (Global ERP
Project). In response to business integration activities related to the new system, the Company has aligned and streamlined the design
and operation of the financial reporting controls environment to be responsive to the change in the operating environment.
57
Remediation Actions
In the Company’s Annual Report on Form 10-K for the year ended July 31, 2015, the Company identified a material weakness
in the Company’s internal control over financial reporting. The material weakness was identified through the Company’s Compliance
Committee’s receipt of reports from two former employees that revenue for a project in the European Gas Turbine Products business
was improperly recognized in the second quarter of fiscal 2015. The Company initiated an internal investigation which verified the
substance of the reports and identified additional revenue transactions within the European Gas Turbine Products business involving
the same improper practice.
The Audit Committee of the Board subsequently engaged independent external counsel and independent forensic accountants
to complete the investigation. Based on the investigation findings, the Company’s conclusions are as follows:
(cid:120) Documents were altered with the intent to inappropriately recognize revenue for certain European Gas Turbine
Products business projects transactions in periods earlier than would be allowable under generally accepted accounting
principles.
(cid:120) The revenue transactions were all valid, but revenue was inappropriately recognized in an accelerated manner during
the fourth quarter of fiscal 2014 and the second and third quarters of fiscal 2015. Due to the inappropriate acceleration
of revenue in the aforementioned periods, revenue was also misstated in the first and fourth quarters of 2015.
In response to the material weakness, management developed remediation plans to address the control deficiencies
identified in fiscal 2015. The Company has implemented the following remediation actions during fiscal 2016:
(cid:120) Termination of certain employees.
(cid:120) A training program on the Company’s policies and procedures for proper revenue recognition.
(cid:120) A newly designed control protocol over the evaluation of revenue recognition that includes:
(cid:120) Review and approval by management of all delivery terms on gas turbine projects.
(cid:120) Expanded use of third party documents for support of the decision as to when recognition of revenue is appropriate.
(cid:120) The utilization of standard forms for determining and documenting the revenue recognition decision.
Management has determined that the remediation actions discussed above were effectively designed and demonstrated
effective operation for a sufficient period of time to enable the Company to conclude that the material weakness regarding its
internal controls associated with the timing of revenue recognition in the Company’s European Gas Turbine Products business has
been remediated as of July 31, 2016.
Management’s Report on Internal Control over Financial Reporting
See Management’s Report on Internal Control over Financial Reporting under Item 8 of this Annual Report.
Report of Independent Registered Public Accounting Firm
See Report of Independent Registered Public Accounting Firm under Item 8 of this Annual Report.
Item 9B. Other Information
None.
58
Item 10. Directors, Executive Officers, and Corporate Governance
PART III
The information under the captions “Item 1: Election of Directors”; “Director Selection Process,” “Audit Committee,” “Audit
Committee Expertise; Complaint-Handling Procedures,” and “Section 16(a) Beneficial Ownership Reporting Compliance” of the 2016
Proxy Statement is incorporated herein by reference. Information on the Executive Officers of the Company is found under the caption
“Executive Officers of the Registrant” in Part I of this Annual Report.
The Company has adopted a code of business conduct and ethics in compliance with applicable rules of the Securities and
Exchange Commission that applies to its Principal Executive Officer, its Principal Financial Officer and its Principal Accounting
Officer or Controller or persons performing similar functions. A copy of the code of business conduct and ethics is posted on the
Company’s website at www.donaldson.com. The code of business conduct and ethics is available in print, free of charge, to any
shareholder who requests it. The Company will disclose any amendments to or waivers of the code of business conduct and ethics for
the Company’s Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer on the Company’s website.
