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 October 31, 1998 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.
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(Exact name of registrant as specified in its charter)
Delaware 41-0222640
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(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 -- 47,434,729 shares as of November 30, 1999
- -----------------------------------------------------------------------
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
(Thousands of Dollars Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
October 31
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net Sales $ 225,431 $ 234,067
Cost of Sales 163,102 165,677
------------ ------------
Gross Margin 62,329 68,390
Operating Expenses 41,798 46,368
Other Income (961) (202)
Interest Expense 1,831 985
------------ ------------
Earnings Before Income Taxes 19,661 21,239
Income Taxes 6,292 7,221
------------ ------------
Net Earnings $ 13,369 $ 14,018
============ ============
Weighted Average Shares Outstanding
Basic 47,837,351 49,463,814
Diluted 48,498,541 50,583,246
Net Earnings Per Share-Basic $ .28 $ .28
Net Earnings Per Share-Diluted $ .28 $ .27
Dividends Paid Per Share $ .05 $ .05
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DONALDSON COMPANY, INC. AND SUBSIDIARIES
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
October 31 July 31
1998 998
---------- ----------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and Cash Equivalents $ 20,308 $ 16,069
Accounts Receivable 166,689 161,914
Inventories
Materials 37,369 38,346
Work in Process 13,767 14,557
Finished Products 47,203 49,114
--------- ---------
Total Inventories 98,339 102,017
Prepaids and Other Current Assets 8,707 7,341
TOTAL CURRENT ASSETS 294,043 287,341
Property, Plant and Equipment, at Cost 403,841 391,381
Less Accumulated Depreciation (220,469) (212,514)
--------- ---------
Property, Plant and Equipment, Net 183,372 178,867
Other Assets 34,768 33,113
--------- ---------
TOTAL ASSETS $ 512,183 $ 499,321
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Short-Term Debt $ 33,170 $ 45,491
Current Maturities of Long-Term Debt 476 405
Trade Accounts Payable 59,063 59,368
Accrued Employee Compensation & Related Taxes 24,107 26,837
Warranty and Customer Support 15,988 16,096
Other Current Liabilities 25,462 19,295
-------- ---------
TOTAL CURRENT LIABILITIES 158,266 167,492
Long-Term Debt 75,399 50,349
Deferred Income Taxes 1,722 1,604
Other Long-Term Liabilities 23,879 24,205
SHAREHOLDERS' EQUITY
Preferred Stock, $1 par value,
1,000,000 shares authorized, no shares issued -- --
Common Stock, $5 par value, 80,000,000 shares authorized,
49,655,954 issued at both dates 248,280 248,280
Additional Paid-in Capital 929 1,199
Retained Earnings 50,609 39,965
Accumulated Other Comprehensive Income (2,604) (5,135)
Treasury Stock - 2,144,546 and 1,274,251 shares at
October 31, 1998 and July 31, 1998, respectively (44,297) (28,638)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 252,917 255,671
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 512,183 $ 499,321
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
October 31
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 13,369 $ 14,018
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 6,498 5,965
Changes in Operating Assets and Liabilities 7,727 7,120
Other (2,016) (874)
-------- --------
Net Cash Provided by Operating Activities 25,578 26,229
INVESTING ACTIVITIES
Net Expenditures on Property and Equipment (9,017) (13,309)
Business Acquisitions, Net of Cash Acquired (150) --
Return of Investment in Affiliate -- 1,500
-------- --------
Net Cash Used in Investing Activities (9,167) (11,809)
FINANCING ACTIVITIES
Purchase of Treasury Stock (17,028) (939)
Net Change in Debt 11,313 3,567
Dividends Paid (2,406) (2,226)
Payment Received from ESOP -- 2,730
Other 1,126 (269)
-------- --------
Net Cash (Used In) Provided by Financing Activities (6,995) 2,863
Effect of Exchange Rate Changes on Cash (5,177) (5,304)
-------- --------
Increase in Cash and Cash Equivalents 4,239 11,979
Cash and Cash Equivalents-Beginning of Year 16,069 14,278
-------- --------
Cash and Cash Equivalents-End of Period $ 20,308 $ 26,257
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and 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 three month period ended October
31, 1998 are not necessarily indicative of the results that may be expected for
the year ended July 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in Donaldson Company, Inc.
and subsidiaries' annual report on Form 10-K for the year ended July 31, 1998.
