Sauer-Danfoss ARS 2006
OF 2006 ANNUAL MEETING
TABLE OF CONTENTS
250 Parkway Drive, Suite 270
TO BE HELD JUNE 1, 2006
TO OUR STOCKHOLDERS:
The annual meeting of stockholders of Sauer-Danfoss Inc., a Delaware corporation, will be held at Sauer-Danfoss GmbH & Co. OHG, Carl-Legien-Strasse 8, 63073 Offenbach/Main, Germany on Thursday, June 1, 2006, commencing at 8:30 a.m. local time. At the meeting, stockholders will act on the following matters:
1. To elect ten (10) directors for a term expiring at the annual meeting of stockholders to be held in 2007, and until their respective successors are duly elected and shall qualify.
2. To approve the Sauer-Danfoss Inc. 2006 Omnibus Incentive Plan.
3. To ratify the appointment of KPMG LLP as the Companys independent registered public accounting firm for 2006.
4. To transact such other business as may properly come before the meeting or any postponement, adjournment, or adjournments.
Stockholders of record at the close of business on April 7, 2006 are entitled to notice of and to vote at the annual meeting or any postponement, adjournment, or adjournments.
Whether or not you expect to attend the Annual Meeting, please either complete, date, sign, and return the accompanying proxy card in the provided envelope or vote your shares by telephone or via the Internet using the instructions on the enclosed proxy card as promptly as possible in order to ensure your representation at the meeting. Even if you have given your proxy, whether by mail, by telephone, or via the Internet, you may still vote in person if you attend the meeting. If your shares are held of record by a broker, bank, or other nominee (Street Name) you will need to obtain from the institution that holds your shares and bring to the meeting a proxy issued in your name, authorizing you to vote the shares.
250 Parkway Drive, Suite 270
April 24, 2006
The enclosed proxy is being solicited on behalf of the Board of Directors of Sauer-Danfoss Inc. (the Company) for use at the annual meeting of the stockholders to be held on June 1, 2006 (the Annual Meeting), and at any postponement, adjournment, or adjournments thereof. Most stockholders have a choice of voting via the Internet, by using a toll-free telephone number, or by completing a proxy card and mailing it in the envelope provided. Check your proxy card or the information forwarded by your bank, broker, or other holder of record to see which options are available to you. Please be aware that if you vote over the Internet, you may incur costs such as telecommunication and Internet access charges for which you will be responsible. The telephone voting facilities and the Internet voting facilities for stockholders of record will be available until 12:00 pm CDT on May 30, 2006, two days prior to the Annual Meeting.
Any proxy given does not affect your right to vote in person at the meeting and may be revoked at any time before it is exercised by notifying Kenneth D. McCuskey, Corporate Secretary, by mail, telegram, or facsimile, by timely delivery of a properly executed, later-dated proxy (including an Internet or telephone vote) or by appearing at the Annual Meeting in person and voting by ballot. Persons whose shares are held of record by a brokerage house, bank, or other nominee and who wish to vote at the meeting, must obtain from the institution holding their shares a proxy issued in such persons name.
The Company intends to mail this Proxy Statement and the accompanying proxy on or about April 24, 2006.
The Company will bear the entire cost of solicitation of proxies, including the preparation, assembly, printing, and mailing of this Proxy Statement, the accompanying proxy and any additional information furnished to stockholders. The Company will reimburse banks, brokerage houses, custodians, nominees, and fiduciaries for reasonable expenses incurred in forwarding proxy material to beneficial owners. In addition to solicitations by mail, officers, other regular employees and directors of the Company may, but without compensation other than their regular compensation, solicit proxies in person or by telephone, facsimile or electronic means. The Company does not expect to pay any compensation for the solicitation of proxies.
All shares entitled to vote and represented by properly completed proxies received prior to the Annual Meeting and not revoked will be voted in accordance with the instructions on the proxy. If no instructions are indicated on a properly completed proxy, the shares represented by that proxy will be voted for the election of the nominees for director designated below, for approval of the Sauer-Danfoss Inc. 2006 Omnibus Incentive Plan (the 2006 Incentive Plan) and for ratification of the appointment of KPMG LLP as independent registered public accounting firm of the Company for 2006.
Only holders of common stock of the Company of record as of the close of business on April 7, 2006 are entitled to notice of and to vote at the Annual Meeting. At the close of business on that date, 47,732,779 shares of common stock were outstanding. Holders of common stock are entitled to one (1) vote for each share held on all matters to be voted upon. Shares cannot be voted at the Annual Meeting unless the owner is present in person or represented by proxy. The directors shall be elected by an affirmative vote of a plurality of the shares that are entitled to vote on the election of directors and that are represented at the meeting by stockholders who are present in person or by proxy, assuming a quorum is present. The ten nominees for directors receiving the greatest number of votes at the Annual Meeting will be elected as directors. For all other matters to be voted upon at the Annual Meeting, the affirmative vote of a majority of shares present in person or represented by proxy, and entitled to vote on the matter, is necessary for approval.
When a broker or other nominee holding shares for a customer votes on one proposal, but does not vote on another proposal because the broker or nominee does not have discretionary voting power with respect to such proposal and has not received instructions from the beneficial owner, it is referred to as a Broker Nonvote. Properly executed proxies marked Abstain or proxies required to be treated as Broker Nonvotes will be treated as present for purposes of determining whether there is a quorum at the meeting. Abstentions will be considered shares entitled to vote in the tabulation of votes cast on proposals presented to the stockholders and will have the same effect as negative votes. Broker Nonvotes are counted towards a quorum, but are not counted for any purpose in determining whether a matter has been approved.
The following table sets forth certain information as of March 16, 2006, with respect to shares of common stock of the Company that were owned beneficially by: (i) each beneficial owner of more than 5% of the outstanding shares of common stock; (ii) each of the directors; (iii) each of the executive officers of the Company named in the Summary Compensation table; and (iv) all executive officers and directors of the Company as a group.
* Represents less than 1%.
(1) Unless otherwise indicated in the following notes, each of the stockholders named in this table has sole voting and investment power with respect to the shares shown as beneficially owned. The following footnotes describe those shares which are beneficially owned by more than one person listed above.
(2) The mailing address for each of these entities and persons is c/o Sauer Holding GmbH, Krokamp 35, 24539 Neumünster, Federal Republic of Germany.
(3) These shares include 10,474,000 shares owned directly by Sauer GmbH, a German limited liability company, 7,613,825 shares owned directly by Sauer Holding GmbH, a German limited liability
company (Sauer Holding), 300,000 shares over which Sauer Holding possesses shared voting power but no dispositive power and over which Klaus H. Murmann and Hannelore Murmann possess shared voting and dispositive power, and 18,241,962 shares owned directly by Danfoss Murmann Holding A/S (the Holding Company). Sauer GmbH possesses only shared dispositive power and no voting power over 10,361,500 of the shares which it owns directly, as to which an irrevocable voting proxy (the Voting Proxy) has been granted to the Holding Company. Sauer Holding possesses only shared voting and dispositive power over 6,812,500 of the shares which it owns directly. As a result of its 100% ownership of Sauer GmbH, Sauer Holding has shared voting and dispositive power over 112,500 of the shares owned directly by Sauer GmbH. As a result of its 50% voting power over the Holding Company, Sauer Holding has shared voting and dispositive power over the 18,241,962 shares owned directly by the Holding Company and over the 10,361,500 shares owned directly by Sauer GmbH that are subject to the Voting Proxy. Sauer Holding disclaims beneficial ownership of the 28,715,962 shares directly owned in the aggregate by Sauer GmbH and the Holding Company. As a result of its 100% ownership of Sauer Holding, Klaus Murmann & Co. KG, a German partnership (Murmann KG), has shared voting and dispositive power over 36,329,787 shares owned in the aggregate by Sauer GmbH, Sauer Holding, and the Holding Company. Klaus H. Murmann and Hannelore Murmann, as the general partners of Murmann KG, and Nicola Keim, Sven Murmann, Ulrike Murmann-Knuth, Anja Murmann-Mbappe, Jan Murmann, Brigitta Zoellner and Christa Zoellner, as limited partners of Murmann KG who share the power to vote on investment decisions, also have shared voting and dispositive power over these 36,329,787 shares. Murmann KG, Klaus H. Murmann, Hannelore Murmann, Nicola Keim, Sven Murmann, Ulrike Murmann-Knuth, Anja Murmann-Mbappe, Jan Murmann, Brigitta Zoellner and Christa Zoellner each disclaim beneficial ownership of these 36,329,787 shares owned directly in the aggregate by Sauer GmbH, Sauer Holding, and the Holding Company. Murmann KG, by virtue of its 100% ownership of Sauer Holding, has shared voting, but no dispositive, power over 300,000 shares over which Sauer Holding has shared voting, but no dispositive, power. Nicola Keim, Sven Murmann, Ulrike Murmann-Knuth, Anja Murmann-Mbappe, Jan Murmann, Brigitta Zoellner, and Christa Zoellner, as limited partners of Murmann KG who share the power to vote on investment decisions, have shared voting power over these 300,000 shares. Klaus H. Murmann and Hannelore Murmann have shared voting and dispositive power over these 300,000 shares. Sauer Holding, Murmann KG, Klaus H. Murmann, Hannelore Murmann, Nicola Keim, Sven Murmann, Ulrike Murmann-Knuth, Anja Murmann-Mbappe, Jan Murmann, Brigitta Zoellner, and Christa Zoellner each disclaim beneficial ownership of these 300,000 shares. Hannelore Murmann further disclaims beneficial ownership of 4,500 shares owned directly by Klaus H. Murmann.
(4) The mailing address for each of these entities is DK-6430 Nordborg, Denmark.
(5) These shares include 18,241,962 shares owned directly by the Holding Company. As a result of its 50% voting power over the Holding Company, Danfoss A/S has shared voting and dispositive power over these shares. These shares also include 10,361,500 shares owned directly by Sauer GmbH that are subject to the Voting Proxy. The Holding Company has sole voting power, but no dispositive power (sole or shared), over these shares. Danfoss A/S has shared voting and dispositive power over these shares. These shares also include 6,812,500 shares owned directly by Sauer Holding, as to which the Holding Company and Danfoss A/S have shared voting and dispositive power. The Holding Company disclaims beneficial ownership of 6,812,500 of these shares. Danfoss A/S disclaims beneficial ownership of all 35,415,962 of these shares.
(6) These shares are owned directly by Sauer GmbH but, pursuant to the Voting Proxy, Sauer GmbH has neither sole nor shared voting or dispositive power over 10,361,500 of these shares.
(7) Mr. Anderson disclaims beneficial ownership with respect to 49,000 of these shares which are owned directly by his wife.
(8) Mr. Loughrey disclaims beneficial ownership with respect to 3,000 of these shares which are owned directly by his wife.
(9) Includes stock owned by the spouses and children of certain directors and executive officers.
The Companys Board of Directors (the Board), currently has ten members, three of whom meet the New York Stock Exchange standard for independence. The Board has an Executive Committee, an Audit Committee, a Compensation Committee and a Nominating Committee. All members of the Audit Committee and Compensation Committee are independent directors, but the two members of the Nominating Committee are not independent. The corporate governance listing standards of the New York Stock Exchange provide that a company of which more than 50% of the voting power is held by an individual, a group or another company (a controlled company) need not comply with the Exchanges listing standards requiring that a majority of the Board be independent and that listed companies have a nominating/corporate governance committee and a compensation committee each composed entirely of independent directors with a written charter that addresses specific items. The Company considers itself to be a controlled company because approximately 74.2% of the voting power of the Companys common stock is owned or controlled by Danfoss Murmann Holding A/S. Accordingly, the Company has elected to utilize the exemption from the requirement that a majority of the Board be independent and from the provisions relating to a nominating/corporate governance committee.