Item 11. Executive Compensation
The information under the captions “Executive Compensation” and “Director Compensation” of the 2016 Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information as of July 31, 2016, regarding the Company’s equity compensation plans:
Number of
securities
to be issued upon
exercise
of outstanding
options,
warrants, and
rights
Weighted – average
exercise price of
outstanding options,
warrants, and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(a)
(b)
(c)
34,720 $
6.10
497,365 $
186,270 $
1,632,355 $
120,620 $
3,977,849 $
68
815,500
24,272 $
7,289,019 $
396,686 $
27,783 $
424,469
7,713,488
2.09
13.68
20.23
19.99
34.30
41.15
34.20
36.59
28.05
19.97
8.60
19.23
27.56
—
—
—
—
—
See Note 1
—
See Note 2
See Note 3
Plan Category
Equity compensation plans approved by security holders:
1980 Master Stock Compensation Plan:
Deferred Stock Gain Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1991 Master Stock Compensation Plan:
Deferred Stock Option Gain Plan . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred LTC/Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
2001 Master Stock Incentive Plan:
Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred LTC/Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 Master Stock Incentive Plan:
Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred LTC/Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock Options for Non-Employee Directors . . . . . . . . . . . . . . . .
Long-Term Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal for plans approved by security holders . . . . . . . . .
Equity compensation plans not approved by security
holders:
Non-qualified Stock Option Program for Non-Employee
Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ESOP Restoration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal for plans not approved by security holders . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59
Note 1:
Note 2:
Note 3:
The 2010 Master Stock Incentive Plan limits the number of shares authorized for issuance to 9,200,000
during the 10-year term of the plan in addition to any shares forfeited under the 2001 plan. The plan
allows for the granting of nonqualified stock options, incentive stock options, restricted stock,
restricted stock units, SAR, dividend equivalents, and other stock-based awards. There are currently
3,909,233 shares of the authorization remaining.
The stock option program for non-Employee Directors provides for each non-Employee Director to
receive annual option grants of 14,400 shares. The 2010 Master Stock Incentive Plan, which was
approved by the Company’s stockholders on November 19, 2010, provides for the issuance of stock
options to non-Employee Directors, and the stock option program for non-Employee Directors has
been adopted as a sub-plan under the 2010 Master Stock Incentive Plan and shares issued to Directors
after December 10, 2010, are issued under the 2010 Master Stock Incentive Plan. Based on Mercer’s
Director compensation review, the Committee approved changing the annual stock option grant from
a fixed number of shares to a fixed value. The annual stock option grant will be based on a $140,000
fixed value. This change is designed to maintain a stable value of equity grant for the Company’s
Director compensation. The number of options granted will be determined by dividing the fixed value
of $140,000 by the Black-Scholes value as of the date of the grant (the shares will be rounded to the
nearest 100 shares). This change was effective for stock options granted beginning in January 2014.
The Company has a non-qualified ESOP Restoration Plan established on August 1, 1990, to
supplement the benefits for executive Employees under the Company’s Employee Stock Ownership
Plan that would otherwise be reduced because of the compensation limitations under the Internal
Revenue Code. The ESOP’s 10-year term was completed on July 31, 1997, and the only ongoing
benefits under the ESOP Restoration Plan are the accrual of dividend equivalent rights to the
participants in the plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information under the captions “Policy and Procedures Regarding Transactions with Related Persons” and “Board
Oversight and Director Independence” of the 2016 Proxy Statement is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information under the captions “Independent Auditor Fees” and “Audit Committee Pre-Approval Policies and
Procedures” of the 2016 Proxy Statement is incorporated herein by reference.
Item 15. Exhibits, Financial Statement Schedules
Documents filed with this report:
PART IV
(1)
(2)
(3)
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings — years ended July 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income — years ended July 31, 2016, 2015 and 2014
Consolidated Balance Sheets — July 31, 2016 and 2015
Consolidated Statements of Cash Flows — years ended July 31, 2016, 2015 and 2014
Consolidated Statements of Changes in Shareholders’ Equity — years ended July 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Financial Statement Schedules
All other schedules (Schedules I, II, III, IV and V) for which provision is made in the applicable accounting regulations of
the Securities and Exchange Commission are not required under the related instruction, or are inapplicable, and therefore
have been omitted.
Exhibits
The exhibits listed in the accompanying index are filed as part of this report or incorporated by reference as indicated therein.