Note B - Net Earnings Per Share
The Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per
Share," which was adopted by the Company in the second quarter of fiscal 1998.
The Company's basic net earnings per share is computed by dividing net earnings
by the weighted average number of outstanding common shares. The Company's
diluted net earnings per share is computed by dividing net earnings by the
weighted average number of outstanding common shares and common share
equivalents relating to stock options, when dilutive.
The following table presents information necessary to calculate basic and
diluted net earnings per common share:
Three Months Ended
October 31
--------------------------
1998 1997
----------- -----------
Weighted average shares outstanding-Basic 47,837,351 49,463,814
Dilutive share equivalents 661,190 1,119,432
Weighted average shares-Diluted 48,498,541 50,583,246
=========== ===========
Net earnings for basic and diluted
earnings per share computation $13,369,000 $14,018,000
----------- -----------
Net earnings per share-Basic $ .28 $ .28
=========== ===========
Net earnings per share-Diluted $ .28 $ .27
=========== ===========
5
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Note C - Comprehensive Income
The Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income," which was adopted by the Company in the first quarter of
fiscal 1999. Upon adoption of SFAS No. 130, the Company is reporting other
comprehensive income as a separate item in the shareholders' equity section of
the balance sheet and disclosing components of other comprehensive income. The
adoption of this Statement has no impact on the Company's net earnings or
shareholders' equity. Other comprehensive income consists solely of foreign
currency translation adjustments. Prior financial statements have been restated
to conform to the provisions of SFAS 130.
Total comprehensive income and its components are as follows (in thousands):
Three Months Ended
October 31
--------------------
1998 1997
-------- --------
Net earnings $ 13,369 $ 14,018
Foreign currency translation adjustment 2,531 (2,787)
Total other comprehensive income $ 15,900 $ 11,231
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
A. Financial Condition
The Company generated $25.6 million of cash and cash equivalents from operations
during the first three months of fiscal 1999. Operating cash flows decreased
2.5% from the prior year. These cash flows plus borrowings from the Company's
credit facility were used primarily to support $9.0 million in capital
additions, repurchase $17.0 million of treasury stock, and pay $2.4 million in
dividends during the first three months of fiscal 1999.
At the end of the first quarter, the Company held $20.3 million in cash and cash
equivalents. Short-term debt totaled $33.2 million, down from $45.5 million at
July 31, 1998. Long-term debt of $75.4 million at October 31, 1998, represented
23.0% of total long-term capital, up from 16.5% at July 31, 1998.
The Company believes that the combination of present capital resources,
internally generated funds, and unused financing sources are more than adequate
to meet cash requirements for 1999.
B. Results of Operations
The Company reported net earnings for the first quarter ended October 31, 1998
of $13.4 million, down 4.6% from the $14.0 million recorded in the first quarter
last year. Diluted net earnings per share were 28 cents, up 3.7% from prior-year
diluted net earnings per share of 27 cents as the average number of shares
outstanding decreased 4.1% compared to the prior year period. The decrease in
net earnings was primarily due to lower sales. Total net sales of $225.4 million
were down 3.7% from prior year sales of $234.1 million. Excluding the negative
impact of foreign currency translation of $4.1 million, sales were down 1.9%
from last year.
6
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Although market conditions remain soft in some key business areas others
continued strong growth. Areas of strong growth include: European operations
(excluding the gas turbine business), which were up 15 percent in local currency
terms relative to last year; the gas turbine business worldwide, which continues
to benefit from strong demand in North America with sales up 9 percent relative
to the same period last year; and the heavy duty truck market in North America,
which continues to operate at maximum capacity. Areas of weakness include:
Japanese operations, which posted revenue declines of about 10 percent from last
year in local currency, in line with our expectations; and the agriculture
sector in North America- representing less than 5 percent of our total annual
revenue- which was weak due to production cut-backs by our major OEM customers.
