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, 1999 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
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(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 - 46,028,985 shares as of November 30, 1999
- ----------------------------------------------------------------------
1
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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
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 246,550 $ 225,431
Cost of sales 172,669 163,102
------------ ------------
Gross margin 73,881 62,329
Operating expenses 48,716 41,798
Other income (750) (961)
Interest expense 1,618 1,831
------------ ------------
Earnings before income taxes 24,297 19,661
Income taxes 7,289 6,292
------------ ------------
Net earnings $ 17,008 $ 13,369
============ ============
Weighted average shares
outstanding - basic 46,087,151 47,837,351
Weighted average shares
outstanding - diluted 46,955,529 48,498,541
Net earnings per share-basic $ 0.37 $ 0.28
Net earnings per share-diluted $ 0.36 $ 0.28
Dividends paid per share $ 0.06 $ 0.05
</TABLE>
2
<PAGE>
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
October 31 July 31
1999 1999
----------- -----------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 56,416 $ 41,944
Accounts Receivable 181,637 178,419
Inventories
Materials 33,827 32,722
Work in process 14,376 13,758
Finished products 36,364 35,618
----------- -----------
Total inventories 84,567 82,098
Prepaid and other current assets 27,964 23,927
----------- -----------
TOTAL CURRENT ASSETS 350,584 326,388
Property, plant and equipment, at cost 439,667 421,425
Less accumulated depreciation (251,114) (239,245)
----------- -----------
Property, plant and equipment, net 188,553 182,180
Other Assets 34,764 34,701
----------- -----------
TOTAL ASSETS 573,901 $ 543,269
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Short-term debt $ 19,576 $ 20,287
Current maturities of long-term debt 405 409
Trade accounts payable 69,427 63,36l
Accrued employee compensation & related taxes 24,502 24,720
Income taxes payable 29,641 28,448
Warranty and accrued liabilities 25,725 22,680
Other current liabilities 6,986 6,150
----------- -----------
TOTAL CURRENT LIABILITIES 176,262 166,055
Long-term debt 92,558 86,691
Deferred income taxes 1,013 1,155
Other long-term liabilities 26,684 26,605
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 248,280 248,280
Additional paid-in capital 2,204 1,611
Retained earnings 101,926 87,909
Accumulated other comprehensive income (2,355) (5,670)
Treasury stock - 3,629,969 and 3,458,670 shares at
October 31, 1999 and July 31, 1999, respectively (72,671) (69,367)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 277,384 262,763
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 573,901 $ 543,269
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
October 31
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 17,008 $ 13,369
Adjustments to reconcile net earnings to
Net cash provided by operating activities:
Depreciation and amortization 7,524 6,498
Changes in operating assets and liabilities 10,059 7,727
Other 257 (2,016)
---------- ----------
Net Cash Provided by Operating Activities 34,848 25,578
INVESTING ACTIVITIES
Net expenditures on property and equipment (11,243) (9,017)
Acquisitions and investment in unconsolidated affiliates 10 (150)
---------- ----------
Net Cash (Used in) investing activities (11,233) (9,167)
FINANCING ACTIVITIES
Purchase of treasury stock (3,339) (17,028)
Change in long-term debt 4,676 24,883
Change in short-term Debt (1,495) (13,570)
Dividends paid (2,766) (2,406)
Other (88) 1,126
---------- ----------
Net Cash (Used in) Financing Activities (3,012) (6,995)
Effect of exchange rate changes on cash (6,131) (5,177)
---------- ----------
Increase in cash and cash equivalents 14,472 4,239
Cash and Cash Equivalents-Beginning of Year 41,944 16,069
---------- ----------
Cash and Cash Equivalents-End of Period $ 56,416 $ 20,308
========== ==========
</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 of
Donaldson Company, Inc. (the Company) have been prepared in accordance with
generally accepted accounting principles 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, 1999 are not necessarily indicative of the results that may be
expected for the year ending July 31, 2000. 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, 1999. Certain amounts in prior periods have been
reclassified to conform to the current presentation. The reclassifications had
no impact on the net earnings as previously reported.