60
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
DONALDSON COMPANY, INC.
Date:
September 23, 2016
By:
Tod E. Carpenter
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated on September 23, 2016.
Tod E. Carpenter
Scott J. Robinson
Melissa A. Osland
*
Jeffrey Noddle
*
Andrew Cecere
*
Michael J. Hoffman
*
Douglas A. Milroy
*
Willard D. Oberton
*
James J. Owens
*
Ajita G. Rajendra
*
Trudy A. Rautio
*
John P. Wiehoff
Amy C. Becker
As attorney-in-fact
*By:
President, Chief Executive Officer
(Principal Executive Officer)
Vice President and Chief Financial Officer
(Principal Financial Officer)
Controller
(Principal Accounting Officer)
Chairman of the Board
Director
Director
Director
Director
Director
Director
Director
Director
61
EXHIBIT INDEX
ANNUAL REPORT ON FORM 10-K
*3-A
— Restated Certificate of Incorporation of Registrant as currently in effect (Filed as Exhibit 3-A to Form 10-Q
Report for the Second Quarter ended January 31, 2012)
*3-B
— Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of
*3-C
— Amended and Restated Bylaws of Registrant (as of July 29, 2016) (Filed as Exhibit 3-C to Form 8-K Report
Registrant, dated as of March 3, 2006 (Filed as Exhibit 3-B to 2011 Form 10-K Report)
*10-C
—
*4
*4-A
*10-A
*10-B
*10-D
*10-E
*10-F
*10-G
*10-H
*10-I
*10-J
*10-K
*10-L
*10-N
*10-O
*10-P
—
—
filed on July 29, 2016
**
Preferred Stock Amended and Restated Rights Agreement between Registrant and Wells Fargo Bank, N.A.,
as Rights Agent, dated as of January 27, 2006 (Filed as Exhibit 4-A to 2011 Form 10-K Report)
— Officer Annual Cash Incentive Plan (Filed as Exhibit 10-A to 2011 Form 10-K Report)***
—
1980 Master Stock Compensation Plan as Amended (Filed as Exhibit 10-A to Form 10-Q Report filed for the
first quarter ended October 31, 2008)***
Form of Performance Award Agreement under 1991 Master Stock Compensation Plan (Filed as Exhibit 10-
B to Form 10-Q Report filed for the first quarter ended October 31, 2008)***
— ESOP Restoration Plan (2003 Restatement) (Filed as Exhibit 10-D to 2009 Form 10-K Report)***
— Compensation Plan for Non-Employee Directors as amended (Filed as Exhibit 10-C to Form 10-Q Report
—
—
—
—
—
—
filed for the first quarter ended October 31, 2008)***
Independent Director Retirement and Death Benefit Plan as amended (Filed as Exhibit 10-D to Form 10-Q
Report filed for the first quarter ended October 31, 2008)***
Supplemental Executive Retirement Plan (2008 Restatement) (Filed as Exhibit 10-G
Form 10-K Report)***
1991 Master Stock Compensation Plan as amended (Filed as Exhibit 10-E to Form 10-Q Report filed for the
first quarter ended October 31, 2008)***
Form of Restricted Stock Award under 1991 Master Stock Compensation Plan (Filed as Exhibit 10-F to
Form 10-Q Report filed for the first quarter ended October 31, 2008)***
Form of Agreement to Defer Compensation for certain Executive Officers (Filed as Exhibit 10-G to Form 10-
Q Report filed for the first quarter ended October 31, 2008)***
Stock Option Program for Non-employee Directors (Filed as Exhibit 10-H to Form 10-Q Report filed for the
first quarter ended October 31, 2008)***
to 2011
— Note Purchase Agreement among Donaldson Company, Inc. and certain listed Insurance Companies Dated
as of July 15, 1998 (Filed as Exhibit 10-I to Form 10-Q Report filed for the first quarter ended
October 31, 2008)
Second Supplement and First Amendment to Note Purchase Agreement among Donaldson Company, Inc.
