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, 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
----------------------------------------
(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 -- 46,164,930 shares as of May 31, 1999
- ---------------------------------------------------------------------
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands of Dollars Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30 April 30
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 244,219 $ 233,840 $ 689,899 $ 700,881
Cost of sales 170,007 171,043 49l,042 504,680
------------ ------------ ------------ ------------
Gross margin 74,212 62,797 198,857 196,201
Operating expenses 49,880 38,634 135,616 129,968
Other income (1,074) (1,073) (4,788) (1,171)
Interest expense 1,638 1,108 5,230 3,084
------------ ------------ ------------ ------------
Earnings before income taxes 23,768 24,l28 62,799 64,320
Income taxes 6,350 8,204 18,840 21,869
------------ ------------ ------------ ------------
Net earnings $ 17,418 $ 15,924 $ 43,959 $ 42,451
============ ============ ============ ============
Weighted average shares
outstanding - basic 46,465,330 49,403,102 47,142,665 49,521,624
Weighted average shares
outstanding - diluted 47,101,705 50,491,472 47,798,038 50,615,501
Net earnings per share-basic $ 0.37 $ 0.32 $ 0.93 $ 0.86
Net earnings per share-diluted $ 0.37 $ 0.32 $ 0.92 $ 0.84
Dividends paid per share $ 0.06 $ 0.05 $ 0.17 $ 0.14
</TABLE>
2
<PAGE>
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
April 30 July 31
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and Cash Equivalents $ 20,750 $ 16,069
Accounts Receivable 172,438 161,914
Inventories
Materials 31,984 38,346
Work in Process 11,784 14,557
Finished Products 40,402 49,114
---------- ----------
Total Inventories 84,170 102,017
Prepaid and Other Current Assets 7,743 7,341
---------- ----------
TOTAL CURRENT ASSETS 285,101 287,341
Property, Plant and Equipment, at Cost 418,656 391,381
Less Accumulated Depreciation (234,723) (212,514)
---------- ----------
Property, Plant and Equipment, Net 183,933 178,867
Other Assets 36,305 33,113
---------- ----------
TOTAL ASSETS $ 505,339 $ 499,321
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Short-Term Debt $ 20,155 $ 45,491
Current Maturities of Long-Term Debt 460 405
Trade Accounts Payable 56,096 59,368
Accrued Employee Compensation & Related Taxes 25,106 26,837
Warranty and Customer Support 15,947 16,096
Other Current Liabilities 27,607 19,295
---------- ----------
TOTAL CURRENT LIABILITIES 145,371 167,492
Long-Term Debt 85,323 50,349
Deferred Income Taxes 1,544 1,604
Other Long-Term Liabilities 24,764 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 1,797 1,199
Retained Earnings 72,956 39,965
Accumulated Other Comprehensive Loss (4,463) (5,135)
Treasury Stock - 3,503,228 and 1,274,251 shares at
April 30, 1999 and July 31, 1998, respectively (70,233) (28,638)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 248,337 255,671
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 505,339 $ 499,321
========== ==========
</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>
Nine Months Ended
April 30
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 43,959 $ 42,451
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 20,739 18,175
Changes in Operating Assets and Liabilities 13,325 (19,044)
Other (3,205) (12,047)
--------- ---------
Net Cash Provided by Operating Activities 74,818 29,535
INVESTING ACTIVITIES
Net Expenditures on Property and Equipment (23,815) (43,471)
Investment in Affiliate (250) (770)
Return of Investment in Affiliate 100 1,500
Dividends From Affiliate 47 836
--------- ---------
Net Cash Used in Investing Activities (23,918) (41,905)
FINANCING ACTIVITIES
Purchase of Treasury Stock (44,538) (14,245)
Net Change in Debt 8,770 34,976
Dividends Paid (8,056) (7,194)
Payment Received from ESOP -- 2,730
Other 873 2,364
--------- ---------
Net Cash (Used In) Provided by Financing Activities (42,951) 18,631
Effect of Exchange Rate Changes on Cash (3,268) (404)
--------- ---------
Increase in Cash and Cash Equivalents 4,68l 5,857
Cash and Cash Equivalents-Beginning of Year 16,069 14,278
--------- ---------
Cash and Cash Equivalents-End of Period $ 20,750 $ 20,135
========= =========