The Board held four meetings during 2005. Each director attended at least 75% of the aggregate of the total number of meetings of the Board and the total number of meetings held by all committees of the Board on which the directors served during 2005. It is the policy of the Board that each director of the Company is expected to attend annual meetings of the stockholders of the Corporation, it being understood, however, that a director infrequently may be unable to attend annual meetings of the stockholders of the Company due to illness, a previously scheduled meeting of importance or other irreconcilable conflict. All of the directors attended the Companys annual stockholders meeting in April of 2005.
The non-management directors of the Company have adopted a schedule to meet in private session at the end of each regular meeting of the Board without any management director or executive officer being present. The non-management directors have also adopted the policy that the Chairman of the Board, or in his absence, the Vice Chairman, shall preside at all such meetings. In addition, at least once a year, only independent, non-employee directors shall meet in private session.
The Board has adopted Corporate Governance Guidelines (the Guidelines), that provide, among other things, that at least three directors must be independent. The Guidelines can be viewed on the Companys website at www.sauer-danfoss.com, and the Company will mail without charge, a copy of the Guidelines upon written request to Kenneth D. McCuskey, Corporate Secretary at 2800 East 13th Street, Ames, Iowa 50010. To be considered independent under the Guidelines, a person must be determined by the Board to have no material relations, directly or indirectly, with the Company or its affiliates or any other director or elected officer of the Company, and must otherwise be independent as that term is defined under the listing standards of the New York Stock Exchange, but also without the appearance of any conflict in serving as a director. In addition to applying these guidelines, the Board shall consider all relevant facts and circumstances in making an independence determination.
The Board undertook its annual review of director independence with respect to the three persons considered independent at its meeting on February 22, 2006. The Board determined whether the three persons under consideration met the objective listing standards of the New York Stock Exchange regarding the definition of independent director, which standards provide that a director is not independent if:
· The director is, or has been within the last three years, an employee of the Company, or an immediate family member is, or has been within the last three years, an executive officer of the Company.
· The director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $100,000 in direct compensation from the Company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service).
· (A) The director or an immediate family member is a current partner of a firm that is the Companys internal or external auditor; (B) the director is a current employee of such a firm; (C) the director has an immediate family member who is a current employee of such a firm and who participates in the firms audit, assurance or tax compliance (but not tax planning) practice; or (D) the director or an immediate family member was within the last three years (but is no longer) a partner or employee of such a firm and personally worked on the Companys audit within that time.
· The director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of the Companys present executive officers at the same time serves or served on that Companys compensation committee.
· The director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, the Company for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2% of such other companys consolidated gross revenues.
The Board also considered whether there were any other transactions or relations between each of said three persons or any member of his immediate family and the Company and its subsidiaries and affiliates that would affect the independence of such persons and concluded that there were none.
As a result of its review, the Board affirmatively determined that Johannes F. Kirchhoff, F. Joseph Loughrey and Steven H. Wood are independent of the Company and its management under the standards set forth in the Guidelines.
The Executive Committee possesses all of the powers of the Board, except for certain powers specifically reserved by Delaware law to the Board. The Executive Committee held two meetings and acted one additional time by unanimous written consent during 2005. Jørgen M. Clausen, Sven Murmann and David J. Anderson are the current members of the Executive Committee.
The Audit Committee is currently composed of three directors, none of whom is an employee of the Company. The Audit Committee currently consists of Messrs. Wood (Chairman), Kirchhoff and Loughrey. All of the members of the Audit Committee are independent within the meaning of the Securities and Exchange Commissions (SEC) regulations, the current listing standards of the New York Stock Exchange and the Companys Corporate Governance Guidelines. In addition, the Board has determined
that at least one member of the Audit Committee meets the New York Stock Exchange listing standard of having accounting or related financial management expertise.
The Board has also determined that Steven H. Wood meets the SECs criteria of an audit committee financial expert. Mr. Woods extensive background and experience includes presently serving as Vice President and Corporate Controller of Metaldyne Corporation, a global designer and supplier of metal-based components, assemblies and modules for the automotive industry, and formerly serving as Executive Vice President and Chief Financial Officer of Maytag Corporation. Prior to joining Maytag, he was an auditor with Ernst & Young, a public accounting firm, and successfully completed the examination for Certified Public Accountants. Mr. Wood is independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A of the SECs rules under the Securities Exchange Act of 1934.
The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the independent registered public accounting firm. The Committee also reviews the scope of the annual audit activities of the independent registered public accounting firm and the Companys internal auditors, reviews audit and quarterly results and administers the Worldwide Code of Business Conduct and Lawful Practices and the Code of Ethics. All of the Committees duties and responsibilities are set forth in a written Audit Committee Charter. The Charter can be viewed on the Companys website at www.sauer-danfoss.com and the Company will mail without charge, a copy of the Audit Committee Charter upon written request to Kenneth D. McCuskey, Corporate Secretary at 2800 East 13th Street, Ames, Iowa 50010. The Audit Committee held four meetings and three telephonic meetings during 2005.
The Compensation Committee is currently composed of three directors, none of whom is an employee of the Company. The Compensation Committee reviews and determines the salaries of the executive officers of the Company and administers the Companys Annual Officer Performance Incentive Plan, the 1998 Long-Term Incentive Plan, the 2006 Omnibus Incentive Plan, the Deferred Compensation Plan for Selected Employees, the 409A Deferred Compensation Plan for Selected Employees, and the Supplemental Executive Savings & Retirement Plan. All of the duties of the Compensation Committee are set forth in a written Charter adopted by the Board in March 2004, and Amended and Restated as of April 27, 2005, which can be viewed on the Companys website at www.sauer-danfoss.com and the Company will mail without charge, a copy of the Compensation Committee Charter upon written request to Kenneth D. McCuskey, Corporate Secretary at 2800 East 13th Street, Ames, Iowa 50010. The Compensation Committee held four meetings in 2005. The current members of the Compensation Committee are Messrs. Kirchhoff (Chairman), Loughrey and Wood, all of whom are independent as defined under the current listing standards of the New York Stock Exchange.
The current members of the Nominating Committee are Messrs. Clausen and Klaus Murmann, neither of whom is independent under the New York Stock Exchanges current listing standards. The Nominating Committee recommends to the Board proposed nominees whose election at the next annual meeting of stockholders will be recommended by the Board. The Nominating Committee acted once by unanimous written consent in 2005. The Nominating Committee does not currently have a written charter, but does follow the guidelines described in the following section.
The Nominating Committee of the Board adopted the policy in March 2004 that it will consider qualified candidates for director that are suggested by stockholders. Stockholders can recommend qualified candidates for director by writing to: Nominating Committee, Attention: Kenneth D. McCuskey,
Corporate Secretary, Sauer-Danfoss Inc., 2800 East 13th Street, Ames, Iowa 50010. Recommendations should set forth detailed information regarding the candidate, including the persons background, education, business, community and educational experience, other Boards of Directors of publicly held corporations on which the candidate currently serves or has served in the past and other qualifications of the candidate to serve as a director of the Company. All recommendations must be received by January 1 in order to be considered as a nominee for director at the annual meeting of stockholders to be held in such year. Recommendations that are received that meet the conditions set forth above shall be forwarded to the Nominating Committee for further review and consideration.
The Nominating Committee is responsible for recommending to the full Board of Directors nominees for election as directors. In evaluating director nominees, the Nominating Committee shall consider, among other things, the following factors:
· The needs of the Company with respect to the particular talents and experience of its directors;
· The extent to which the candidate would contribute to the range of talent, skill and expertise appropriate for the Board;
· The ability of the candidate to represent the interests of the stockholders of the Company;
· The candidates standards of integrity, commitment and independence of thought and judgment;
· The candidates ability to dedicate sufficient time, energy and attention to the diligent performance of his or her duties as a director of the Company, taking into account the candidates services on other boards, including public and private company boards as well as not-for-profit boards, and other business and professional commitments of the candidate;
· The knowledge, skills and experience of the candidate, including experience in the Companys industry, business, finance, administration or public service, in light of prevailing business conditions;
· Experience with accounting rules and practices;
· Familiarity with national and international business matters; and
· The desire to balance the considerable benefit of continuity with the periodic injection of the fresh perspective provided by new members.
The Nominating Committee will also consider such other relevant factors as it deems appropriate, including the current composition of the Board, the need for independent directors, the need for Audit Committee expertise and the evaluations of other candidates. Other than considering the factors set forth above, there shall be no stated minimum criteria for director nominees.
The Nominating Committee will identify candidates by first evaluating the current members of the Board of Directors willing to continue in service. If any member of the Board does not wish to continue in service or if the Nominating Committee or the Board decides not to re-nominate a member for election to the Board, the Nominating Committee shall identify the desired skills and experience of a new candidate in light of the factors set forth above. Current members of the Board of Directors may be polled for suggestions as to individuals meeting the criteria of the Nominating Committee, and qualified candidates recommended by stockholders shall be considered. Research may be performed to identify qualified individuals. The Nominating Committee may, but shall not be required to, engage third parties to identify or evaluate or assist in identifying potential candidates. The Nominating Committee has from time to time utilized an executive search firm to assist in identifying potential candidates.
In connection with its evaluation of candidates, the Nominating Committee shall determine which, if any, candidates shall be interviewed, and if warranted, one or more members of the Nominating Committee, and others as appropriate, shall interview prospective candidates in person or by telephone. After completing this evaluation and interview process, the Nominating Committee shall make a recommendation to the full Board of Directors as to the persons who should be nominated by the Board of Directors.
Entities and persons under the control of Klaus H. Murmann, Chairman Emeritus and a director of the Company (the Murmann Family) and Danfoss A/S (Danfoss) have entered into an agreement regarding their ownership of the common stock owned by Danfoss Murmann Holding A/S (the Holding Company Agreement). Pursuant to the Holding Company Agreement, the Murmann Family and Danfoss will each identify for recommendation to the Companys Nominating Committee three candidates for Director who may be associated with the Murmann Family or Danfoss. In addition, the Murmann Family and Danfoss will each identify for recommendation two additional candidates for Director. One such candidate recommended by the Murmann Family will be the Companys Chief Executive Officer and President and the remaining three such candidates must be independent from and not associated or affiliated with the Murmann Family or Danfoss. With respect to the current nominees for election as Directors, Klaus H. Murmann, Nicola Keim and Sven Murmann were recommended by the Murmann Family and Messrs. Ole Steen Andersen, Clausen and Kirk were recommended by Danfoss.
The Corporate Governance Guidelines of the Company set forth the method by which stockholders may communicate with the Board. Stockholders and other parties interested in communicating directly with the Chairman of the Board or with the non-management directors as a group or with the entire Board of Directors as a group or with an individual director may do so in writing addressed to such person or group at: Sauer-Danfoss Inc., 2800 East 13th Street, Ames, Iowa 50010, Attn: Corporate Secretary. The Corporate Secretary shall review all such correspondence and shall forward all those not deemed frivolous, threatening or otherwise inappropriate to each member of the group or to the individual director to whom the correspondence is directed. The Corporate Secretary shall maintain a log of all correspondence received by the Corporation that is addressed to members of the Board and directors may at any time review such log and request copies of any such correspondence. Letters containing concerns relating to accounting, internal controls or auditing matters will immediately be brought to the attention of the Companys internal Corporate Counsel and handled in accordance with procedures established by the Audit Committee with respect to such matters.