and certain listed Insurance Companies dated as of September 30, 2004 (Filed as Exhibit 10-N to 2010
Form 10-K Report)
2001 Master Stock Incentive Plan (Filed as Exhibit 10-O to 2009 Form 10-K Report)***
Form of Officer Stock Option Award Agreement under the 2001 Master Stock Incentive Plan (Filed as
Exhibit 10-P to 2010 Form 10-K Report)***
Form of Non-Employee Director Non-Qualified Stock Option Agreement under the 2001 Master Stock
Incentive Plan (Filed as Exhibit 10-Q to 2010 Form 10-K Report)***
—
—
—
*10-M —
*10-Q
— Restated Compensation Plan for Non-Employee Directors dated July 28, 2006 (Filed as Exhibit 10-Q to 2011
Form 10-K Report)***
*10-R
— Restated Long-Term Compensation Plan dated May 23, 2006
(Filed as Exhibit 10-R
to
2011 Form 10-K Report)***
*10-S
*10-T
— Qualified Performance-Based Compensation Plan (Filed as Exhibit 10-S to 2011 Form 10-K Report)***
— Deferred Compensation and 401(k) Excess Plan (2008 Restatement) (Filed as Exhibit 10-T to 2011
Form 10-K Report)***
— Deferred Stock Option Gain Plan (2008 Restatement) (Filed as Exhibit 10-U to 2011 Form 10-K Report) ***
— Excess Pension Plan (2008 Restatement) (Filed as Exhibit 10-V to 2011 Form 10-K Report) ***
Form of Management Severance Agreement for Executive Officers (Filed as Exhibit 10-A to Form 10-Q
Report for the Third Quarter ended April 30, 2008)***
2010 Master Stock Incentive Plan (Filed as Exhibit 4.5 to Registration Statement on Form S-8 (File No. 333-
170729) filed on November 19, 2010)***
62
*10-U
*10-V
*10-W —
*10-X
—
*10-Y —
*10-Z
—
Form of Officer Stock Option Award Agreement under the 2010 Master Stock Incentive Plan (Filed as
Exhibit 10.1 to Form 8-K Report filed on December 16, 2010) ***
Form of Restricted Stock Award Agreement under the 2010 Master Stock Incentive Plan (Filed as Exhibit 10.2
to Form 8-K Report filed on December 16, 2010) ***
*10-AA — Non-Employee Director Automatic Stock Option Grant Program (Filed as Exhibit 10-AA to 2011
*10-BB —
*10-CC —
*10-DD —
Form 10-K Report)***
Form of Indemnification Agreement for Directors (Filed as Exhibit 10.1 to Form 8-K Report filed on
April 2, 2012)***
Form of Non-Employee Director Non-Qualified Stock Option Agreement under the 2010 Master Stock Incentive
Plan (Filed as Exhibit 10-CC to 2012 Form 10-K Report)***
Form of Management Severance Agreement for Executive Officers (Filed as Exhibit 10.1 to Form 8-K Report
filed October 4, 2012)***
*10-EE — Compensation Plan for Non-Employee Directors (Filed as Exhibit 10-B to Form 10-Q Report filed
December 6, 2012)***
*10-FF — Non-Employee Director Automatic Stock Option Grant Program (Filed as Exhibit 10-FF to 2013
Form 10-K Report)***
*10-GG — Credit Agreement among Donaldson Company, Inc. and certain listed lending parties dated as of December 7,
*10-HH — Note Purchase Agreement, dated as of March 27, 2014, by and among Donaldson Company, Inc. and the
2012 (Filed as Exhibit 10.1 to Form 8-K Report filed December 13, 2012)*
*10-II —
*10-JJ —
*10-KK —
10-LL —
10-MM —
*10-1
—
purchasers named therein (Filed as Exhibit 10.1 to Form 8-K filed April 2, 2014)
Form of Employment Agreement for Director Level Employees in Belgium (unofficial English translation)
(Filed as Exhibit 10-II to 2014 Form 10-K Report)***
First Amendment, dated as of March 9, 2015, to Note Purchase Agreement dated as of March 27, 2014, by and
among Donaldson Company, Inc. and the purchasers named therein (Filed as Exhibit 10.1 to Form 8-K on March
12, 2015)
First Supplement, dated as of April 15, 2015, to Note Purchase Agreement, dates as of March 27, 2014, by and
among Donaldson Company, Inc. and the purchasers named therein (as amended)(Filed as Exhibit 10.1 to Form
8-K report on April 21, 2015)
Form of Separation and General Release Agreement, dated as of February 12, 2016, by and between James F.
