Annual Report (Form 10-K), fiscal year 1994

Item 1. BUSINESS
GENERAL
Donaldson Company, Inc. ("Donaldson" or the "Company") was founded in 1915 and organized in its present corporate form under the laws of the State of Delaware in 1936.
The Company is a worldwide manufacturer of air cleaners, liquid filters and exhaust products and accessories for heavy duty mobile equipment; in-plant air cleaning systems; air intake systems and exhaust products for industrial gas turbines; and specialized filters for diverse applications. The Company has one industry segment which consists of the design, manufacture and sale of products to filter air, sound and liquid.
The Company's principal products are primarily sold through a direct sales force. The table below shows the percentage of total sales contributed by the principal classes of similar products for each of the last three fiscal years:
Year Ended July 31 1994 1993 1992 ---- ---- ---- Air cleaners, filtration devices and accessories 67% 68% 71% Acoustical Products 11% 11% 9% Other 22% 21% 20%
RAW MATERIALS
The Company experienced no significant or unusual problems in the purchase of raw materials or commodities. Donaldson has more than one source of raw materials essential to its business.
The Company is not required to carry significant amounts of inventory to meet rapid delivery demands or secure supplier allotments.
PATENTS
The Company owns various patents which it considers in the aggregate to constitute a valuable asset. However, it does not regard the validity of any one patent as being of material importance.
SEASONALITY
The Company's business is not considered to be seasonal.
MAJOR CUSTOMER
Approximately 12% of the Company's 1994 sales were made to Caterpillar Inc. and subsidiaries ("Caterpillar"). Caterpillar has been a customer of the Company for many years and they purchase several models and types of products for a variety of applications.
Sales to the U.S. Government do not constitute a material portion of the Company's business.
BACKLOG
At August 31, 1994, the backlog of orders expected to be delivered within 90 days was $111,147,000. The backlog at August 31, 1993 was $88,953,000.
COMPETITION
Principal methods of competition are price, service and product performance. The Company estimates it has more than 20 competitors in the sale of filtration products and less than 10 competitors in the sale of acoustical products.
Generally the Company does not provide rights to return merchandise or give extended payment terms to customers and believes the industry practices are similar to its own.
RESEARCH AND DEVELOPMENT
During 1994 the Company spent $10,873,000 on research and development activities relating to the development of new products or improvements of existing products or manufacturing processes. The Company spent $11,364,000 in 1993 and $10,323,000 in 1992 on research and development activities. Essentially all commercial research and development is Company sponsored.
ENVIRONMENTAL MATTERS
The Company does not anticipate any material effect on its capital expenditures, earnings or competitive position due to compliance with government regulations involving environmental matters.
EMPLOYEES
The Company employed 4,417 persons in worldwide operations as of July 31, 1994.
GEOGRAPHIC AREAS
Note J of the Notes to Consolidated Financial Statements on page 28 in the 1994 Annual Report to Shareholders contains information regarding the Company's geographic areas and is incorporated herein by reference.
Political conditions, tariffs, local tax structures, and currency exchange rate fluctuations contribute to the risks of foreign operations.
Item 2.



Item 2. PROPERTIES
The Company's principal office and research facilities are located in Bloomington, a suburb of Minneapolis, Minnesota. European administrative and engineering offices are located in Leuven, Belgium.
Manufacturing activities are carried on in ten plants in the United States, two in Japan and one each in Australia, Brazil, United Kingdom, Hong Kong, South Africa, Italy, Belgium and Germany. The inside back cover of the 1994 Annual Report to Shareholders lists U.S. plant locations and is incorporated herein by reference. Note J on page 28 of the 1994 Annual Report to Shareholders presents identifiable assets by geographic area and is incorporated herein by reference.
Donaldson is a lessee under several long-term leases pursuant to Industrial Revenue Bond financings. These leases provide for options to purchase the facilities at the end of the lease term and have been capitalized.
The Company's properties are considered to be suitable for their present purposes, well maintained and in good operating condition.
Item 3.