The Company has had a code of conduct in effect for a number of years. The current version, the Sauer-Danfoss Inc. Worldwide Code of Legal and Ethical Business Conduct (the Code of Conduct) was adopted by the Board in September 2002. The Code of Conduct applies to every employee, agent, representative, consultant and director of the Company. The Code of Conduct requires that the Companys employees, agents, representatives, consultants and directors avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner and otherwise act with integrity and in the Companys best interests.
Overall administration of the Code of Conduct is the responsibility of the Audit Committee and the day-to-day administration of the Code of Conduct is the responsibility of the Corporate Business Conduct Committee that assists the Companys employees in complying with the requirements of the Code of
Conduct. Employees are encouraged to report any conduct that they believe in good faith to be an actual or apparent violation of the Code of Conduct.
The Company has also adopted the Sauer-Danfoss Inc. Code of Ethics for Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer or Controller and Other Senior Finance Staff (the Code of Ethics). The Code of Ethics is intended to comply with the provisions of Section 406 of the Sarbanes-Oxley Act of 2002 and regulations of the SEC. The Code of Ethics is intended to promote honesty and integrity, the avoidance of conflicts of interests, full, accurate, and timely disclosure of financial reports, and compliance with laws and regulations and other matters.
The Code of Conduct and the Code of Ethics are posted on the Companys website at www.sauer-danfoss.com. The Company will mail without charge, upon written request, a copy of the Code of Conduct and/or Code of Ethics. Requests should be sent to Kenneth D. McCuskey, Corporate Secretary at 2800 East 13th Street, Ames, Iowa 50010.
Directors who are not employees of the Company receive quarterly retainers of $6,500 ($26,000 per annum), plus $1,500 for each Board meeting attended and $750 for participation in a telephonic meeting, together with expenses relating to their duties as directors. Each non-employee director also receives an annual retainer of $7,000 for each Committee of the Board on which such director serves as a member. The Vice Chairman receives a total quarterly retainer of $10,000 ($40,000 per annum) and the Chairman receives a total quarterly retainer of $20,000 ($80,000 per annum).
Pursuant to the Non-Employee Director Stock Option and Restricted Stock Plan, the Board has determined that following each annual meeting of stockholders, each non-employee director shall receive 1,500 shares of Restricted Common Stock of the Company. All shares of Restricted Common Stock of the Company will vest on the third anniversary of the date of grant. The non-employee directors will have voting and dividend rights with respect to the Restricted Common Stock, but the Restricted Common Stock will be forfeited upon termination of service from the Board for any reason prior to the third anniversary of the grant, unless otherwise determined by the Board in its discretion.
The Company contributed $348,000 in January 2005 to the Danfoss Universe Park (Danfoss Universe), which is a science park located in Nordborg, Denmark that will demonstrate the value of and relationships between science, technology and quality of life. The principal sponsor of Danfoss Universe is the Bitten and Mads Clausen Foundation, which is the principal shareholder of Danfoss A/S, which is a 50% owner of Danfoss Murmann Holding A/S that is the beneficial owner of approximately 74.2% of the common stock of the Company. Jørgen Clausen, Chairman and a director of the Company, and Ole Steen Andersen and Hans Kirk, directors of the Company, are executive officers of Danfoss A/S and members of its Executive Committee. Sven Murmann, Vice Chairman and a director of the Company, is a director of Danfoss A/S. The funds contributed by the Company will be used to finance two exhibits that will demonstrate hydraulic power and the use thereof by the Companys products. The Audit Committee of the Board approved the expenditures.
The information contained in the following report shall not be deemed to be soliciting material or filed or incorporated by reference in future filings with the Securities Exchange Commission, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference into a document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934.
The Audit Committee of the Board of Directors (the Board) of Sauer-Danfoss Inc. (the Corporation) acts under the Sauer-Danfoss Inc. Audit Committee Charter, as amended and restated by the Board in February 2006, which Charter provides that the purpose of the Audit Committee is to represent and assist the Board with the oversight of:
· the accounting, reporting and financial practices of the Corporation, including the integrity of the Corporations financial statements;
· the functioning of the Corporations systems of internal accounting and financial controls;
· the independent registered public accounting firms qualifications and independence;
· the performance of the Corporations internal audit functions and the independent registered public accounting firm.
Management has the primary responsibility for the Corporations financial statements and the financial reporting process, including the system of internal controls. The full text of the Audit Committee Charter is available under the Corporate Governance section of the Corporations website at www.sauer-danfoss.com.
In fulfilling its oversight responsibilities, the Audit Committee has discussed with KPMG LLP (KPMG), the Corporations independent registered public accounting firm, the overall scope and plans for their audit. The Audit Committee met with both management and KPMG to review and discuss the audited financial statements.
The Audit Committee reviewed with KPMG their judgments as to the quality and acceptability of the Corporations accounting principles. The Audit Committees review included discussion with KPMG of the matters required to be discussed pursuant to Statement on Auditing Standards No. 61, Communications With Audit Committees.
The Audit Committee has received and reviewed the written disclosures and the letter from KPMG required by the Independence Standards Board, Standard No. 1, Independence Discussions With Audit Committees, and has discussed with KPMG, among other things, matters relating to its independence. The Audit Committee has also considered the compatibility of the nonaudit services provided by KPMG with its independence.
Based on the reviews and discussions referred to above, the Audit Committee recommends to the Board of Directors that the audited financial statements for the year ended December 31, 2005 be included in the Corporations Annual Report on Form 10-K for the year ended December 31, 2005, for filing with the Securities and Exchange Commission.
Steven H. Wood, Chairman
February 21, 2006
The following table sets forth information concerning total compensation awarded or paid to or earned by the Chief Executive Officer during 2005 and the four other most highly compensated executive officers of the Company, who served in such capacities as of December 31, 2005 (the Named Executive Officers), for services rendered to the Company in all capacities during each of the last three fiscal years ended December 31, 2005.
(1) The amounts shown represent Company contributions to the 401(k) Plan on behalf of all of the Named Executive Officers, except for Mr. Anderson who is not eligible for Company contributions to the 401(k) Plan, provided under the same terms and conditions that apply to U.S. employees generally. The amounts for Mr. Anderson represent above-market amounts earned on deferred compensation during 2004 and 2005. The amount for Mr. Wilcox for 2005 includes $94 in above-market amounts earned on deferred compensation during 2005.
(2) Performance Units granted in 2005 are set forth below in the table under Long-Term Incentive Plan Awards.
(3) On December 31, 2005, the Named Executive Officers held the following target number of Performance Units with the following value, based on the closing per share price of common stock of the Company on December 31, 2005, of $18.81: Mr. Anderson77,177 Units with a value of $1,451,699; Mr. Wilcox60,205 Units with a value of $1,132,456; Mr. Schmidt41,482 Units with a value of $780,276; Mr. Cornett36,692 Units with a value of $690,177; and Mr. Kittel23,927 Units with a value of $450,067. These Units are performance-based target units and, unless otherwise determined by the Committee, are only paid out if and when the performance goals (described below
in the table under Long-Term Incentive Plan Awards) are satisfied. Each of the Named Executive Officers receives dividend equivalents on the target number of Performance Units.
(4) Salary, bonus and Long-Term amounts include amounts officers earned but elected to defer until a later year.
(5) The value shown is the number of vested Performance Units times the $20.26 market price of the Companys common stock on February 21, 2006, the date the Units vested. Earned Performance Units were paid 100% in shares of the Companys common stock, with a sufficient number of shares withheld to cover the Companys minimum statutory tax withholding requirements.
(6) Includes a discretionary bonus of $100,000 awarded by the Compensation Committee in recognition of Mr. Andersons 2004 performance and to compensate for the fact that the payout to Mr. Anderson under the Special 2002 Performance Unit Award was inappropriately low as it was based on a grant under the LTIP made when Mr. Anderson was not CEO. Mr. Anderson was CEO during the entire performance period for the Special 2002 Performance Unit Award during which the financial results produced a payout of Performance Units at the maximum level.
(7) Payout of Performance Units awarded under the Companys 1998 Long-Term Incentive Plan pursuant to Special 2002 Performance Unit Awards granted in March 2004 to replace the original grants made in 2002, based on performance during 2004. The value of each earned Performance Unit was $21.81, which was the market price of a share of the common stock of the Company on December 31, 2004. Messrs. Anderson, Wilcox and Kittel received payment for their earned Performance Units all in cash, which were 8,576 Units for Mr. Anderson, 10,934 Units for Mr. Wilcox and 4,534 Units for Mr. Kittel. Messrs. Schmidt and Cornett each received half of their earned Performance Units in the form of shares of the Companys common stock and half in cash, with Mr. Schmidt receiving 5,360 shares of the Companys common stock and Mr. Cornett receiving 4,502 shares of the Companys common stock.
(8) Includes two months salary, grossed up for taxes, for relocation allowances for moves to the Chicago area.
(9) Includes $79,508 in reimbursement for relocation expenses for move to the Chicago area.
(10) Payments to Mr. Kittel were made in Euros and converted to U.S. dollars for this table using weighted average annual exchange rates for 2003, 2004 and 2005.
The following table sets forth, for the Named Executive Officers, certain information regarding grants made in 2005 under the Sauer-Danfoss Inc. 1998 Long-Term Incentive Plan.
(1) Above awards were made in accordance with the terms of the Sauer-Danfoss Inc. 1998 Long-Term Incentive Plan. The awards are the target number of Performance Units with the actual number of units to be based on performance. Dividend equivalents are paid on the units at the same rate and at the same time as dividends on the number of shares of common stock equal to the target number of units. Target awards are based upon a percentage of base salary and vary depending upon the individuals position and responsibilities within the organization.
(2) Estimated Future Payouts are based upon the Simple Average Actual Return on Net Assets (RONA) as derived from the consolidated financial statements of the Company. For the Performance Period of January 1, 2005 to December 31, 2007, the achievement of 11% RONA will result in payment of the threshold amount (50% of Target); achievement of 15% RONA will result in payment of the Target amount (100% of Target); and achievement of 17% RONA will result in payment of the Maximum amount (200% of Target). The Compensation Committee has determined that the payout of any earned Performance Units reflected in the above table will be paid out 100% in shares, with a number of shares withheld from such payout equal to the value required to satisfy the Companys minimum statutory tax withholding requirements.
U.S. Retirement Plan. The following table sets forth the estimated annual benefits payable under the Sauer-Danfoss Employees Retirement Plan (the U.S. Retirement Plan) to participants retiring at a normal retirement date of January 1, 2006, for the specified average annual earnings and years of participation. The benefits have been calculated on the basis of a straight-life annuity.
NOTE: Compensation shown is for the final year in each calculation. In order to obtain Final Average Compensation, historic salary growth was assumed to have been 5% per year.