Shaw and Donaldson Company, Inc. ***
Form of Separation and General Release Agreement, dated as of March 1, 2016, by and between Jay L. Ward
and Donaldson Company, Inc. ***
First Amendment, dated as of October 28, 2014, to Credit Agreement, dated as of December 7, 2012, among
Donaldson Company Inc., each of the lenders from time to time parties to the Credit Agreement (the “Lenders”)
and Wells Fargo National Association, as administrative agent for the Lenders and issuer of letter of credit (Filed
as Exhibit 10.1 on Form 8-K filed October 29, 2014)
11
— Computation of net earnings per share (See “Earnings Per Share” in “Summary of Significant Accounting
21
23
24
31-A
31-B
32
101
Policies” in Note A in the Notes to Consolidated Financial Statements included in Item 8)
Subsidiaries
—
— Consent of PricewaterhouseCoopers LLP
—
— Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
— Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
— Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
Powers of Attorney
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
— The following financial information from the Donaldson Company, Inc. Annual Report on Form 10-K for the
fiscal year ended July 31, 2016 as filed with the Securities and Exchange Commission, formatted in Extensible
Business Reporting Language (XBRL): (i) the Consolidated Statements of Earnings, (ii) the Consolidated
Balance Sheets, (iii) the Consolidated Statements of Cash Flows (iv) the Consolidated Statement of Changes in
Shareholders’ Equity and (v) the Notes to Consolidated Financial Statements.
___________
*
**
Exhibit has previously been filed with the Securities and Exchange Commission and is incorporated herein by reference as an exhibit.
Pursuant to the provisions of Regulation S-K Item 601(b)(4)(iii)(A) copies of instruments defining the rights of holders of certain long-term debts of the
Company and its subsidiaries are not filed and in lieu thereof the Company agrees to furnish a copy thereof to the Securities and Exchange Commission upon
request.
*** Denotes compensatory plan or management contract.
Note: Exhibits have been furnished only to the Securities and Exchange Commission. Copies will be furnished to individuals upon request.
63
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-170729,
333-107444, 333-97771, 333-56027, 33-27086, 2-90488 and 33-44624) of Donaldson Company, Inc. of our report dated
September 23, 2016 relating to the financial statements and the effectiveness of internal control over financial reporting, which
appears in this Form 10-K.
Exhibit 23
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
September 23, 2016
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31-A
I, Tod E. Carpenter, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Donaldson Company, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date:
September 23, 2016
By:
Tod E. Carpenter
Chief Executive Officer
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31-B
I, Scott J. Robinson, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Donaldson Company, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date:
September 23, 2016
By:
Scott J. Robinson
Chief Financial Officer
Exhibit 32
Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the following
certifications are being made to accompany the Annual Report on Form 10-K for the fiscal year ended July 31, 2016 for
Donaldson Company, Inc.:
I, Tod E. Carpenter, Chief Executive Officer of Donaldson Company, Inc., certify that:
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
1.
2.
The Annual Report on Form 10-K of Donaldson Company, Inc. for the fiscal year ended July 31, 2016, (the “Report”),
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of Donaldson Company, Inc.
Date:
September 23, 2016
By:
Tod E. Carpenter
Chief Executive Officer
I, Scott J. Robinson, Chief Financial Officer of Donaldson Company, Inc., certify that:
CERTIFICATION OF CHIEF FINANCIAL OFFICER
1.
2.