Item 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Company's business.
Item 4.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during the fourth quarter of the year ended July 31, 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
Current information regarding executive officers is presented below. All terms of office are for one year. There are no arrangements or understandings between individual officers and any other person pursuant to which he was selected as an officer.
First Year Elected or appointed as an Name Age Positions and Offices Held Officer - - ---- --- -------------------------- ---------- William A. Hodder 63 Chairman, Chief Executive 1973 Officer & Director
Erland D. Anderson 53 Vice President, Corporate 1978 Technology
William M. Cook 41 Vice President, Industrial 1994
Edmund C. Craft 54 Vice President, Engine 1985 Aftermarket
James R. Giertz 37 Vice President, Chief 1994 Financial Officer
Richard M. Negri 61 Vice President, Corporate 1976 Manufacturing
Nickolas Priadka 48 Vice President, Engine OEM 1989
Lowell F. Schwab 46 Vice President, Operations 1994
John R. Schweers 49 Treasurer 1987
John E. Thames 44 Vice President, Human Resources 1989
William G. Van Dyke 49 President, Chief Operating 1979 Officer and Director
Thomas A. Windfeldt 45 Vice President, Controller 1985
All of the above-named executive officers have held executive or management positions with Registrant for more than the past five years except Mr. Giertz who was previously Assistant Treasurer Corporate Finance for General Motors Corporation (1992) and Treasurer of various subsidiaries of General Motors Corporation and Mr.Schwab who was previously Vice President and General Manager of the Machinery Division of Washington Scientific, Inc.
PART II
Item 5.

Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information in the sections "NYSE Listing," and "Quarterly Financial Information (Unaudited)" on page 32, and restrictions on payment of dividends in Note D, page 24 of the 1994 Annual Report to Shareholders is incorporated herein by reference. As of September 27, 1994, there were approximately 1,500 shareholders of record of Common Stock.
The high and low sales prices for registrant's common stock for each full quarterly period during fiscal 1993 and 1994 are as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1993 $14-19 $17-19 1/4 $16 5/8-20 1/8 $17-19 1/8 1994 $18 1/4-21 5/8 $20-23 3/4 $21 7/8-25 1/4 $20-26 1/8
Item 6.

Item 6. SELECTED FINANCIAL DATA
The information for the years 1990 through 1994 on pages 12 and 13 of the 1994 Annual Report to Shareholders is incorporated herein by reference.
Item 7.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The textual information commencing with "Capital Structure" in the section "Management's Discussion and Analysis" on pages 14 through 18 of the 1994 Annual Report to Shareholders is incorporated herein by reference.
Item 8.


Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes to Consolidated Financial Statements on pages 19 through 28, and the Quarterly Financial Information (Unaudited) on page 32 of the 1994 Annual Report to Shareholders is incorporated herein by reference.
Item 9.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10.



Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the captions "Nominees For Election" and "Directors Continuing In Office" on pages 3 and 4 and under the heading "Compliance With Section 16 (a) of the Securities Exchange Act of 1934" on page 10 of the Company's definitive proxy statement dated October 14, 1994 is incorporated herein by reference. Information about the executive officers of the Company is set forth in Part I of this report.
Item 11.