Under the U.S. Retirement Plan, the monthly amount of Mr. Andersons retirement benefit at his normal retirement date (the date the participant reaches age 65) is calculated pursuant to a formula contained in the plan based on (i) the average of the participants highest five-year annual earnings less an offset for Social Security benefits and (ii) the participants years of participation in the U.S. Retirement Plan. Messrs. Cornetts, Schmidts and Wilcoxs benefits are provided by a 2% of pay annual credit under the cash balance component of the U.S. Retirement Plan. Mr. Wilcoxs benefit is a combination of the cash balance component and a prior benefit under the retirement plan (7.7 years of prior service).
The U.S. Retirement Plan is a defined benefit pension plan intended to be qualified under Section 401(a) of the Code. Benefits are based only on salary and any sales commissions (the Company currently pays no sales commissions). The current compensation covered by the U.S. Retirement Plan for Messrs. Anderson, Cornett, Schmidt and Wilcox are the amounts set forth under Salary in the Summary Compensation Table. No other Named Executive Officer participated in the U.S. Retirement Plan.
Messrs. Anderson, Cornett, Schmidt and Wilcox have completed 21.4, 4.2, 4.0 and 12.7 years of participation, respectively, and their estimated annual U.S. Retirement Plan benefits at their normal retirement dates, assuming their present salaries and present Social Security benefits remain unchanged, would be $113,396, $6,718, $8,709 and $25,779, respectively.
Mr. Kittel participates in the pension plan covering most of the Companys German employees. The plan is similar in nature to a defined benefit plan in the United States, with the exception that the plan is unfunded. Under the plan, a monthly pension is paid to employees who retire after attaining the age of 65, calculated pursuant to a formula based on (i) a percentage of each employees base monthly salary as of the end of October of each year and (ii) the participants years of service. Mr. Kittel completed 17 years of service as of December 31, 2005, and assuming that his present salary remains unchanged and that he will retire at age 65, his pension will be $32,264 per year to be paid in Euros.
U.S. Supplemental Plans. The Code generally limits to $175,000, indexed for inflation, the amount of any annual benefit that may be paid from the U.S. Retirement Plan. Moreover, the U.S. Retirement Plan may consider no more than $220,000 as indexed for inflation, of a participants annual compensation in determining that participants retirement benefit. In recognition of these two limitations, the Company has adopted a Supplemental Retirement Benefit Plan (the U.S. Supplemental Plan). The U.S. Supplemental
Plan is designed to provide supplemental retirement benefits to the extent that a participants benefits under the U.S. Retirement Plan are limited by either the $175,000 annual benefit limitation or the $220,000 annual compensation limitation. Under the U.S. Supplemental Plan, however, the actual payment of supplemental benefits is entirely at the discretion of the Company.
At December 31, 2005, Mr. Anderson was a participant in the U.S. Supplemental Plan. The estimated annual supplemental retirement benefit for Mr. Anderson at his normal retirement date at age 65, assuming his present salary until retirement, would be $186,640. No other Named Executive Officer is entitled to benefits under the U.S. Supplemental Plan.
The Company has also adopted an unfunded Supplemental Executive Savings & Retirement Plan (SESRP) which provides for Company contributions for certain participants in the Companys defined contribution retirement plan (the U. S. 401(k) Plan) and in the Companys cash balance component in the U.S. Retirement Plan. Under the U.S. 401(k) Plan, for certain participants, the Company makes base contributions of 2% of eligible compensation and a matching contribution of up to 2% of eligible compensation. The Code and the U.S. 401(k) Plan place certain limitations on participants ability to receive Company base or Company matching contributions into the U. S. 401(k) Plan, including the annual limitation on eligible compensation of $220,000, indexed for inflation, and the annual employee elective deferral limitation of $15,000, indexed for inflation. The Code and the U.S. Retirement Plan similarly place certain limitations on participants ability to receive 2% compensation credits into the cash balance component of the U.S. Retirement Plan, including the annual limitation on eligible compensation of $220,000, indexed for inflation. Participants whose Company contributions into the U.S. 40l(k) Plan and compensation credits into the cash balance component of the U.S. Retirement Plan are limited by these provisions are eligible to receive supplemental Company credits to the SESRP, to the extent that such contributions are limited. Mr. Anderson is not a participant in the SESRP. Messrs. Cornett, Schmidt and Wilcox are participants in the SESRP and their accrued benefits under the SESRP as of December 31, 2005 are $7,618, $14,082 and $49,057 respectively. The estimated lump sum supplemental retirement benefit under the SESRP for Messrs. Cornett, Schmidt and Wilcox at their normal retirement dates at age 65, assuming their present salaries until retirement, current IRS limits and assumed earnings, would be $38,840, $115,661 and $139,483, respectively. Participants in the SESRP are able to direct a portion of their unfunded account balance into a variety of hypothetical investment alternatives that mirror investment alternatives and returns available under the U.S. 401(k) Plan.
The Company has entered into employment contracts with Messrs. Anderson, Wilcox, Schmidt, Cornett and Kittel that provide for annual base salaries of not less than $425,000, $350,000, $260,000, $210,000 and Euros 164,626 respectively, along with participation in the Companys bonus plan, benefit plans and perquisites for which they are currently eligible and in any plans substituted therefore. Each of the named Executives is also eligible for not less than four weeks paid vacation in any twelve-month period.
If the Executive terminates the contract for Good Reason, or if the Company terminates the contract without good cause, the contract provides that the termination date shall be no earlier than 30 days following the date on which a notice of termination is delivered. In the event of such termination, the Executive shall be entitled to receive: a) any accrued benefits; b) a pro-rata annual incentive; c) a lump sum payment in cash equal to the Executives base salary and target annual incentive opportunity multiplied by one and one-half; d) continuation of medical plan benefits for one year, provided that such benefits would be reduced to the extent comparable medical benefits are made available from a successor employer; and e) executive level career outplacement services.
The contracts contain a change-in-control provision in the event the Executives employment is terminated within two years following a change-in-control, unless such termination is: (i) by the Company for cause; (ii) by reason of Death, Disability or Retirement; or (iii) by the Executive without Good Reason, then in lieu of all other benefits provided to the Executive, the Company shall pay to the Executive: (a) any accrued benefits; (b) a pro-rata annual incentive payment; (c) a lump sum payment in cash equal to the Executives base salary and target incentive opportunity multiplied by one and one-half; and (d) a lump sum payment in cash equal to ten percent of the Executives base salary in lieu of medical plan benefits.
In case of termination due to death, the Executives estate or representative shall be entitled to receive any accrued benefits plus a lump sum payment in cash equal to one years base salary and a pro-rata incentive amount. For those immediate family members who were participating in the Companys medical benefit plan as of the date of death, medical benefits shall continue for the one-year period immediately following the date of death.
Should an Executive be incapable of performing his principal duties because of physical or mental incapacity for a period of 180 consecutive days in any 12-month period, they shall be considered disabled and employment terminated. The Executive shall be entitled to: (a) accrued benefits; (b) a lump sum payment in cash equal to one years base salary; (c) the pro-rata annual incentive; and (d) the continuation of medical benefits for one year.
The contracts contain a covenant not to compete for a term of 18 months following termination of the contract. The contracts also contain covenants prohibiting the disclosure of confidential information and developments and the solicitation of customers and employees.
The information contained in the following report shall not be deemed to be soliciting material or filed or incorporated by reference in future filings with the Securities Exchange Commission, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference into a document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934.
Role of the Compensation Committee
The Compensation Committee of the Board (the Committee) establishes and administers the executive compensation program for the Chief Executive Officer and other elected officers of the Company (Executives), including base salaries, the Companys Annual Officer Performance Incentive Plan and the Companys 1998 Long-Term Incentive Plan. The Committee currently consists of three non-employee directors, who have no interlocking relationships.
During 2005, the Compensation Committee amended and restated its written charter to govern its operations. Committee members have evaluated their performance relative to the charter and have determined that the Committee is in compliance with its Charter. Additional information regarding the role of the Compensation Committee is included in the Committees Charter, which is posted on the Companys website: www.sauer-danfoss.com.
Compensation Philosophy and Objectives
The Committee has adopted a Global Reward Philosophy that contains the following compensation philosophy and objectives as they pertain to Executives:
(a) Global compensation and benefit programs must help attract, motivate, and retain the people needed to achieve the Companys business goals and success.
(b) These programs must support the Companys vision, core competencies and business values, driving behaviors and performance that enhance the return to Stockholders.
(c) Such programs should support employee involvement, be market driven, reward success, create shared responsibility, maximize value, be administered with both ethics and integrity and provide balance between the interests of Stockholders and Employees.
The current components of the Companys executive total compensation program include:
(a) An annual base salary;
(b) An annual variable cash performance incentive;
(c) Long-term stock-based incentives; and
(d) A competitive benefit package.
These components consider individual performance, the Companys performance, and market data regarding comparable positions at other companies in similar industries served by the Company.
It is the intent of the Committee to provide to the Companys Executives a total compensation package that will be targeted at the competitive market median with the opportunity to achieve the 75th percentile through base salary, variable pay, and long-term incentive programs.
In February 2005 the Committee reviewed and approved annual base salaries effective April 2005 for the Companys Executives. The Committee based its decision on market survey data and the performance of each Executive.
Variable Cash Performance Incentive
The Committee believes that a substantial portion of the annual compensation of each Executive should be in the form of variable cash performance incentive pay. The Committee approved participation of the Companys Executives in the Sauer-Danfoss Inc. Annual Officer Performance Incentive Plan for 2005 (AOPI Plan). Under the AOPI Plan, a target award is set for each participating Executive and such target award is stated as a percentage of the Executives base salary for the year. The incentive opportunity levels are according to the Executives position and responsibilities, and are based on achievement of Earnings Before Interest and Taxes (EBIT) and Sales Growth. Actual awards, if any, are based on the extent to which the Company achieves the EBIT and Sales Growth goals. The achievement of 3.6% EBIT, as defined in the Plan, and 10.4% Sales Growth, as defined in the Plan, for the year ended December 31, 2005, resulted in calculated payments of 45% of target.
Long-Term, Stock-Based Incentives
The goal of the Companys long-term, stock-based incentive awards is to align the interests of Executives with stockholders and to provide each Executive with a significant incentive to manage the Company from the perspective of an owner with an equity stake in the business. The Committee approved new awards during 2005 of Performance Units as allowed under the terms of the Sauer-Danfoss Inc. 1998 Long-Term Incentive Plan (Long-Term Incentive Plan). Threshold, Target and Maximum performance-related payouts based on Return on Net Assets (RONA) over a three-year performance period were approved. Participation and Target Awards were approved according to the Executives position and responsibilities. The Committee has authorized any future payment of any earned Performance Units under the 2005 Performance Unit Award be made 100% in shares, with the understanding that the Company will withhold from any award payout shares having a value limited to the amount needed to satisfy the minimum statutory withholding requirements of the Company or its subsidiary in the appropriate taxing jurisdiction.
The two-year performance period for the Performance Units granted to replace the 2003 grants under the Long-Term Incentive Plan ended December 31, 2005. The two-year average RONA performance was 10.7%, thereby resulting in payment to participants of 180% of the target number of Performance Units awarded. Such earned awards are to be paid in shares of the common stock of the Company, with the Company withholding the amount needed to satisfy the minimum statutory withholding requirements.
