UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDING April 30, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO ________________.
Commission File Number 1-7891
DONALDSON COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 41-0222640
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1400 West 94th Street
Minneapolis, Minnesota 55431
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (612) 887-3131
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $5 Par Value -- 25,122,924 shares as of May 30, 1997
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONDENSED STATEMENTS OF CONSOLIDATED EARNINGS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
(Thousands of Dollars Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30 April 30
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 213,876 $ 185,225 $ 597,901 $ 556,257
Cost of Sales 147,672 129,853 417,370 394,547
------------ ------------ ------------ ------------
Gross Margin 66,204 55,372 180,531 161,710
Operating Expenses 42,557 34,378 119,946 106,623
Other (Income) Expense 877 (251) 1,483 169
Interest Expense 582 819 1,655 2,195
------------ ------------ ------------ ------------
Earnings Before Income Taxes 22,188 20,426 57,447 52,723
Income Taxes 7,988 7,801 20,681 20,720
------------ ------------ ------------ ------------
Net Earnings $ 14,200 $ 12,625 $ 36,766 $ 32,003
============ ============ ============ ============
Average Shares and
Equivalents Outstanding
During Period 25,461,101 25,941,827 25,505,989 26,060,561
============ ============ ============ ============
Net Earnings Per Share $ .56 $ .49 $ 1.44 $ 1.23
============ ============ ============ ============
Dividends Paid Per Share $ .09 $ .08 $ .26 $ .22
============ ============ ============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DONALDSON COMPANY, INC. AND SUBSIDIARIES
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
April 30 July 31
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 21,902 $ 30,924
Accounts Receivable, Net 147,854 137,145
Inventories
Materials 35,463 30,359
Work in Process 11,284 10,184
Finished Products 33,851 31,427
--------- ---------
Total Inventories 80,598 71,970
Prepaids and Other Current Assets 9,382 10,712
--------- ---------
TOTAL CURRENT ASSETS 259,736 250,751
Property, Plant and Equipment, at Cost 338,031 307,979
Less Accumulated Depreciation 191,890 183,066
--------- ---------
Property, Plant and Equipment, Net 146,141 124,913
Other Assets 30,075 27,186
--------- ---------
TOTAL ASSETS $ 435,952 $ 402,850
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-Term Debt $ 19,348 $ 8,916
Current Maturities of Long-Term Debt 3,158 4,229
Trade Accounts Payable 63,634 62,020
Accrued Employee Compensation & Related Taxes 25,763 23,524
Other Current Liabilities 46,976 39,889
--------- ---------
TOTAL CURRENT LIABILITIES 158,879 138,578
Long-Term Debt 8,526 10,041
Deferred Income Taxes 641 560
Other Long-Term Liabilities 24,389 24,791
SHAREHOLDERS' EQUITY
Preferred Stock, $1 par value,
1,000,000 shares authorized, no shares issued -- --
Common Stock, $5 par value, 40,000,000 shares authorized,
27,063,407 issued on April 30, 1997 and July 31, 1996 135,317 135,317
Additional Paid-in Capital 4,429 2,994
Retained Earnings 156,124 128,795
Cumulative Translation Adjustment (2,118) 6,065
Treasury Stock - 1,945,292 and 1,738,793 shares, at cost (47,505) (41,561)
Receivable from ESOP (2,730) (2,730)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 243,517 228,880
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 435,952 $ 402,850
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
(Thousands of Dollars)
(Unaudited)
Nine Months Ended
April 30
--------------------
1997 1996
-------- --------
OPERATING ACTIVITIES
Net Earnings $ 36,766 $ 32,003
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 15,344 15,424
Property, Plant and Equipment Write-downs 0 1,398
Changes in Operating Assets and Liabilities (8,982) (971)
Other (1,037) (2,172)
-------- --------
42,091 45,682
INVESTING ACTIVITIES
Net Expenditures on PP&E (31,753) (24,870)
Business Acquisitions, Net of Cash Acquired (14,431) (278)