While engine product sales decreased 6.0% from the same period last year
industrial products improved slightly posting a 1.3% increase from the same
period last year. Overall, revenue growth has slowed and we expect modest or no
growth for fiscal 1999.
The gross margins for the first quarter of fiscal 1999 were 27.6%--about one and
a half percentage points below the same quarter last year, but unchanged
relative to the second half of last fiscal year. The lower margins relative to
last year reflect a variety of negative developments, primarily in engine
products, including: unfavorable sales mix, higher product cost not recovered
with price increases, and general price pressure.
Operating expenses during the first quarter of fiscal 1999 were $41.8 million,
18.5% of sales, compared to $46.4 million, 19.8% of sales in the same quarter of
fiscal 1998. This reduction in operating expense was due primarily to lower
levels of warranty expense and lower salary compensation expense.
The effective income tax rate of 32% for the period ending October 31, 1998 was
lower compared to 34% for the same period last year due to lower overseas tax
rates.
Hard order backlogs--goods scheduled for delivery in 90 days -- of $145.4
million for the first quarter of fiscal 1999 are down 6.4% from the same period
last year and up 4.8% from the prior quarter end. Relative to last year, the
majority of the decline in backlog is attributed to the automotive, defense and
heavy duty truck market segments in North America. Excluding the impact of
discontinued product lines and other special factors in these three businesses,
backlogs are essentially unchanged from prior year.
The US dollar continues to be strong relative to the currencies of foreign
countries where the Company operates. The strong dollar continues to have a
negative impact on overseas results because foreign exchange denominated sales
and earnings translate into less U.S. dollars. The impact of foreign exchange
translation on net sales was a negative $4.1 million for the three months ended
October 31, 1998. The impact of foreign exchange translation on net sales was a
negative $6.3 million for the three months ended October 31, 1997.
Year 2000 and Euro Currency Issues
The Company has developed plans to address the potential for business
interruption related to the impact of Year 2000 on computer systems. Financial,
information and operating systems (including any equipment with embedded
microprocessors) have been surveyed and assessed. In
7
<PAGE>
most cases, identified problems have already been rectified or detailed plans
are in place to modify impacted systems prior to the end of 1998. In some cases
identified problems will be addressed with repair projects to be completed in
1999. Progress against these plans is monitored and reported to senior
management and to the Audit Committee of the Board of Directors on a regular
basis. Implementation of required changes to, and testing of, critical business
systems is expected to be complete by the end of 1998. Changes to all other
systems are expected to be complete by July 1999. Testing of non-critical
systems will be performed on a spot basis; more extensive testing may be
initiated if it is deemed appropriate.
The Company has also surveyed its significant suppliers to assess the potential
impact on operations if key third parties are not successful in converting their
systems in a timely manner. Responses to these surveys are incomplete at this
time. Responses received to date indicate that our suppliers are aware of the
Year 2000 issue and are implementing all necessary changes, mostly scheduled for
completion by mid-1999.
Incremental costs (including contractor expenses and the cost of internal
resources dedicated to achieving Year 2000 compliance) are charged to expense as
incurred. Total costs for all relevant Year 2000 specific activity is estimated
to be $5 million, of which approximately 70 percent has been spent to date. The
source of funds for these costs is operating cash flow.
In general, only a small percentage of our products contain microprocessors and
all of our product range is now Year 2000 compliant. Our information systems
(financial, purchasing, manufacturing planning, etc.) are easily inventoried and
detailed modification plans exist and are being executed. Our manufacturing
systems are, in general, standard pieces of equipment with relatively few
proprietary or unique operating systems or controls. At this time, the Company
does not have in place a comprehensive, global contingency plan relative to
potential Year 2000 disruptions. Rather, each significant system either has been
repaired and tested, or is being repaired. For systems currently being reworked,
contingency plans exist to address the most reasonably likely negative
scenarios.
The most reasonably likely negative scenario is that modification work will not
proceed on schedule, causing some increase to the total cost of achieving Year
2000 compliance. The impact on the Company's results of operations if the
Company or its suppliers or customers are not fully Year 2000 compliant is not
reasonably determinable. However, since we are depending on our ability to
execute modification plans and our vendors to continue material supply without
interruption, there can be no assurance that unforeseen difficulties will not
arise for the Company or its customers and that related costs will not thereby
be incurred. This dependence on the performance of our employees, contractors
and vendors, as it relates to the Year 2000 issue, does not appear significantly
different from our dependence on these groups relative to a wide range of other
expectations (e.g., product quality, dependable delivery, technical support,
etc.)