Chief Executive Officer (CEO) Compensation
The compensation of the CEO is reviewed annually on the same basis as discussed above for all Executives. The Companys employment contract with Mr. Anderson provides for an annual salary of not less than $425,000. The Committee increased Mr. Andersons base salary from $500,000 to $550,000 effective April 4, 2005, which increase was based on Mr. Andersons performance and a review of market data. The cash incentive earned by Mr. Anderson for 2005 under the AOPI Plan was $148,240, which was 45% of target. As a result of the Company RONA performance (as discussed above under Long-Term, Stock-Based Incentive Awards), Mr. Anderson earned 64,690 Performance Units under the Long-Term Incentive Plan for 2005, valued at $1,310,619 based on the February 21, 2006 closing share value of $20.26.
Deferred Compensation Plan
The Company established the Sauer-Danfoss Inc. Deferred Compensation Plan for Selected Employees effective January 1, 2004 (the Deferred Plan). Pursuant to the Deferred Plan, certain members of management, including the Executives, may elect to defer up to 100% of his or her base compensation and/or annual incentive plan bonus paid by the Company for services rendered during a plan year. The Company maintains an individual bookkeeping account for deferrals made by each participant, and earnings credited to the deferrals. Payments of amounts deferred commence upon retirement or termination from service, unless a participant has made an early payment election, or in the case of severe financial hardship as approved by the Compensation Committee.
The Company has decided to freeze the Deferred Plan effective December 31, 2004 and establish a new nonqualified deferred compensation plan that satisfies the requirements of Section 409A of the Internal Revenue Code, which became effective for deferrals made on and after January 1, 2005. The new nonqualified deferred compensation plan will provide Executives with the same voluntary deferral capabilities but will impose the additional Code Section 409A restrictions on timing of deferral elections, the timing of payment elections, and changes to payment elections.
Deductibility Of Executive Compensation
Internal Revenue Code Section 162(m) limits the deductibility by the Company of compensation in excess of $1,000,000 paid to each of the Named Executive Officers. This limitation applies only to compensation that is not considered performance-based under the Section 162(m) rules. The policy of the Committee is to establish and maintain a compensation program that will optimize the deductibility of compensation. The Committee, however, reserves the right to use its judgment, where merited by the need for flexibility to respond to changing business conditions or by an executive officers individual performance, to authorize compensation that may not, in a specific case, be fully deductible by the Company. While the incentive awards discussed above are based on Company performance, they are not considered performance-based under the technical Section 162(m) definition. For 2005, the Company recorded $85,000 of nondeductible compensation expense.
The following graph shows a comparison of the cumulative total returns from December 31, 2000 to December 31, 2005, for the Company, the Russell 2000 Index, and the Hemscott, Inc.Diversified Machinery Index (HemscottGroup Index). The graph assumes that $100 was invested on December 31, 2000 in the Companys common stock, the Russell 2000 Index and the HemscottGroup Index, a peer group index, and that all dividends were reinvested.
The Board of Directors of the Company (the Board) has nominated the ten current directors for election. All directors are elected annually.
Each of the ten nominees for directors are currently directors and if elected, will serve until the 2007 Annual Meeting and until a successor has been elected and qualified, or until such directors earlier death, resignation, or removal.
Each share is entitled to one vote for each of ten directors. The persons named in the accompanying proxy will vote it for the election of the nominees named below as directors unless otherwise directed by the stockholder. Each nominee has consented to be named and to continue to serve if elected. In the unanticipated event that a nominee becomes unavailable for election for any reason, the proxies will be voted for the other nominees and for any substitute.
Ole Steen Andersen, age 59, has been a director of the Company since May 3, 2000. Mr. Andersen has been Executive Vice President and Chief Financial Officer of Danfoss A/S since April 1, 2000 and a member of its Executive Committee for more than the past five years. For more than five years prior to April, 2000, he served as Executive Vice President of Danfoss A/S. He is also Chairman of the Board of Cowi A/S, an independent Danish consulting company delivering services within the fields of engineering, environmental science, and economics, and a member of the Board of Danske Traelast which supplies materials and related services for building and home improvement in the Nordic countries, and Vice Chairman of Auriga A/S, a Danish agrochemicals company listed on the Copenhagen stock exchange.
David J. Anderson, age 58, a director of the Company since July 1, 2002, has been President and Chief Executive Officer of the Company and President of Sauer-Danfoss (US) Company, the primary U.S. operating subsidiary of the Company, since July 1, 2002. He served as Executive Vice PresidentStrategic Business Development of the Company from May 3, 2000, until July 1, 2002. Since joining the Company in 1984, Mr. Anderson has held various senior management positions with the Company and Sauer-Danfoss (US) Company with increasing responsibility. He is a member of the Board of several of the Companys subsidiaries and joint ventures. He is a member of the Executive Committee of the Board. He is also a member of the Board and an officer of the National Fluid Power Association.
Jørgen M. Clausen, age 57, has been a director of the Company since May 3, 2000, Chairman of the Company since May 5, 2004, and prior to that served as Vice Chairman of the Company from 2000 to 2004. He has served as the President and Chief Executive Officer and a member of the Executive Committee of Danfoss A/S for more than the past five years. He is also Chairman of the Board of Risoe National Laboratories, a Danish government-owned research organization, Chairman of Junior Achievement/ Young Enterprise Europe, and a member of the Academy of Technical Sciences, a nonprofit organization promoting the technical sciences in Denmark. He is a member of the Executive Committee and the Nominating Committee of the Board.
Nicola Keim, age 45, has been a director of the Company since April 1990. Ms. Keim, a lawyer by profession, served as a part-time internal counsel for HypoVereinsbank, a German bank, from 1999 to 2003. Ms. Keim is the daughter of Klaus H. Murmann, Chairman Emeritus and a director of the Company and a sister of Sven Murmann, Vice Chairman and a director of the Company.
Johannes F. Kirchhoff, age 48, has been a director of the Company since April 1997. Mr. Kirchhoff has been owner and Managing Director of FAUN Umwelttechnik GmbH & Co. KG, a German manufacturer of vehicles for waste disposal, since December 1994. He is Chairman of the Compensation Committee of the Board and a member of the Audit Committee of the Board.
Hans Kirk, age 63, has been a director of the Company since May 3, 2000. He has served as Executive Vice President and Chief Operating Officer and a member of the Executive Committee of Danfoss A/S for
more than the past five years. He is also a director of NIRAS Group, a Danish construction consulting company and a director of The Danish Technological Institute, an independent institution approved by the Danish authorities to provide technological services to businesses and the community.
F. Joseph Loughrey, age 56, has been a director of the Company since June 23, 2000. He has been President and Chief Operating Officer of Cummins Inc. since May 2005. From October 1999 until May 2005, he was Executive Vice President of Cummins Inc. and PresidentEngine Business of Cummins Inc. since October 1999. From 1996 to 1999, Mr. Loughrey served as Executive Vice President of Cummins Engine Company and Group PresidentIndustrial and Chief Technical Officer. He also is a director of Cummins Inc. and Tower Automotive, Inc., a global designer and manufacturer of structural components and assemblies and suspension systems for original equipment manufacturers of automobiles. Mr. Loughrey is a member of the Audit Committee and the Compensation Committee of the Board.
Klaus H. Murmann, age 74, a director of the Company since April 1990, is currently Chairman Emeritus of the Company. From 1987 to May 3, 2000, he served as Chairman and Chief Executive Officer of the Company and its predecessor. He retired as an active employee of the Company as of December 31, 2002. Mr. Murmann founded Sauer Getriebe, a predecessor to the Company, in 1967, and has been involved in the hydrostatics business for more than 40 years. He is Chairman of the Board of PSV AG, Cologne, a German national pension fund. Klaus Murmann is the father of Nicola Keim, a director of the Company and Sven Murmann, Vice Chairman and a director of the Company. He is a member of the Nominating Committee of the Board.
Sven Murmann, age 38, has been a director of the Company since April 1994, and Vice Chairman of the Company since May 5, 2004. Mr. Murmann is Managing Director of Sauer Holding GmbH, an investment company controlled by the Murmann family, a position he has held since February 2000, and is Chairman of Bibus Hydraulik AG, a distributor of industrial and mobile hydraulic systems and electronic components for the Swiss market. He previously served from August 2000 to August 2002 as Manager of HAKO Holding GmbH & Co., a global manufacturer of indoor and outdoor cleaning equipment based in Germany. He is a member of the Board of Danfoss A/S. Mr. Murmann is the son of Klaus H. Murmann, Chairman Emeritus and a director of the Company, and a brother of Nicola Keim, a director of the Company. He is a member of the Executive Committee of the Board.
Steven H. Wood, age 48, has been a director of the Company since January 1, 2003. Mr. Wood is currently Vice President and Corporate Controller for Metaldyne Corporation, a global designer and supplier of metal-based components, assemblies and modules for the automotive industry. He was formerly Executive Vice President and Chief Financial Officer of Maytag Corporation from 2000 until July 2003, and from 1996 to 2000 he was Vice President-Financial Reporting and Audit of Maytag. Mr. Wood held various other financial leadership positions within Maytag from 1989 to 1996. Prior to joining Maytag, he was an auditor with Ernst & Young, a public accounting firm, and successfully completed the examination for Certified Public Accountants. He is Chairman of the Audit Committee and a member of the Compensation Committee of the Board.
The Board recommends that stockholders vote FOR the election of the nominees named above as directors.
2APPROVAL OF THE SAUER-DANFOSS INC.
Consistent with the Companys practice of rewarding employees responsible for significant contributions to the Companys business, the Compensation Committee (the Committee) has advised the Board of Directors that it is in the interests of the Company to adopt the Sauer-Danfoss Inc. 2006 Omnibus Incentive Plan (the 2006 Incentive Plan). The purpose of the 2006 Incentive Plan is to optimize the profitability and growth of the Company through incentives which are consistent with the Companys goals, which link and align the personal interests of participants to those of the Companys stockholders,
and which meet the definition of performance-based compensation under Internal Revenue Code Section 162(m) for tax deductibility purposes. The 2006 Incentive Plan is further intended to provide flexibility to the Company in its ability to attract, motivate, and retain the services of employees who make significant contributions to the Companys success and to allow such employees to share in the success of the Company. Accordingly, on December 8, 2005, the Board of Directors, acting on the recommendation of the Committee, unanimously approved the 2006 Incentive Plan, subject to stockholder approval, and directed that it be submitted for consideration and action at the next meeting of stockholders. Adoption of the 2006 Incentive Plan requires that the 2006 Incentive Plan be approved by the affirmative vote of a majority of the shares of common stock voted at the meeting. In general, the 2006 Incentive Plan provides for the grant of awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, covered employee annual incentive awards, cash-based awards, and other stock-based awards.
The 2006 Incentive Plan is being submitted for approval to our stockholders in accordance with the requirements of the New York Stock Exchange, to qualify certain plan awards for the performance-based exception to Internal Revenue Code Section 162(m), and to obtain favorable tax treatment for incentive stock options (ISOs), under Internal Revenue Code Section 422.
2006 Incentive Plan Summary
The following is a brief but not comprehensive summary of the proposed 2006 Incentive Plan. The complete text of the 2006 Incentive Plan is attached as Appendix A and reference is made to that Appendix for a complete statement of the provisions of the 2006 Incentive Plan.