Note B - Net Earnings Per Share
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, when dilutive.
The following table presents information necessary to calculate basic and
diluted net earnings per common share:
Three Months Ended
October 31
--------------------------
1999 1998
----------- -----------
Weighted average shares outstanding - Basic 46,087,151 47,837,351
Dilutive share equivalents 868,378 661,190
----------- -----------
Weighted average shares outstanding - Diluted 46,955,529 48,498,541
=========== ===========
Net earnings for basic and diluted
earnings per share computation $17,008,000 $13,369,000
----------- -----------
Net earnings per share - Basic $ .37 $ .28
=========== ===========
Net earnings per share - Diluted $ .36 $ .28
=========== ===========
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Note C - Comprehensive Income
The Company adopted Statement of Financial Accounting Standard (SFAS) No. 130,
"Reporting Comprehensive Income," in the first quarter of fiscal 1999. Upon
adoption of SFAS No. 130, the Company is reporting Accumulated 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.
Total comprehensive income and its components are as follows (in thousands):
Three Months Ended
October 31
--------------------
1999 1998
-------- --------
Net earnings $ 17,008 $ 13,369
Foreign currency translation adjustment 3,315 2,531
-------- --------
Total other comprehensive income $ 20,323 $ 15,900
======== ========
Note D - Segment Reporting
Beginning with fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," This standard requires the
Company to disclose selected financial data by operating segment defined as a
component with business activity resulting in revenue and expense that has
separate financial information evaluated regularly by the Company's chief
operating decision maker in determining resource allocation and assessing
performance. The Company has identified two reportable segments based on the
internal organization structure, management of operations and performance
evaluation: Engine Products and Industrial Products. Segment detail is
summarized as follows (in thousands):
Engine Industrial Corporate & Total
Products Products Unallocated Company
-------- -------- ----------- -------
Three Months Ended
October 31, 1999:
Net sales $161,166 $ 85,384 $246,550
Earnings before income taxes 19,018 11,748 $ (6,469) 24,297
Three Months Ended
October 31, 1998:
Net sales 150,624 74,807 225,43l
Earnings before income taxes $ l6,455 $ 4,852 $ (1,646) $ 19,661
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Note E - New Accounting Standards
SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" is
effective for fiscal years beginning after June 15, 2000. SFAS 133 requires a
company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of the hedged assets, liabilities, or firm commitments are
recognized through earnings or in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The company has not
yet determined what the effect of SFAS 133 will be on earnings and the financial
position of the company.
Note F - Subsequent Event
On November 1, 1999 the Company completed the purchase of all of the outstanding
shares of AirMaze, a privately held supplier of heavy duty air and liquid
filters, air/oil separators and high purity air filter products. This
acquisition supports the Company's strategy of providing a comprehensive line of
filtration and exhaust products for customers around the world while giving the
Company the opportunity to expand into the industrial compressor market. AirMaze
is headquartered in Stow, Ohio and has manufacturing facilities in Stow, OH,
Greeneville, TN, and Carpinteria, CA. AirMaze operations will be a part of the
Company's Engine Products segment. The results of operations of AirMaze was not
material in relation to the Company's consolidated results of operations for the
quarter ended October 31, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
The Company generated $34.8 million of cash and cash equivalents from operations
during the first three months of fiscal 2000. Operating cash flows increased
from the prior year period primarily because of an increase in accounts payable
and other accruals compared to the prior year. These cash flows, plus borrowings
from the Company's credit facility were used primarily to support $11.2 million
in capital additions (a 24.7% increase from prior year), repurchase $3.3 million
of treasury stock, and the payment of $2.8 million in dividends during the first
three months of fiscal 2000. At the end of the first quarter, the Company had
approximately 3.5 million shares of common stock remaining under the share
repurchase program authorized in November 1998.
