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, 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.
-----------------------------------------------------------------------
(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 -- 48,927,545 shares as of May 31, 1998
<PAGE>
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,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 233,840 $ 213,876 $ 700,881 $ 597,901
Cost of Sales 171,096 147,672 504,807 417,370
------------ ------------ ------------ ------------
Gross Margin 62,744 66,204 196,074 180,531
Operating Expenses 38,649 42,557 129,996 119,946
Other (Income) Expense (1,141) 877 (1,326) 1,483
Interest Expense 1,108 582 3,084 1,655
------------ ------------ ------------ ------------
Earnings Before Income Taxes 24,128 22,188 64,320 57,447
Income Taxes 8,204 7,988 21,869 20,681
------------ ------------ ------------ ------------
Net Earnings $ 15,924 $ 14,200 $ 42,451 $ 36,766
============ ============ ============ ============
Weighted Average Shares
Outstanding 49,403,102 50,198,490 49,521,624 50,274,836
============ ============ ============ ============
Diluted Shares Outstanding 50,491,472 50,955,727 50,615,501 51,045,503
============ ============ ============ ============
Net Earnings Per Share-Basic $ .32 $ .28 $ .86 $ .73
============ ============ ============ ============
Net Earnings Per Share
Assuming Dilution $ .32 $ .28 $ .84 $ .72
============ ============ ============ ============
Dividends Paid Per Share $ .05 $ .04 $ .14 $ .13
============ ============ ============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DONALDSON COMPANY, INC. AND SUBSIDIARIES
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
April 30, July 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 20,135 $ 14,278
Accounts Receivable, Net 157,664 161,440
Inventories
Materials 45,417 36,178
Work in Process 14,058 11,488
Finished Products 48,662 38,253
----------- -----------
Total Inventories 108,137 85,919
Prepaids and Other Current Assets 7,419 7,181
----------- -----------
TOTAL CURRENT ASSETS 293,355 268,818
Property, Plant and Equipment, at Cost 383,162 354,154
Less Accumulated Depreciation (208,691) (199,559)
----------- -----------
Property, Plant and Equipment, Net 174,471 154,595
Other Assets 32,226 30,981
----------- -----------
TOTAL ASSETS $ 500,052 $ 454,394
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-Term Debt $ 77,897 $ 42,027
Current Maturities of Long-Term Debt 228 647
Trade Accounts Payable 69,304 68,317
Accrued Employee Compensation & Related Taxes 27,300 28,760
Warranty and Customer Support 16,730 16,502
Other Current Liabilities 23,336 20,044
----------- -----------
TOTAL CURRENT LIABILITIES 214,795 176,297
Long-Term Debt 1,868 4,201
Deferred Income Taxes 945 1,442
Other Long-Term Liabilities 22,125 28,589
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 and 54,126,814 issued April 30, 1998
and July 31, 1997, respectively 248,281 135,317
Additional Paid-in Capital 1,268 6,212
Retained Earnings 27,867 167,444
Cumulative Translation Adjustment (7,418) 934
Treasury Stock - 409,030 and 4,674,758 shares issued (9,679) (63,312)
April 30, 1998 and July 31, 1997, respectively
Receivable from ESOP -- (2,730)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 260,319 243,865
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 500,052 $ 454,394
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
April 30
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 42,451 $ 36,766
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 18,175 15,344
Changes in Operating Assets and Liabilities (19,044) (8,982)
Other (12,047) (1,037)
---------- ----------
Net Cash Provided by Operating Activities 29,535 42,091
INVESTING ACTIVITIES
Net Expenditures on PP&E (43,471) (31,753)
Business Acquisitions, Net of Cash Acquired -- (14,431)
Dividends & Distributions from Affiliates 1,566 3,749
---------- ----------
Net Cash Used in Investing Activities (41,905) (42,435)
FINANCING ACTIVITIES
Purchase of Treasury Stock (14,245) (8,904)
Net Change in Debt 34,976 7,643
Dividends Paid (7,194) (6,539)
Payment Received from ESOP 2,730 --
Other 2,364 701
---------- ----------
Net Cash Provided by (Used In) Financing Activities 18,631 (7,099)
Effect of Exchange Rate Changes on Cash (404) (1,579)
---------- ----------
Increase (Decrease) in Cash and Cash Equivalents 5,857 (9,022)
Cash and Cash Equivalents-Beginning of Year 14,278 30,924
---------- ----------
Cash and Cash Equivalents-End of Period $ 20,135 $ 21,902
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
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, 1998 are not necessarily indicative of the results that may be
expected for the year ended July 31, 1998. 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, 1997.