Plan Administration. The 2006 Incentive Plan will be administered by the Compensation Committee of the Board of Directors (the Committee), which is comprised of non-employee directors who meet the applicable requirements of a non-employee director under Rule 16b-3 promulgated under Section 16 of the Securities Exchange Act of 1934. Subject to the provisions of the 2006 Incentive Plan, the Committee has full and exclusive discretionary power to interpret the terms and the intent of the 2006 Incentive Plan, any Award Agreement or other document ancillary to or in connection with the 2006 Incentive Plan, to determine eligibility for awards, to select award recipients, and establish all award terms and conditions (including performance criteria and restrictions).
Shares Reserved For Issuance. The total number of shares of common stock of the Company available for issuance to participants under the 2006 Incentive Plan, including shares that may be issued pursuant to ISOs, shall be 3,500,000 shares. The 2006 Incentive Plan provides that the Committee, in its discretion, may make adjustments to the number of available shares to prevent dilution upon the occurrence of certain corporate events, including a change in the common stock of the Company or the capitalization of the Company such as a merger, consolidation, reorganization, recapitalization, separation, partial or complete liquidation, stock dividend, stock split, reverse stock split, split up, spin-off, or other distribution of stock or property of the Company. Shares of common stock covered by an Award shall only be counted as used to the extent they are actually issued under the 2006 Incentive Plan. Any shares of common stock related to Awards which terminate by expiration, forfeiture, cancellation, or otherwise without the issuance of said shares, are settled in cash in lieu of shares, or are exchanged with the Committees permission, prior to the issuance of shares, for Awards not involving shares of common stock, shall be available again for grant under this 2006 Incentive Plan. Moreover, if the option price of any option granted under the 2006 Incentive Plan or the tax withholding requirements with respect to any Award granted under the 2006 Incentive Plan are satisfied by tendering shares of common stock to the Company, or if a stock appreciation right is exercised, only the number of shares of common stock issued, net of the shares tendered, if any, will be deemed delivered for purposes of determining the maximum number of shares available for issuance under the 2006 Incentive Plan.
Stock Options. Options entitle the holder to purchase shares of common stock during the specified period at a purchase price specified by the Committee (but at a price not less than 100% of the fair market value of the common stock on the date the option is granted). Each option granted under the 2006 Incentive Plan will be outstanding for a maximum period of ten years from the date of grant, or such lesser period as the Committee shall determine. The Committee may grant either non-qualified stock options (NQSO) or incentive stock options (ISOs) (which is an option that may qualify for certain U.S. federal tax advantages). The aggregate fair market value of the shares of common stock with respect to which incentive stock options become exercisable by an individual participant for the first time in any calendar year may not exceed $100,000. The option price of any option shall be payable upon exercise in full either: (a) in cash or its equivalent; (b) by tendering previously acquired shares having an aggregate fair market value at the time of exercise equal to the option price (provided that except as otherwise determined by the Committee, the shares that are tendered must have been held by the participant for at least six months or such other period, if any, as the Committee may permit) prior to their tender to satisfy the option price; (c) by a cashless (broker-assisted) exercise; (d) by a combination of any of the foregoing; or (e) any other method approved or accepted by the Committee in its sole discretion. The maximum aggregate number of shares subject to options granted in any one plan year to any one participant shall be 500,000.
Stock Appreciation Rights. A stock appreciation right is an award that is valued by reference to the increase in value of the Companys common stock over the term of the award. The grant price of a stock appreciation right shall be determined by the Committee, provided that the grant price from the date of grant must be at least equal to 100% of the fair market value of a share of the Companys common stock as determined on the date of grant. At the discretion of the Committee, the payment upon exercise of a stock appreciation right may be in cash, in shares of common stock of the Company of equivalent value, or in some combination thereof. The maximum number of shares of common stock of the Company subject to stock appreciation rights granted in any one plan year to any one participant shall be 500,000.
Restricted Stock and Restricted Stock Units. A restricted stock award is an award of shares of common stock that is typically subject to vesting conditions and transfer restrictions. A restricted stock unit award is similar to a restricted stock award except that no shares are actually awarded to the participant on the date of grant. Unless otherwise determined by the Committee, participants holding shares of restricted stock (but not restricted stock units) may be granted the right to exercise full voting rights with respect to said shares during the period of restriction. The maximum aggregate grant with respect to Restricted Stock or Restricted Stock Units in any one plan year to any one participant shall be 250,000 shares or units.
Performance Units/Performance Shares. The 2006 Incentive Plan permits the Committee to grant awards of Performance Units and/or Performance Shares, the value of which at the time it is payable by the Company is determined as a function of the extent to which corresponding performance criteria have been achieved. The maximum aggregate Award of Performance Units or Performance Shares that a participant may receive in any one plan year shall be 500,000 shares, or units equal to the value of 500,000 shares determined as of the date of vesting or payout, as applicable.
Cash-Based Awards and Other Stock-Based Awards. Each Cash-Based Award shall specify a payment amount or payment range as determined by the Committee. Each other Stock-Based Award shall be expressed in terms of shares of the common stock of the Company or units based on shares of the common stock of the Company, as determined by the Committee. The Committee may establish performance goals in its discretion. The maximum aggregate amount awarded or credited with respect to Cash-Based Awards or Stock-Based Awards to any one participant in any one plan year may not exceed the value of the greater of $10,000,000 or 500,000 shares determined as of the date of vesting or payout, as applicable.
Covered Employee Annual Incentive Award. The Committee may designate certain employees to be eligible to receive a monetary payment in any plan year based on a percentage of an incentive pool equal to the greater of: (i) 15% of the Companys EBIT for such plan year, (ii) 10% of the Companys Operating
Cash Flow for such plan year, or (iii) 50% of the Companys Net Income for such plan year. The Committee shall allocate an incentive pool percentage to each designated employee at the beginning of each plan year. In no event may (i) the incentive pool percentage for any one designated employee exceed 50% of the total pool, and (ii) the sum of the incentive pool percentages for all designated employees cannot exceed 100% of the total pool. In no event may the portion of the incentive pool allocated to a designated employee be increased in any way. The Committee shall retain the discretion to adjust any Covered Employee Annual Incentive Award downward.
Non-Employee Directors Awards. The Board of Directors or the Committee shall determine all awards to non-employee directors. The terms and conditions of any grant to any such non-employee director shall be set forth in an Award Agreement.
Transferability. No incentive stock option may be transferred, other than by will or by the laws of descent and distribution. With respect to all other awards, no award may be transferred, other than by the laws of descent and distribution, except as provided by the Board of Directors or the Committee.
Change of Control. In the event of a change of control (as defined in the 2006 Incentive Plan): (i) subject to certain limitations that may be imposed by the Committee under certain circumstances, any and all options shall become immediately vested and exercisable; (ii) all stock appreciation rights then outstanding shall become immediately vested and exercisable, and shall remain exercisable throughout their entire term; (iii) any period of restriction and restrictions imposed on restricted stock or restricted stock units shall lapse; (iv) the incentive pool used to determined Covered Employee Annual Incentive Awards shall be based on the EBIT or Operating Cash Flow or Net Income of the Plan Year (as such terms are defined in the 2006 Incentive Plan) immediately preceding the year of the Change of Control, or such other method of payment as may be determined by the Committee at any time but prior to the Change of Control; and (v) the target payout opportunities attainable under all outstanding awards of performance-based restricted stock, performance-based restricted stock units, performance units, and performance shares, shall have been deemed to have been fully earned based on target performance being attained as of the effective date of the Change of Control.
Dividend Equivalents. Any participant selected by the Committee may be granted dividend equivalents based on the dividends declared on shares of the Companys common stock that are subject to any award or as otherwise determined by the Committee for any award, to be credited as of dividend payment dates, during the period between the date the award is granted and the date the award is exercised, vests or expires, as determined by the Committee. Notwithstanding the foregoing, the Committee in its discretion, may choose, prior to granting any award, in lieu of crediting dividend equivalents to pay out all dividend equivalents in cash currently and simultaneously with the dividend payment date.
Performance Goals; Internal Revenue Code Section 162(m). The vesting of certain awards, including restricted stock, restricted stock units, performance shares and performance units, granted to employees who are Covered Employees (as defined in Section 162(m) of the Internal Revenue Code) may be based on the attainment of performance goals pre-established by the Committee from the list of performance measures set forth in the 2006 Incentive Plan. Section 162(m) precludes the Company for taking a deduction for compensation in excess of $1 million paid to the Companys named executive officers. Certain qualified performance-based compensation is excluded from this limitation. If the 2006 Incentive Plan is approved and the other conditions of the 2006 Incentive Plan and Section 162(m) are met, the vesting of restricted stock, restricted stock units, performance shares and performance units and other designated performance-based awards will be excluded from the Section 162(m) limitation because it will qualify as performance-based compensation. See the description of Section 162(m) under Certain Federal Income Tax Consequences.
Performance goals will be based on one or more of the following performance measures: net earnings or net income (before or after taxes); earnings per share; net sales or revenue growth; net operating profit; return measures (including, but not limited to, return on assets, return on net assets, capital, invested capital, equity, sales or revenue); cash flow (including, but not limited to, operating cash flow, free cash flow, cash flow return on equity, and cash flow return on investment), EBIT or earnings before or after taxes, interest, depreciation, and/or amortization; growth or operating margin; productivity ratio; share price (including, but not limited to, growth measures and total shareholder return); expense targets; margin; operating efficiency; market share; customer satisfaction; working capital target; and economic value added or EVA® (net operating profit after tax minus the sum of capital multiplied by the cost of capital). Performance goals may be expressed in terms of attaining a specified level of the particular criteria or the attainment of a percentage increase or decrease in the particular criteria, and may be applied to one or more of the entire Company, subsidiary, affiliate, or a business unit of the Company, subsidiary, or affiliate, or any combination thereof, as the Committee may be deem appropriate, or any of the performance measures as compared to the performance of a group of comparator companies, or published or special index that the Committee, in its sole discretion, deems appropriate, or the Company may select a share price as compared to various stock market indexes. The Committee also has the authority to provide for accelerated vesting of any award based on the achievement of performance goals pursuant to the specified performance measures.
Set forth below is a discussion of certain U.S. federal income tax consequences with respect to awards that may be granted pursuant to the plan. The following discussion is a brief summary only, and reference is made to the Internal Revenue Code and the regulations and interpretations issued thereunder for a complete statement of all relevant federal tax consequences. This summary is not intended to be exhaustive and does not describe state, local or foreign tax consequences of participation in the plan.
ISOs. ISOs granted under the plan will be subject to the applicable provisions of the Internal Revenue Code, including Section 422. If shares of common stock are issued to an optionee upon the exercise of an ISO, and if no disqualifying disposition of such shares is made by the optionee within one year after the exercise of the ISO or within two years after the date the ISO was granted (whichever is later), then:
· no income will be recognized by the optionee at the time of the grant of the ISO,
· no income, for regular income tax purposes, will be recognized by the optionee at the date of exercise,
· upon sale of the shares of common stock acquired by exercise of the ISO, any amount realized in excess of the option price will be taxed to the optionee, for regular income tax purposes, as a capital gain (at varying rates depending upon the optionees holding period in the shares and income level) and any loss sustained will be a capital loss, and
· the Company will not be allowed any deduction for federal income tax purposes.
However, the excess of the fair market value of the shares received upon exercise of the ISO over the option price for such shares will generally constitute an item of adjustment in computing the optionees alternative minimum taxable income for the year of exercise. Thus, certain optionees may increase their federal income tax liability as a result of the exercise of an ISO under the alternative minimum tax rules of the Internal Revenue Code.