At the end of the first quarter, the Company held $56.4 million in cash and cash
equivalents. Short-term debt totaled $19.6 million, down from $20.3 million at
July 31, 1999. Long-term debt of $92.6 million at October 31, 1999 (an increase
of $5.9 million since July 31, 1999), represented 25.0% of total long-term
capital, up slightly from 24.8% at July 31, 1999.
7
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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 the next twelve month period.
Results of Operations
The Company reported net earnings for the first quarter ended October 31, 1999
of $17.0 million, up 27.2% from the $13.4 million recorded in the first quarter
last year. Total net sales for the three months ended October 31, 1999 of $246.6
million were up 9.4% from prior year sales of $225.4 million. The increase in
net earnings resulted from increased sales as well as an improved gross margin
and a lower effective income tax rate compared to the prior year. Diluted net
earnings per share were 36 cents, up 28.6% from prior year diluted net earnings
per share of 28 cents as the average number of shares outstanding decreased 3.2%
compared to the prior year period.
Growth in net sales was achieved in both the Engine Products and Industrial
Products segment. The Engine Products segment showed a 7.0% increase in net
sales from the same period in the prior year. This increase is led by strong
sales in transportation products showing an increase of 22.7% from the same
period in the prior year. An increase in aftermarket products also contributed
to sales growth with an increase of 8.6% in sales from the same period in the
prior year. These increases were offset by a decrease in sales of off-road
products for the period compared to the prior year. The Industrial Products
segment showed a 14.1% increase in net sales from the same period in the prior
year. Within the Industrial Products segment, the high purity products and gas
turbine products showed strong net sales growth posting increases of 24.8% and
15.3% from the same period in the prior year, respectively. Increased sales in
high purity products reflect a strong disk drive market. Growth in gas turbine
sales is a result of strong customer demand in North America.
Consolidated gross margin for the first quarter of fiscal 2000 was 30.0% which
was 2.4% above the same quarter last year. The improvement in gross margin for
the quarter reflects the growth in net sales achieved in both operating segments
of the Company as well as continued efforts of cost reduction and product
improvement initiatives.
Operating expenses during the first quarter of fiscal 2000 were $48.7 million
(19.8% of sales), compared to $41.8 million (18.5% of sales) in the same quarter
of fiscal 1999. This increase in operating expense was due primarily to an
increase in operating expenses related to increased sales and increases in
warranty reserves and other accruals.
Other income was slightly lower for the three month period ending October 31,
1999 compared to the same period in the prior year. Other income for the current
three month period consists of interest income of $0.9 million income from
unconsolidated affiliates of $0.9 million, offset by charitable contributions of
$0.7 million and other expense of $0.3 million.
The effective income tax rate is consistent with the 1999 fiscal year rate.
8
<PAGE>
Hard order backlogs -- goods scheduled for delivery in 90 days -- of $170.3
million for the first quarter of fiscal 2000 are up 17.1% from the same period
in the prior year and up 8.4% from the prior quarter end. These increases are a
result of growth in heavy duty transportation in North America as well as strong
orders in gas turbine products.
The US dollar has weakened relative to the currencies of foreign countries where
the Company operates. The weakening of the dollar, primarily in Japan, has had
positive effects on net income for the three months period ending October 31,
1999. The impact of foreign exchange translation on net sales was a positive
$2.1 million for the three months ended October 31, 1999. The impact of foreign
exchange translation on net sales was a negative $4.1 million for the three
months ended October 31, 1998.
Year 2000
The Company initiated its planning and implementation to address the Year 2000
problem several years ago. The Company has surveyed and assessed all critical
business systems and processes as part of its implementation of the Year 2000
plan described below and based on those activities believes that all significant
systems and processes are now Year 2000 ready. Based on our efforts to address
this problem, the Company believes it has relatively low risk of experiencing
Year 2000 operational problems. A summary of the Company's Year 2000 readiness
follows.