Item 11. EXECUTIVE COMPENSATION
The information under "Director Compensation" on page 4 and in the section "Executive Compensation" on pages 5 through 9, the "Pension Plan Table" on page 10 and under the captions "Resignation Agreement" and "Change-in-Control Arrangements" on page 11 of the Company's definitive proxy statement dated October 14, 1994, is incorporated herein by reference.
Item 12.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the section "Security Ownership" on pages 1 and 2 of the Company's definitive proxy statement dated October 14, 1994, is incorporated herein by reference.
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the section "Resignation Agreement" on page 10 of the Company's definitive proxy statement, dated October 14, 1994, is incorporated herein by reference.
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed with this report:
(1) Financial Statements -
Consolidated Statements of Financial Position--July 31, 1994 and 1993 (incorporated by reference from page 20 of the 1994 Annual Report to Shareholders)
Consolidated Statements of Earnings--years ended July 31, 1994, 1993 and 1992 (incorporated by reference from page 19 of the 1994 Annual Report to Shareholders)
Consolidated Statements of Cash Flows--years ended July 31, 1994, 1993 and 1992 (incorporated by reference from page 21 of the 1994 Annual Report to Shareholders)
Consolidated Statements of Changes in Shareholders' Equity-years ended July 31, 1994, 1993 and 1992 (incorporated by reference from page 22 of the 1994 Annual Report to Shareholders)
Notes to Consolidated Financial Statements (incorporated by reference from pages 23 through 28 of the 1994 Annual Report to Shareholders)
Report of Independent Auditors (incorporated by reference from page 29 of the 1994 Annual Report to Shareholders).
(2) Financial Statement Schedules -
Schedule II Amounts receivable from related parties and underwriters, promoters, and employees other than related parties
Schedule V Property, plant and equipment
Schedule VI Accumulated depreciation, depletion and amortization of property, plant and equipment
Schedule VIII Valuation and qualifying accounts
Schedule IX Short-term borrowings
Schedule X Supplementary income statement information
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instruction, or are inapplicable, and therefore have been omitted.
(3) Exhibits
The exhibits listed in the accompanying index are filed as part of this report or incorporated by reference as indicated therein.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended July 31, 1994.
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DONALDSON COMPANY, INC. (Registrant)
Date: October 28, 1994 By /s/ Raymond F. Vodovnik Raymond F. Vodovnik Vice President, Legal
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
/s/ William A. Hodder Chairman, Chief Executive William A. Hodder Officer and Director
/s/ Thomas A. Windfeldt Vice President, Controller Thomas A. Windfeldt
/s/ James R. Giertz Vice President, Chief Financial James R. Giertz Officer
*William G. Van Dyke President, Chief Operating William G. Van Dyke Officer and Director
*A. Gary Ames Director A. Gary Ames
*Michael R. Bonsignore Director Michael R. Bonsignore
*Jack W. Eugster Director Jack W. Eugster
*Kendrick B. Melrose Director Kendrick B. Melrose
*S. Walter Richey Director S. Walter Richey
*Stephen W. Sanger Director Stephen W. Sanger
*C. Angus Wurtele Director C. Angus Wurtele
*By /s/Raymond F. Vodovnik Date: October 28, 1994 Raymond F. Vodovnik
* As attorney-in-fact
SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
DONALDSON COMPANY, INC. AND SUBSIDIARIES
(1) The loan was fully secured by a mortgage on Mr. Read's residence in favor of the Company. The note accrued interest at the rate of 9.1% per annum. On August 8, 1994, Mr. Read resigned from the Company. The Company agreed to forgive the outstanding note as part of his Resignation Agreement.
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT
DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars)
See notes on following page.
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT--Continued
DONALDSON COMPANY, INC. AND SUBSIDIARIES
Note A--Includes $3,200 related to a write down of certain Brazilian assets.
Note B--Amounts represent the effect of changes in foreign currency exchange rates on property and equipment. Foreign currency translation methods are disclosed in Note A to the consolidated financial statements.
Note C--Includes $1,828 relating to the acquisition of property, plant and equipment of a high purity products materials supplier.
Note D--Includes $5,898 relating to the acquisition of property, plant and equipment of Filtrobras-Roma Filtros Automotivos Ltda. and ENV Services, Inc.