If a disqualifying disposition of shares acquired by exercise of an ISO is made, the optionee will recognize taxable ordinary income at that time in an amount equal to the lesser of (i) the excess of the fair market value of the shares purchased at the time of exercise over the option price or (ii) the excess of the amount realized on disposition over the option price, and the Company will be entitled to a federal income
tax deduction equal to such amount at that time. The amount of any gain in excess of the amount taxable as ordinary income will be taxable as capital gain at that time to the holder (at varying rates depending upon such holders holding period in the shares and income level), for which the Company will not be entitled to a federal tax deduction.
NQSO. An optionee will not be taxed at the time an NQSO is granted. In general, an employee exercising an NQSO will recognize ordinary income equal to the excess of the fair market value on the exercise date of the stock purchased over the option price. Upon subsequent disposition of the stock purchased, the difference between the amount realized and the fair market value of the stock on the exercise date will constitute capital gain or loss. The Company will not recognize income, gain or loss upon the granting of an NQSO. Upon the exercise of such an option, the Company is entitled to an income tax deduction equal to the amount of ordinary income recognized by the employee.
Stock Appreciation Rights. A participant will not be taxed at the time a stock appreciation right is granted. Upon exercise of a stock appreciation right, the participant will recognize ordinary income in an amount equal to the cash or the fair market value of the stock received on the exercise date (or, if a participant exercising a stock appreciation right for shares of common stock is subject to certain restrictions, upon lapse of those restrictions, unless the participant makes a special tax election under Section 83(b) of the Internal Revenue Code to have the income recognized at the time of transfer). The Company generally will be entitled to a deduction in the same amount and at the same time as the participant recognizes ordinary income.
Restricted Stock. In general, a participant who has received restricted stock, and who has not made an election under Section 83(b) of the Internal Revenue Code to be taxed upon receipt, will include in gross income as compensation income an amount equal to the fair market value of the restricted stock at the earlier of the first time the rights of the employee are transferable or the restrictions lapse. The Company is entitled to a deduction at the time that the employee is required to recognize income.
Performance Units, Performance Shares and Restricted Stock Units. A participant who is awarded performance units, performance shares or restricted stock units will not recognize income and the Company will not be allowed a deduction at the time the award is made. When a participant receives payment for performance units, performance shares or restricted stock units in shares of common stock or cash, the fair market value of the shares or the amount of the cash received will be ordinary income to the participant and the Company will be allowed a deduction for federal income tax purposes. However, if any shares of common stock used to pay out earned performance awards and restricted stock units are non-transferable and there is a substantial risk that such shares will be forfeited (for example, because the Committee conditions those shares on the performance of future services), the taxable event is deferred until either the risk of forfeiture or the restriction on transferability lapses. In this case, the participant may be able to make an election under Section 83(b) of the Internal Revenue Code to be taxed upon receipt. The Company is entitled to a corresponding deduction at the time the ordinary income is recognized by the participant.
Internal Revenue Code Section 162(m). The Companys allowable federal income tax deduction for compensation paid with respect to its Chief Executive Officer and its four other most highly compensated executive officers serving as such at the end of the fiscal year is limited to no more than $1,000,000 per year per individual. This limitation on deductibility is subject to certain exemptions, including an exemption relating to performance-based compensation that is payable:
· solely on account of the achievement of one or more performance goals established by a compensation committee consisting exclusively of two or more outside directors,
· under a plan the material terms of which are approved by stockholders before payment is made, and
· solely upon certification by the Compensation Committee that the performance goals and other material conditions precedent to the payment have been satisfied.
The 2006 Incentive Plan is structured so that compensation paid pursuant to the plan will qualify for this performance-based exception to the extent practicable to do so. The Compensation Committee has discretion to eliminate, or reduce the size of awards, based on factors it deems appropriate.
The Compensation Committee may also grant awards under the plan that are not based on the performance criteria specified above, in which case the compensation paid under such awards to the employee may not be deductible.
The Board of Directors of the Company believes that approval of the 2006 Omnibus Incentive Plan is advisable in order to optimize the profitability and growth of the Company through incentives which are consistent with the Companys goals, to link and align the personal interests of participants to those of the Companys stockholders, and to meet the definition of performance-based compensation under Internal Revenue Code Section 162(m) for tax deductibility purposes.
The Board of Directors recommends APPROVAL of the 2006 Omnibus Incentive Plan.
The Audit Committee of the Board has appointed KPMG LLP as the independent registered public accounting firm to audit the consolidated financial statements of the Company and its subsidiaries for 2006, subject to ratification of the stockholders at the Annual Meeting. A representative of KPMG LLP is expected to be present at the Annual Meeting and will have the opportunity to make a statement if he or she so desires and to respond to appropriate questions. The affirmative vote of a majority of the shares present and entitled to vote on this item at the Annual Meeting is necessary for the approval of the appointment of KPMG LLP as the Companys independent registered public accounting firm for 2006. In the event stockholders do not ratify the appointment of KPMG LLP, the appointment will be reconsidered by the Audit Committee. Even if the selection is ratified, the Audit Committee in its discretion may direct the appointment of a different independent registered public accounting firm at anytime during the year if they determine that such a change would be in the best interests of the Company and its stockholders.
The following table presents fees for professional services rendered by KPMG LLP for the audit of the Companys Annual Financial Statements for the years ended December 31, 2005 and 2004 and fees billed for other services rendered by KPMG LLP during those periods:
(1) Consists principally of employee benefit plan audits and statutory accounting advice.
(2) Consists of international and U.S. tax planning and compliance services, and expatriate tax services.
The Audit Committees policy is to pre-approve all audit and non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit related services, tax services and other services that are not prohibited from being provided by the independent registered public accounting firm by the Sarbanes-Oxley Act of 2002 or rules issued thereunder (Permitted Services). Pre-approval is granted on an annual basis, generally at the first meeting of the Audit Committee held during each year, and any pre-approval shall be detailed as much as possible as to the particular service or category of services and shall generally be subject to a specific budget. The Committee may delegate pre-approval authority to one or more of its members with respect to Permitted Services when expedition of services is necessary, and has delegated such pre-approval authority to its Chairman. The independent registered public accounting firm and management are required to periodically report to the full Audit Committee (generally at each regular quarterly meeting of the Audit Committee, but the Audit Committee may request a report at any time), regarding the extent of services provided by the independent registered public accounting firm in accordance with any pre-approval, and the fees for the services performed to date. All audit fees, audit related fees and tax fees paid in 2005 and 2004 were pre-approved by the Audit Committee, or its Chairman.
The Board recommends that stockholders vote FOR ratification of the appointment of KPMG LLP as the Companys independent registered public accounting firm for 2006.
To permit the Company and its stockholders to deal with stockholder proposals in an informed and orderly manner, the Bylaws of the Company establish an advance notice procedure. No stockholder proposals, nominations for the election of directors or other business may be brought before an annual meeting unless written notice of such proposal or other business is received by the Secretary of the Company at 2800 E. 13th Street, Ames, Iowa 50010 not less than 120 calendar days in advance of the date that the Companys proxy statement was released to stockholders in connection with the previous years Annual Meeting. Such notice must contain certain specified information concerning the matters to be brought before the meeting as well as the stockholder submitting the proposal. For the Companys annual meeting in the year 2007, the Company must receive this notice on or before December 24, 2006. A copy of the applicable Bylaw provisions may be obtained, without charge, upon written request to the Secretary of the Company at 2800 E. 13th Street, Ames, Iowa 50010.
In addition, stockholder proposals intended to be included in the Companys Proxy Statement for the annual meeting in 2007 must be received by the Secretary of the Company at 2800 E. 13th Street, Ames, Iowa 50010, not later than December 24, 2006. Such proposals must comply with certain rules and regulations promulgated by the Securities and Exchange Commission.
If any other matters are properly presented at the Annual Meeting for consideration, including, among other things, consideration of a motion to adjourn the Annual Meeting to another time or place, the persons named as proxies and acting thereunder will have discretion to vote on those matters to the same extent as the person delivering the proxy would be entitled to vote. If any other matter is properly brought before the Annual Meeting, proxies in the enclosed form returned to the Company prior to the Annual Meeting will be voted in accordance with the recommendation of the Board or, in the absence of such a recommendation, in accordance with the judgment of the proxy holder. At the date this Proxy Statement went to press, the Company did not anticipate that any other matters would be properly brought before the Annual Meeting.
Based solely upon a review of Forms 3, 4 and 5 furnished to the Company pursuant to Section 16(a) of the Securities Exchange Act of 1934 with respect to the fiscal year ended December 31, 2005, the Company believes that all of such reports required to be filed during such fiscal year by the Companys officers, directors and 10% beneficial owners were timely filed.
The Company will mail without charge, upon written request, a copy of its Annual Report on Form 10-K filed with the Securities and Exchange Commission, including the financial statements, schedules, and list of exhibits. Requests should be sent to Kenneth D. McCuskey, Corporate Secretary, at 2800 E. 13th Street, Ames, Iowa 50010.
Sauer-Danfoss Inc. (NYSE: SHS) is a global leader in the design, manufacture and marketing of mobile equipment, hydraulics, electronic systems and electric drives for sale to manufacturers of mobile equipment used for agriculture, construction, road building, specialty, material handling, and turf care vehicles. We engineer advanced components and systems to enable our customers to produce highly reliable, efficient and innovative mobile equipment vehicles.
The composition of our business among our three segments is 48% Propel, 28% Work Function, and 24% Controls. Propel segment products include hydrostatic transmissions, gear boxes, orbital motors, and integrated hydrostatic transaxles. Work Function segment products include steering units, gear pumps and motors, multi-pump assemblies, open circuit pumps, and gear boxes. Controls segment products include a complete line of valves, microcontrollers, solenoid-operated valves, joysticks, speed and positions sensors, grade and slope sensors, and electric drives. All of our segments products are sold into each of our markets either directly to OEMs or through distributors to OEMs and the aftermarket.
NYSE Price Range, Dividends by Quarter
The Company submitted to the New York Stock Exchange last year, on or about June 1, 2005, the unqualified Section 303A.12(a) Annual CEO Certification.
The Company also filed as exhibits 31.1 and 31.2 to its Forms 10-K for the years ended December 31, 2005 and December 31, 2004, the certifications of the CEO and CFO required under Section 302 of the Sarbanes-Oxley Act of 2002.
Safe Harbor Statement
This Managements Discussion and Analysis of Financial Condition and Results of Operations, as well as other portions of this annual report on Form 10-K, contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. All statements regarding future performance, growth, sales and earnings projections, conditions or developments are forward-looking statements. Words such as anticipates, in the opinion, believes, intends, expects, may, will, should, could, plans, forecasts, estimates, predicts, projects, potential, continue, and similar expressions may be intended to identify forward-looking statements.