Only a small percentage of our products contain microprocessors, and we have
assessed and identified all of our products as Year 2000 compliant.
Our business information systems (financial, purchasing, manufacturing,
planning, etc.) have been inventoried and assessed. The plan to achieve Year
2000 readiness included the installation of new applications in some areas and
the remediation of legacy systems as appropriate. All significant business
information systems are now Year 2000 ready.
We have surveyed and evaluated our infrastructure that supports all information
technology and communication systems for the Company worldwide. All critical
computer hardware, databases, operating systems, network equipment and
communication gear have been assessed and identified as Year 2000 ready for all
our global facilities. Personal computers and workstations have been inventoried
and evaluated; all essential hardware and software is now Year 2000 ready.
We surveyed our 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 received to date indicate that our suppliers are
aware of the Year 2000 issue and are implementing all necessary changes. We have
completed on-site Year 2000 assessments of certain key suppliers.
We surveyed and assessed our manufacturing and significant administrative
facilities globally, and based on this evaluation believe that all critical
systems that support the building operations are Year 2000 ready. We surveyed
and assessed our engineering systems and based on this evaluation believe these
systems are Year 2000 ready. We have surveyed the machine and
9
<PAGE>
process control equipment in our manufacturing plants and believe that all
significant remediation work is now complete.
All Year 2000 issues are managed through a task force led by the Chief Financial
Officer. Regular updates are provided to senior management. The Chief Financial
Officer reports progress to the Audit Committee of the Board of Directors on a
regular basis.
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 $8.0 million. The source of funds for these costs is operating cash flow.
These costs do not include overall costs of new system applications that have
been implemented in the normal business cycle and not specifically for Year 2000
remediation.
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, its suppliers, customers or other critical public or private entities
are not fully Year 2000 compliant, and the scope of resulting difficulties and
related costs, are not reasonably determinable.
Forward-Looking Statements
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. 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 United States 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. For a more detailed
explanation of the foregoing and other risks; see exhibit 99 to the Company's
annual report on Form 10-K for the year ended July 31, 1999 which is filed with
the Securities and Exchange Commission. The Company wishes to caution investors
that other factors may in the future prove to be important in affecting the
company's
10
<PAGE>
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
There have been no material changes in the reported market risk of the
Company since July 31, 1999. See further discussion of these market
risks in the Donaldson Company, Inc. Annual Report on Form 10-K for
the year ended July 31, 1999.
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
October 31, 1999.
11
<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 14, 1999 By /s/ James R. Giertz
--------------------- --------------------------------------
James R. Giertz
Senior Vice President and
Chief Financial Officer
Date December 14, 1999 By /s/ Norman C. Linnell
-------------------- --------------------------------------
Norman C. Linnell
General Counsel and Secretary
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 56,416
<SECURITIES> 0
<RECEIVABLES> 186,107
<ALLOWANCES> 4,470
<INVENTORY> 84,567
<CURRENT-ASSETS> 350,584
<PP&E> 439,667
<DEPRECIATION> 251,114
<TOTAL-ASSETS> 573,901
<CURRENT-LIABILITIES> 176,262
<BONDS> 0
0
0
<COMMON> 248,280
<OTHER-SE> 29,104
<TOTAL-LIABILITY-AND-EQUITY> 573,901
<SALES> 246,550
<TOTAL-REVENUES> 0
<CGS> 172,669
<TOTAL-COSTS> 48,716
<OTHER-EXPENSES> (750)
<LOSS-PROVISION> (335)
<INTEREST-EXPENSE> 1,618
<INCOME-PRETAX> 24,297
<INCOME-TAX> 7,289
<INCOME-CONTINUING> 17,008
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,008
<EPS-BASIC> .37
<EPS-DILUTED> .36
</TABLE>