Dividends & Distributions from Affiliates 3,749 616
-------- --------
(42,435) (24,532)
FINANCING ACTIVITIES
Purchase of Treasury Stock (8,904) (14,852)
Net Change in Debt 7,643 (579)
Dividends Paid (6,539) (5,674)
Other 701 1,396
-------- --------
(7,099) (19,709)
Effect of Exchange Rate Changes on Cash (1,579) 189
-------- --------
(Decrease) Increase in Cash and Cash Equivalents (9,022) 1,630
Cash and Cash Equivalents-Beginning of Year 30,924 28,565
-------- --------
Cash and Cash Equivalents-End of Period $ 21,902 $ 30,195
======== ========
See Notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A - The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine month period
ended April 30, 1997 are not necessarily indicative of the results that may be
expected for the year ended July 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in Donaldson
Company, Inc. and subsidiaries' annual report Form 10-K for the year ended July
31, 1996.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
A. Financial Condition
The Company generated $42.1 million of cash and cash equivalents from operations
during the first nine months of fiscal 1997. While nine month net earnings
increased 14.9% from the prior year, operating cash flows decreased 7.9% due
primarily to higher inventory requirements and a higher accounts receivable
balance. In addition to the operating cash flow, $3.7 million was received in
dividends and as a return-of-capital from an unconsolidated affiliate. These
cash flows were used primarily to support $31.8 million in capital additions (a
27.7% increase from the prior year), to make business acquisitions with
aggregate cash prices of $14.4 million, to repurchase 321,788 shares of common
stock for $8.9 million, and to pay $6.5 million in regular quarterly dividends.
At the end of the third quarter, the Company held $21.9 million in cash and cash
equivalents. Cash balances net of short-term debt and current maturities of
long-term debt totaled a negative $0.6 million, down from $17.8 million at July
31, 1996. Long-term debt of $8.5 million at April 30, 1997, represented 3.4% of
total long-term capital, down from 4.2% at July 31, 1996. Year-to-date the
Company exercised early retirement options on long term domestic debt totaling
$3.6 million.
During the third quarter of fiscal 1997, the Company completed the acquisition
of two overseas operations in our Engine Products Group. In South Africa, the
Company purchased the exhaust products manufacturing assets of the Kilber
Division of N.E.I., which will allow the Company to expand its exhaust products
into that market. In Mexico, the Company purchased all of the outstanding shares
of Diemo, SA de CV, a supplier of liquid filter components, in what was
primarily a vertical integration. In addition, the Company completed the
acquisition of the assets of the Armada Tube Group, including Armada Products
Co., located in Armada, MI., and Lakeside Tube Fabricators, Inc., located in
Mooresville, N.C. The Armada Group, with annual sales of more than $15 million,
specializes in manufacturing and delivering bent and fabricated tubular
assemblies for exhaust and other engine related products. All of the above
acquisitions were treated as purchases. The results of operations of these
businesses were not material in relation to the Company's consolidated results
of operations for the quarter ended April 30, 1997.
B. Results of Operations
The Company reported record net earnings for the third quarter, and the nine
months ended April 30, 1997. Third quarter net earnings were $14.2 million,
compared to $12.6 million in the third quarter of 1996, an increase of 12.5%.
Net earnings per share of 56 cents, were up 14.3% from 49 cents in the prior
year period. Year-to-date net earnings were $36.8 million, compared with $32.0
million in 1996. Quarterly net earnings improved primarily due to higher sales,
higher gross margins and a reduction in the effective income tax rate. Increased
sales level and gross margin improvements and a reduction in the effective
income tax rate were the primary reasons for the increase in year-to-date net
earnings.