Note B - New Accounting Standards
In February, 1997, 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. Upon adoption of SFAS No. 128, the Company is presenting basic
earnings per share and diluted earnings per share. Basic earnings per share is
computed based on the weighted average number of shares outstanding during the
period. Diluted earnings per share is computed based on the weighted average
number of shares outstanding during the period increased by: (1) the effect of
dilutive stock options using the treasury stock method, and (2) shares issuable
under the Company's Performance and Incentive Plans.
The following table presents information necessary to calculate basic and
diluted earnings per common share and common share equivalent:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding-Basic 49,403,102 50,198,490 49,521,624 50,274,836
Dilutive share equivalents 1,088,370 757,237 1,093,877 770,667
----------- ----------- ----------- -----------
Weighted average shares - Diluted 50,491,472 50,955,727 50,615,501 51,045,503
=========== =========== =========== ===========
Net earnings for basic and diluted
earnings per share computation $15,924,000 $14,200,000 $42,451,000 $36,766,000
----------- ----------- ----------- -----------
Basic earnings per share $ .32 $ .28 $ .86 $ .73
=========== =========== =========== ===========
Diluted earnings per share $ .32 $ .28 $ .84 $ .72
=========== =========== =========== ===========
</TABLE>
Earnings per share amounts and share amounts have been restated to reflect the
Company's 2-for-1 stock split effected in the form of a stock dividend issued on
January 13, 1998.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
A. Financial Condition
The Company generated $29.5 million of cash and cash equivalents from operations
during the first nine months of fiscal 1998. Operating cash flows decreased
29.8% from the prior year period primarily due to higher inventory requirements
to support higher sales levels. In addition to the operating cash flow, $1.5
million was received as a return-of-capital from an unconsolidated affiliate.
These cash flows plus borrowings from the Company's credit facility were used
primarily to support $43.5 million in capital additions (a 36.9% increase from
the prior year), repurchase $14.2 million of treasury stock, and pay $7.2
million in dividends during the first nine months of fiscal 1998. The increase
in capital expenditures is due to projects designed to enhance productivity at
various plants in the United States and overseas, capacity expansion and
continuing upgrades to information systems. Expenditures for domestic plants and
distribution centers totaled $23.5 million for the first nine months of fiscal
1998. Expenditures for overseas operations totaled $13.7 million for the same
period.
At the end of the third quarter, the Company held $20.1 million in cash and cash
equivalents. Short-term debt totaled $77.9 million, up from $42.0 million at
July 31, 1997. Long-term debt of $1.9 million at April 30, 1998, represented
0.7% of total long-term capital, down from 1.7% at July 31, 1997.
On November 21, 1997 the Board of Directors declared a 2-for-1 stock split of
its common stock, effected in the form of a 100 percent stock dividend. The
stock dividend was issued on January 13, 1998, to shareholders of record as of
December 19, 1997.
B. Results of Operations
The Company reported record net earnings for the three months ended April 30,
1998 of $15.9 million, up 12.1% from the $14.2 million recorded for the three
months ended April 30, 1997. Diluted earnings per share were 32 cents, up 14.3%
from prior-year diluted earnings per share of 28 cents; the average number of
shares outstanding decreased 0.9% compared to the prior year period. The
increase in net earnings was primarily due to higher sales and a reduction in
the effective income tax rate offset by lower margins. Total net sales for the
three months ended April 30, 1998 of $233.8 million were up 9.3% from the same
period last year of $213.9 million. Excluding the negative impact of foreign
currency translation of $5.5 million, sales for the three months ended April 30,
1998 were up 11.9% from the three month period ended April 30, 1997.