Note E--Includes $6,583 relating to the acquisition of property, plant and equipment of Gimetal N.V. and FBO s.r.l.
SCHEDULE VI--ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars)
Note A--Amounts represent the effect of changes in foreign currency exchange rates on property, plant and equipment. Foreign currency translation methods are disclosed in Note A to the consolidated financial statements.
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars)
Note A--Foreign currency translation losses (gains) recorded directly to retained earnings.
Note B--Bad debts charged to allowance, net of recoveries.
SCHEDULE IX--SHORT-TERM BORROWINGS
DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars)
Note A--The average amount outstanding during the period was computed by dividing the total of month-end outstanding principal balances by twelve.
Note B--The weighted average interest rate during the period was computed by dividing the actual interest expense by average month end short-term debt outstanding.
SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION
DONALDSON COMPANY, INC. AND SUBSIDIARIES
(Thousands of Dollars)
COL. A COL. B Charged to Item Costs and Expenses - - ------------------------- ------------------
Year ended July 31, 1994 Maintenance and repairs $5,935 ======
Year ended July 31, 1993 Maintenance and repairs $5,575 ======
Year ended July 31, 1992 Maintenance and repairs $4,832 ======
Amounts for other items are not presented as such amounts are less than 1% of total sales.
EXHIBIT INDEX ANNUAL REPORT ON FORM 10-K
* 3-a - Certificate of Incorporation of Registrant as currently in effect
* 3-B - By-laws of Registrant as currently in effect
* 4 - **
* 4-A - Preferred Stock Amended and Restated Rights Agreement (Filed as Exhibit 1 to Form 8-K Report Dated May 19, 1989)
* 4-B - Credit Agreement among Donaldson Company, Inc. and certain listed banks dated as of October 8, 1987 (Filed as Exhibit 4-B to 1987 Form 10-K Report)
* 4-C - Copy of First Amendment to Preferred Stock Amended and Restated Rights Agreement (Filed as Exhibit 1 to Form 8-K Report Dated September 20, 1991)
10-A - Copy of Resignation Agreement dated August 21, 1994 between Registrant and John C. Read
* 10-B - Supplementary Retirement Agreement with William A. Hodder (Filed as Exhibit 10-B to 1993 Form 10-K Report)
* 10-C - 1980 Master Stock Compensation Plan as Amended (Filed as Exhibit 10-C to 1993 Form 10-K Report)
* 10-D - Form of Performance Award Agreement under 1980 Master Stock Compensation Plan (Filed as Exhibit 10-D to 1989 Form 10-K Report)
* 10-E - Copy of Phantom Stock Plan (Filed as exhibit 10-E to 1991 Form 10-K Report)
* 10-F - Deferred Compensation Plan for Non-employee Directors as amended (Filed as Exhibit 10-F to 1990 Form 10-K Report)
* 10-G - Form of "Change in Control" Agreement with key employees as amended (Filed as Exhibit 10-F to 1990 Form 10-K Report)
* 10-H - Independent Director Retirement and Benefit Plan as amended (Filed as Exhibit 10-H to 1993 Form 10-K Report)
* 10-I - Excess Benefit Plan (Filed as Exhibit 10-I to 1989 Form 10-K Report)
* 10-J - Copy of Supplementary Executive Retirement Plan (Filed as Exhibit 10-J to 1991 Form 10-K Report)
* 10-K - 1991 Master Stock Compensation Plan as amended (Filed as Exhibit 10-K to 1993 Form 10-K Report)
* 10-L - Form of Restricted Stock Award under 1991 Master Stock Compensation Plan. (Filed as Exhibit 10-L to 1992 Form 10-K Report)
* 10-M - Form of Agreement to Defer Compensation for certain Executive Officers (Filed as Exhibit 10-M to 1993 Form 10-K Report)
* 10-N - Stock Option Program for Nonemployee Directors (Filed as Exhibit 10-N to 1993 Form 10-K Report)
11 - Statement re computation of per share earnings
13 - Portions of Registrant's Annual Report to Shareholders for the year ended July 31, 1994
21 - Subsidiaries ("Wholly Owned Subsidiaries" and "Joint Ventures" on the inside back cover of Donaldson's 1994 Annual Report is incorporated by reference)
23 - Consent of Independent Auditors
24 - Powers of Attorney
27 - Financial Data Schedule
99 - Annual Report of Employees' Retirement Savings Plan on Form 11-K for year ended July 31, 1994
* Exhibit has heretofore been filed with the Securities and Exchange Comission and is incorporated herein by reference as an exhibit.
** Pursuant to the provisions of Regulation S-K Item 601(b)(4)(iii)(A) copies of instruments defining the rights of holders of certain long-term debts of Registrant and its subsidiaries are not filed and in lieu thereof Registrant agrees to furnish a copy thereof to the Securities and Exchange Commission upon request.
Note: Exhibits have been furnished only to the Securities and Exchange Commission. Copies will be furnished to individuals upon request and payment of $15 representing Registrant's reasonable expense in furnishing such exhibits.