Actual future results may differ materially from those described in the forward-looking statements due to a variety of factors, including the fact that the U.S. economy generally, and the construction, road building, and material handling markets specifically, continued to improve during 2005. It is difficult to determine if past experience is a good guide to the future. While the economy in the U.S. has generally been improving, it remains unstable due to the uncertainty surrounding continued job creation, interest rates, crude oil prices and the U.S. governments stance on the exchange rate of the dollar. The economic situation in Europe has not necessarily followed the improvement that occurred in the U.S., and the economy in China was slow in 2005 due to government intervention, however there are signs that the Chinese economy will improve in 2006. Any downturn in the Companys business segments could adversely affect the Companys revenues and results of operations. Other factors affecting forward-looking statements include, but are not limited to, the following: specific economic conditions in the agriculture, construction, road building, turf care, material handling and specialty vehicle markets and the impact of such conditions on the Companys customers in such markets; the cyclical nature of some of the Companys businesses; the ability of the Company to win new programs and maintain existing programs with its original equipment manufacturer (OEM) customers; the highly competitive nature of the markets for the Companys products as well as pricing pressures that may result from such competitive conditions; the continued operation and viability of the Companys significant customers; the Companys execution of internal performance plans; difficulties or delays in manufacturing; cost-reduction and productivity efforts; competing technologies and difficulties entering new markets, both domestic and foreign; changes in the Companys product mix; future levels of indebtedness and capital spending; claims, including, without limitation, warranty claims, field retrofit claims, product liability claims, charges or dispute resolutions; ability of suppliers to provide materials as needed and the Companys ability to recover any price increases for materials and product pricing; the Companys ability to attract and retain key technical and other personnel; labor relations; the failure of customers to make timely payment; any inadequacy of the Companys intellectual property protection or the potential for third-party claims of infringement; global economic factors, including currency exchange rates; general economic conditions, including interest rates, the rate of inflation, and commercial and consumer confidence; energy prices; governmental laws and regulations affecting operations, including tax obligations; changes in accounting standards; worldwide political stability; the effects of terrorist activities and resulting political or economic instability; natural catastrophes; U.S. military action overseas; and the effect of acquisitions, divestitures, restructurings, product withdrawals, and other unusual events.
The Company cautions the reader that these lists of cautionary statements and risk factors may not be exhaustive. The Company expressly disclaims any obligation or undertaking to release publicly any updates or changes to these forward-looking statements that may be made to reflect any future events or circumstances.
Sauer-Danfoss Inc. and subsidiaries (the Company) is a worldwide leader in the design, manufacture, and sale of engineered hydraulic and electronic systems and components that generate, transmit and control power in mobile equipment. The Companys products are used by original equipment manufacturers (OEMs) of mobile equipment, including construction, road building, agricultural, turf care, material handling, and specialty equipment. The Company designs, manufactures, and markets its products in the Americas, Europe, and the Asia-Pacific region, and markets its products throughout the rest of the world either directly or through distributors.
The nature of the Companys operations as a global producer and supplier in the fluid power industry means the Company is impacted by changes in the local economies, including currency exchange rate fluctuations. In order to gain a better understanding of the Companys base results, a financial statement user needs to understand the impact of those currency exchange rate fluctuations. The following table summarizes the change in the Companys results from operations by separately identifying changes due to currency fluctuations and the underlying change in operations from 2004 to 2005. This analysis is more consistent with how the Companys management internally evaluates results.
The underlying growth in sales, excluding the effect of currency fluctuations, was approximately 10 percent in 2005. The improving economy in the U.S., not only resulted in increased sales within the Americas, but also increased export business from the Companys European and Asia-Pacific customers. Margin on total net sales decreased due to several factors, including labor costs for overtime worked to meet the high demand for product, costs to expedite product to meet customer demand, and costs for subcontract suppliers used to reduce the cost of production bottlenecks, primarily in the Work Function segment.
The increase in selling, general, and administrative costs in 2005 is due to the continuing development and implementation of a common business system to standardize business processes and provide a single interface to direct OEM customers and suppliers. The new business system has been in development since 2003 and the costs incurred in 2004, with the exception of $3.5 million, related to development and therefore were capitalized. The common business system was implemented at five locations during 2005 and costs related to the system and its implementation are now expensed. Costs in 2005 related to the common business system totaled $23.0 million, of which $5.8 million are of an ongoing nature that will replace costs related to the current systems in place. In future years it is anticipated that the investment in the common business system will drive improved operational efficiency, customer service, and thereby improve financial performance. The system will continue to be implemented at additional locations until complete in 2008. The Company incurred $4.4 million of expense in 2004 to restructure its sales and distribution operations in Europe resulting in consolidated inventory, warehouse, and distribution operations as well as streamlined delivery directly from the manufacturing locations to the customer. There were no additional costs related to this restructuring in 2005.
Research and development costs increased approximately 13 percent in 2005, due to ongoing research projects, primarily related to the Propel and Controls segments.
In 2005 the Company recognized other income of $3.2 million related to foreign currency gains on transactions. The Company recognized $4.1 million of expense in 2004 due to foreign currency losses on transactions. This fluctuation between years was primarily due to the significant weakening of the U.S. dollar in late 2004 and the strengthening of the U.S. dollar throughout 2005.
Sales Growth by Market
The following table summarizes the Companys sales growth by market. The table and following discussion is on a comparable basis, which excludes the effects of currency fluctuations.
The Asia-Pacific region showed the greatest percentage of growth, however this is a relatively small market as it represents less than five percent of the Companys sales in the agriculture and turf care markets. The agriculture market in the Americas was down overall; however, increased sales in the North American sprayer market offset reduced tractor production. The consumer turf care market in the Americas was level with 2004, while demand in the commercial market was lower than in 2004. The agriculture market in Europe was also down compared to 2004 resulting in reduced tractor sales. The agriculture market in Europe is not expected to improve in 2006 and therefore certain OEMs are reducing inventory and phasing out older product models.
The construction and road building markets were improved in the Americas in 2005. The 20 percent growth in the Americas is primarily due to a strong market for skid steer loaders; however, sales also increased due to new sales of medium power hydrostatic products to a major OEM in 2005. The 29 percent growth in Asia-Pacific is also due to strong markets for skid steer loaders and road roller products in North America as the OEMs are exporting product to the Americas. The transit mixer market drove the growth in the European market in 2005, in addition to OEMs exporting product to the Americas for the road building market.
A strong aerial lift market is contributing to the 30 percent growth in the Americas. In Europe several of the material handling markets experienced growth in 2005 including forklift, aerial lifts, and container handling equipment. The forestry and marine markets have also contributed to the 11 percent growth in the European specialty markets. The sales growth in the Asia-Pacific region is due to increased sales into the mining market, although Asia-Pacific sales are a small percentage of the Companys total sales in the specialty markets.
Products related to all of the above markets are sold to distributors, who then serve smaller OEMs.
The following table shows the Companys order backlog and orders written activity for 2004 and 2005, separately identifying the impact of currency fluctuations. In 2005 the Company changed its methodology of recording backlog for a few of its larger customers. Under the revised approach the Company no longer includes customers forecasted amounts in backlog. The 2004 amounts have been revised to reflect this change. Order backlog represents the amount of customer orders received for future shipment.
Total order backlog at the end of 2005 was $487.2 million, compared to $450.4 million at the end of 2004. On a comparable basis, excluding the impact of currency fluctuation, order backlog increased 13 percent over 2004. New sales orders written for 2005 were $1,631.7 million, an increase of 14 percent over 2004, excluding the impact of currency fluctuations.
In recent years backlog information has become less reliable as an indicator of future sales levels as customers alter their sales order patterns. The 14 percent increase in orders written in 2005 is reflective of the strong sales experienced during the year and backlog remains strong at the end of the year with over $480 million of customers orders received for future delivery.
Business Segment Result
The following discussion of operating results by reportable segment relates to information as presented in Note 17 in the Notes to Consolidated Financial Statements. Segment income is defined as the respective segments portion of the total Companys net income, excluding net interest expense, income
taxes, minority interest, and global service expenses. Propel products include hydrostatic transmissions and related products that transmit the power from the engine to the wheel to propel a vehicle. Work Function products include steering motors as well as gear pumps and motors that transmit power for the work functions of the vehicle. Controls products include electrohydraulic controls, microprocessors, electric drives and valves that control and direct the power of a vehicle. The following table provides a summary of each segments net sales and segment income, separately identifying the impact of currency fluctuations during the year.
The Propel segment experienced the strongest growth in 2005, with a sales increase of 14 percent excluding the effects of currency fluctuations. Consumers continue to move away from mechanical transmissions to hydrostatic transmissions in the turf care market, which has contributed to increased sales in the Propel segment, although, as noted in the market section, the growth in the turf care market is beginning to level off. The gross profit percentage of sales in the Propel segment was consistent in 2005 with the 25 percent achieved in 2004. Segment income increased 18 percent from 2004, excluding the effects of currency fluctuations.
Work Function Segment
Sales in the Work Function segment increased by 4 percent, excluding the effect of currency fluctuations, in 2005 compared to 2004. Similar to 2004, demand for Work Function product has been high and has resulted in increased overtime costs and increased delivery costs to expedite shipments to meet customer demand which has had a negative impact on the gross margin. In late 2005 the Company established production capacity in the U.S. for Work Function products that are sold in the U.S. market. This additional production capability is expected to reduce capacity constraints and freight costs in 2006. During 2005 the Work Function segment recognized $1.0 million of field recall costs related to two separate quality issues. In 2004 the income of the Work Function segment was negatively affected by $2.2 million of restructuring costs, including the remaining costs to relocate the operations of the Companys West Branch, Iowa facility that was started in 2003.
Net sales increased 8 percent, excluding the effects of currency fluctuations, in 2005 compared to 2004. Gross profit as a percent of sales was consistent with 2004 at 28 percent. Segment income in 2005 increased 26 percent compared to 2004 excluding the impact of currency fluctuations.
Global Services and other expenses, net
Segment costs in Global Services and other expenses, net relate to internal global service departments, along with the operating costs of the Companys executive offices. Global services include costs such as consulting for special projects, tax, and accounting fees paid to outside third parties, certain insurance premiums, and the amortization of intangible assets from certain business combinations. Expenses in global services increased in 2005 due to $19.5 million of increased expenses related to the common business system. This increased expense was partially off-set by a $7.3 million fluctuation in foreign currency gain/loss and a $1.5 million reduction in outside service costs to assess internal controls and related audit costs to test managements assessment of internal control under Section 404 of the Sarbanes-Oxley Act of 2002. Total costs in 2005 related to the internal control assessment were $5.2 million in 2005, compared to $6.7 million in 2004. As noted in the executive summary, the Company recognized other income of $3.2 million related to foreign currency gains on transactions in 2005 compared to $4.1 million of losses on foreign currency exchange in 2004, which is included in global services and other expenses.
The Companys effective tax rate was 22.1 percent in 2005 compared to 32.2 percent in 2004.
The 2005 rate includes the benefit of the reduction of the statutory tax rate in Denmark from 30 percent to 28 percent that was enacted in 2005. This change in tax rate resulted in a decrease of tax expense of $0.4 million for current year income and $1.1 million for the change in deferred tax liabilities related to earlier periods for a total benefit of $1.5 million. The benefit was partially offset by $0.8 million of tax expense in the U.S. related to the repatriation of previously undistributed earnings from a subsidiary in Denmark, in connection with the American Jobs Creation Act. The 2005 rate also includes benefit of $4.4 million for reversal of valuation allowances on deferred tax assets. These deferred tax assets were generated in prior years and no tax benefits were recognized at that time.
Executive Summary of 2004 Compared to 2003
The following table summarizes the change in the Companys results from operations by separately identifying changes due to currency fluctuations, acquisitions, and the underlying change in operations from 2003 to 2004. This analysis is more consistent with how the Companys management internally evaluates results.