The Company has a significant number of customers located in the European Union
countries participating in the conversion on January 1, 1999 to a new European
Currency (the "Euro Conversion"). The Company does not expect the costs of any
modifications to its internal systems to have a material effect on the Company's
results of operations or financial condition. The Euro Conversion may also have
competitive implications for the sale of the Company's products, which could be
material in nature, however, any such impact is not known at this time. There
can be no assurance that unforeseen difficulties will not arise for the Company
or its customers and that related costs will not thereby be incurred.
8
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Market Risk
The Company's market risk includes the potential loss arising from adverse
changes in foreign currency exchange rates and interest rates. The Company
manages foreign currency market risk through the use of a variety of financial
and derivative instruments. The Company's objective in managing these risks is
to reduce fluctuations in earnings and cash flows associated with changes in
foreign currency exchange rates. The Company uses forward exchange contracts and
other hedging activities to hedge the U.S. dollar value resulting from
anticipated foreign currency transactions. The Company's market risk on interest
rates is the potential increase in fair value of long-term debt resulting from a
potential decrease in interest rates. There have been no material changes in the
reported market risks of the Company since July 31, 1998. See further discussion
of these market risks in the Donaldson Company, Inc. annual report on Form 10-K
for the year ended July 31, 1998.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 "SAFE HARBOR"
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and is making this cautionary
statement in connection with such safe harbor legislation. This Form 10-Q, the
Company's Annual Report to Shareholders, any Form 10-K, Form 10-Q or Form 8-K of
the Company or any other written or oral statements made by or on behalf of the
Company may include forward-looking statements which reflect the Company's
current views with respect to future events and financial performance. The words
"believe," "expect," "anticipate," "intends," "estimate," "forecast," "project,"
"should" and similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. 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 risk factors noted below.
The Company wishes to caution investors that any forward-looking statements made
by or on behalf of the Company are subject to uncertainties and other factors
that could cause actual results to differ materially from such statements. These
uncertainties and other risk factors include, but are 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, continued
access to capital markets, issues related to the Company's Year 2000 compliance
program, and foreign currency risks (including any associated with the
conversion of various European currencies into the "Euro" in 1999). Though the
Company has attempted to list comprehensively these import factors, the Company
wishes to caution investors that other factors may in the future prove to be
important in affecting the Company's results of operations. New factors emerge
from time to time and it is not possible for management to predict all such
factors, nor can it assess the impact of each such factor on the business or the
extent to which any factor, or a combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
Investors are further cautioned not to place undue reliance on such
forward-looking statements as they speak only to the Company's views as of the
date the statement is made. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
See discussion of quantitative and qualitative disclosure about market
risk in "Market Risk" section of Management's Discussion and Analysis.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
None
9
<PAGE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended October
31, 1998.
10
<PAGE>
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 December 15, 1998 By /s/ James R. Giertz
------------------------- -------------------
James R. Giertz
Senior Vice President and
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 20,308
<SECURITIES> 0
<RECEIVABLES> 170,824
<ALLOWANCES> 4,135
<INVENTORY> 98,339
<CURRENT-ASSETS> 294,043
<PP&E> 403,841
<DEPRECIATION> 220,469
<TOTAL-ASSETS> 512,183
<CURRENT-LIABILITIES> 158,266
<BONDS> 0
0
0
<COMMON> 248,280
<OTHER-SE> 4,637
<TOTAL-LIABILITY-AND-EQUITY> 512,183
<SALES> 225,431
<TOTAL-REVENUES> 0
<CGS> 163,102
<TOTAL-COSTS> 41,798
<OTHER-EXPENSES> (961)
<LOSS-PROVISION> 972
<INTEREST-EXPENSE> 1,831
<INCOME-PRETAX> 19,661
<INCOME-TAX> 6,292
<INCOME-CONTINUING> 13,369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,369
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