For the nine months, net earnings were a record $42.5 million, up 15.5% from
fiscal 1997. Diluted earnings per share were 84 cents, up 16.7% from last year's
diluted earnings per share of 72 cents. Year-to-date sales are up 17.2% to
$700.9 million. Excluding the negative impact of foreign currency translation of
$18.4 million, sales for the nine months ended April 30, 1998 were up 20.3% from
the nine month period ended April 30, 1997. Excluding foreign exchange
translation and incremental revenue from businesses acquired in the last twelve
months, sales for the nine month period ended April 30, 1998 would have been
$695.2 million, up 16.3% from the same period last year.
<PAGE>
In general, business conditions remain strong in North America and Europe while
Japan and certain surrounding markets are flat; these general trends are
expected to continue for the near term. Specifically, in the first nine months
of the year, revenue in local currency terms is up 25.4% in North America and
27.9% in Europe relative to last year; revenue from our Japanese subsidiary was
unchanged relative to last year. Engine products revenues were $161.1 million, a
13.1% increase over third quarter last year and $477.5 million for the nine
month period, an increase of 17.8% over prior year. Significant factors
supporting the growth in engine products include growth in replacement part
sales and the addition of the Armada Tube Group which was acquired in the third
quarter of fiscal 1997. Industrial products revenues were $72.7 million, a 1.9%
increase over third quarter last year and $223.4 million for the nine month
period, a 16.1% increase over prior year. Significant contributors to revenue
growth in industrial products include an increase in Torit dust collection sales
due to strong market conditions in the United States and Europe, strong gas
turbine and high purity growth, and the acquisition of the assets of the
Aercology business in the fourth quarter of fiscal 1997.
The gross margins for the third quarter of fiscal 1998 decreased to 26.8% from
30.9% in the same period last year. The nine months figures are 28.0% and 30.2%,
respectively. The decrease was due to product mix changes resulting in lower
profitability in the automotive business, integration cost related to the Armada
Tube acquisition and pricing pressures in the high purity, defense and
aftermarket areas, but was partially offset by higher margins in industrial
products.
Operating expenses during the third quarter of fiscal 1998 were $38.6 million,
16.5% of sales, compared to $42.6 million, 19.9% of sales in the same quarter of
1997. Year-to-date operating expenses as a percentage of sales have decreased
from 20.1% to 18.5%, primarily due to lower reserves for warranty expense and
pension obligations.
Hard order backlogs -- goods scheduled for delivery in 90 days -- of $151.4
million at April 30, 1998, were virtually unchanged from April 30, 1997 and are
down slightly from the second quarter of fiscal 1998. The gas turbine backlog is
up 45.8% relative to prior year and indicates a strong fourth quarter. In
general, current backlogs appear to indicate a slowdown in revenue growth over
the next several months.
The U. S. 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 $5.5 million and $18.4 million for the
three and nine months ended April 30, 1998. The impact of foreign exchange
translation on net sales was a negative $5.8 million and $14.4 million for the
three and nine months ended April 30, 1997.
<PAGE>
C. Year 2000 Issues
A task force was formed approximately one year ago to assess the Company's
exposure to the "year 2000" issue -- all of the Company's computer hardware and
software systems have now been evaluated to determine whether date-dependent
functions will remain operable through the year 2000. In summary, the Company
has implemented measures to have all critical business systems year-2000-ready
by December 31, 1998. Several auxiliary or non-critical systems will be modified
during calendar year 1999. Costs incurred and expected to be incurred related
exclusively to addressing year-2000 issues at the Company total approximately
$5.0 million.
The Company presently believes that the year 2000 issue will not pose
significant operational problems for the Company's systems after modifications
to existing software and conversion to new software. However, there can be no
assurance that unforeseen difficulties will not arise for the Company, its
customers or vendors and that related costs will not thereby be incurred.
D. Risk Factors
Except for the historical information contained herein, certain 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. Actual
results could differ materially both due to the risk factors mentioned here and
to other factors not so referenced.
<PAGE>
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
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended April
30, 1998.
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 June 12, 1998 By /s/James R. Giertz
------------------ ------------------
James R. Giertz
Senior Vice President and
Chief Financial Officer
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