The Annual Report on Form 10-K of Donaldson Company, Inc. for the fiscal year ended July 31, 2016, (the “Report”),
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of Donaldson Company, Inc.
Date:
September 23, 2016
By:
Scott J. Robinson
Chief Financial Officer
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F IV E - Y E AR CO MPAR I SON OF R E S ULTS
(Dollars and shares outstanding are in millions, except per share amounts)
Operating Results
Net Sales
Gross Margin
Operating Margin
Net Earnings
Diluted Earnings per Share
Additional Shareholder Information
After-Tax Return on Investment
Return on Average Shareholders’ Equity
Dividends Paid per Share
Shares Outstanding
Share Price
High
Low
Twelve Months Ended July 31,
2016
2015
2014
2013
2012
$2,220
34.0%
12.3%
$191
$1.42
16.6%
24.6%
$0.685
132.8
$37.08
$25.21
$2,371
34.1%
12.2%
$208
$1.49
17.2%
23.4%
$0.665
134.5
$43.31
$31.62
$2,473
35.5%
14.4%
$260
$1.76
$2,437
34.8%
14.1%
$247
$1.64
$2,493
35.0%
14.6%
$264
$1.73
21.4%
24.9%
$0.575
140.3
21.5%
24.8%
$0.410
146.0
$43.74
$34.60
$39.36
$30.90
23.5%
28.7%
$0.320
147.5
$38.89
$23.19
CORPORATE OFFICERS
BOARD OF DIRECTORS
AMY C. BECKER
VP, General Counsel and Secretary
ROGER J. MILLER
VP, Global Engine OEM Sales
GUILLERMO BRISENO
VP, Latin America
SHEILA C. PEYRAUD
VP, Chief Technology Officer
FRANKLIN G. CARDENAS
VP, Global Engine Aftermarket
SCOTT J. ROBINSON
VP, Chief Financial Officer
TOD E. CARPENTER
President and Chief Executive Officer
THOMAS R. SCALF
SVP, Engine Products
TIMOTHY H. GRAFE
VP, New Business Development
JEFFREY E. SPETHMANN
SVP, Industrial Products
WIM J. V. VERMEERSCH
VP, Europe, Middle East and Africa
DENNIS D. JANDIK
VP, Asia Pacific
SHEILA G. KRAMER
VP, Human Resources
RICHARD B. LEWIS
VP, Global Operations
Safe Harbor Statement
TOD E. CARPENTER
President and Chief Executive Officer
Donaldson Company, Inc.
WILLARD D. OBERTON
Chairman of the Board
Fastenal Company
ANDREW CECERE
President and COO
U.S. Bancorp
JAMES J. OWENS
President and CEO
H.B. Fuller Company
MICHAEL J. HOFFMAN
Chairman and CEO
The Toro Company
AJITA G. RAJENDRA
Chairman, President and CEO
A.O. Smith Corporation
DOUGLAS A. MILROY
Chairman and CEO
G & K Services, Inc.
TRUDY A. RAUTIO
Retired President and CEO
Carlson
JEFFREY NODDLE
Non-Executive Chairman of the Board
Donaldson Company
Retired Chairman and CEO
SUPERVALU Inc.
JOHN P. WIEHOFF
Chairman and CEO
C. H. Robinson Worldwide, Inc.
Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP, Minneapolis, MN
Statements in this document regarding future events and expectations, such as forecasts, plans, trends and projections
relating to the Company’s business and financial performance, are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements speak only as of the date such statements
are made and are subject to risks and uncertainties that could cause the Company’s results to differ materially from these
statements. These risks and uncertainties are described in the Company’s Annual Report on Form 10-K, and Donaldson
undertakes no obligation to publicly update or revise any forward-looking statements.
Donaldson Company, Inc. Headquarters • 1400 West 94th Street • Bloomington, MN 55431
Contact Us: p: 1.952.703.4965 • e: investor.relations@donaldson.com • www.donaldson.com
© 2016 Donaldson Company, Inc. All Rights Reserved.