Strong business conditions continued in the third quarter across all business
units. The core engine products business units - first-fit and replacement parts
- - sales were up 10.9% over the same quarter last year. The Torit Products
business unit showed solid growth in the third quarter after a slow start in the
first half. The gas turbine business sales were up 82.9% from last year and
backlogs are 95.1% higher than one year ago. Overall, the gas turbine business
is expected to post full-year revenue approximately equal to last year.
The gross margins for the quarter increased to 31.0% from 29.9% in the third
quarter of fiscal 1996. Year-to-date figures are 30.2% and 29.1%, respectively.
The improvement from the prior year is due to a combination of favorable
material prices and product mix.
Operating expenses were $42.6 million for the third quarter of 1997 as compared
to $34.4 million for the third quarter of 1996, an increase of 23.8%, and have
increased from 18.6% to 19.9% as a percent of sales. Year-to-date operating
expenses were $119.9 million in fiscal 1997 as compared to $106.6 million in
fiscal 1996, an increase of 12.5%, and have increased from 19.2% to 20.1% as a
percent of sales. Operating expenses for the quarter and year-to-date were
higher than previous year's quarter and year-to-date primarily because of
increased selling expenses and $6.6 million of increases in the third quarter
for warranty, legal and other accruals. The accruals include a reserve of
approximately $5.0 million for air cleaner assemblies that may not meet customer
expectations with regard to corrosion resistance. The reserve represents a
reasonable best estimate of the Company's total potential costs. The ultimate
amount cannot be fully determined as of April 30, 1997. Although costs could be
significant in any one period, they are not expected to have a material effect
on the Company's liquidity or consolidated financial position.
Hard order backlogs -- goods scheduled for delivery in 90 days -- of $152.0
million at April 30, 1997, increased 20.6% from the same period last year and
are up 5.7% in the quarter. Only the Torit Products market has softened against
the prior year. Besides the gas turbine increases mentioned above, year over
year backlogs are up 24.0% in high purity, up 10.7% in off-road and up 16.0% in
transportation markets.
C. Risk Factors
Certain the of the matters discussed in this Form 10-Q are "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995,
which involve risks and uncertainties, including, but not limited to changing
economic and political conditions in the U.S. and in other countries, changes in
governmental spending and budgetary policies, governmental laws and regulations
surrounding various matters such as environmental remediation, contract pricing,
and international trading restrictions, customer product acceptance, and
continued access to capital markets. All forecasts and projections in this Form
10-Q are "forward-looking statements," and are based on management's current
expectations of the Company's near-term results, based on current information
available pertaining to the Company, including the aforementioned risk factors
and the factors set forth in Exhibit 13 to the Company's Report on Form 10-K for
the year ended July 31, 1996. Actual results could differ materially both due to
the risk factors mentioned here, and to other factors not so referenced.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
None
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
April 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DONALDSON COMPANY, INC.
(Registrant)
Date 6/ /97 By /s/James R. Giertz
James R. Giertz
Senior Vice President -
Chief Financial Officer
Date 6/ /97 By /s/Norman C. Linnell
Norman C. Linnell
General Counsel and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> APR-30-1997
<CASH> 21,902
<SECURITIES> 0
<RECEIVABLES> 151,694
<ALLOWANCES> 3,840
<INVENTORY> 80,598
<CURRENT-ASSETS> 259,736
<PP&E> 338,031
<DEPRECIATION> 191,890
<TOTAL-ASSETS> 435,952
<CURRENT-LIABILITIES> 158,879
<BONDS> 8,526
0
0
<COMMON> 135,317
<OTHER-SE> 108,200
<TOTAL-LIABILITY-AND-EQUITY> 435,952
<SALES> 597,901
<TOTAL-REVENUES> 0
<CGS> 417,370
<TOTAL-COSTS> 119,946
<OTHER-EXPENSES> 1,483
<LOSS-PROVISION> 145
<INTEREST-EXPENSE> 1,655
<INCOME-PRETAX> 57,447
<INCOME-TAX> 20,681
<INCOME-CONTINUING> 36,766
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,766
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.44
</TABLE>