</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 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 nine period ended April 30, 1999 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 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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30 April 30
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding-Basic 46,465,330 49,403,102 47,142,665 49,521,624
Dilutive share equivalents 636,375 1,088,370 655,373 1,093,877
----------- ----------- ----------- -----------
Weighted average shares outstanding-
Diluted 47,101,705 50,491,472 47,798,038 50,615,501
=========== =========== =========== ===========
Net earnings for basic and diluted
earnings per share computation $17,418,000 $15,924,000 $43,959,000 $42,451,000
----------- ----------- ----------- -----------
Net earnings per share - Basic $ .37 $ .32 $ .93 $ .86
=========== =========== =========== ===========
Net earnings per share - Diluted $ .37 $ .32 $ .92 $ .84
=========== =========== =========== ===========
</TABLE>
5
<PAGE>
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. 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 and accumulated other comprehensive income consist
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):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30 April 30
----------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net earnings $ 17,418 $ 15,924 $ 43,959 $ 42,451
Foreign currency translation adjustment (5,872) (2,565) 672 (8,352)
--------- --------- --------- ---------
Total other comprehensive income $ 11,546 $ 13,359 $ 44,631 $ 34,099
========= ========= ========= =========
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
The Company generated $74.8 million of cash and cash equivalents from operations
during the first nine months of fiscal 1999. Operating cash flows more than
doubled from the prior year period primarily because inventory levels have
declined this year while inventory increased last year. These cash flows, plus
borrowings from the Company's credit facility, were used primarily to support
$23.8 million in capital additions (a 45.2% decrease from the prior year),
repurchase $44.5 million of treasury stock, and the payment of $8.1 million in
dividends during the first nine months of fiscal 1999. At the end of the third
quarter, the Company had approximately 3.6 million shares of common stock
remaining under the share repurchase program authorized in November 1998.
At the end of the third quarter, the Company held $20.8 million in cash and cash
equivalents. Short-term debt totaled $20.2 million, down from $45.5 million at
July 31, 1998. Long-term debt of $85.3 million at April 30, 1999 (an increase of
$35.0 million since July 31, 1998), represented 25.6% 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 the next twelve month period.
6
<PAGE>
Results of Operations
The Company reported net earnings for the third quarter ended April 30, 1999 of
$17.4 million, up 9.4% from the $15.9 million recorded in the third quarter last
year. Total net sales for the three months ended April 30, 1999 of $244.2
million were up 4.4% from prior year sales of $233.8 million. The increase in
net earnings resulted from a strong gross margin and a reduction in the
effective income tax rate in the third quarter. Diluted net earnings per share
were 37 cents, up 15.6% from prior year diluted net earnings per share of 32
cents as the average number of shares outstanding decreased 6.7% compared to the
prior year period.
For the nine months ended April 30, 1999, net earnings were $44.0 million, up
3.6% from the $42.5 million reported for the nine months ended in the prior
year. Diluted net earnings per share were 92 cents, up 9.5% from prior year's
diluted net earnings per share of 84 cents. Total net sales for the nine months
ended April 30, 1999 of $690.0 million were down 1.6% from the prior years sales
of $701.0 million. Excluding the negative impact of foreign currency translation
of $1.2 million, sales were down 1.4% from last year. The increase in net
earnings, despite lower sales, was primarily due to cost reduction and
productivity initiatives, an increase in other income as discussed below and a
reduction in the effective income tax rate.
For the quarter, Industrial Products showed a 17.1% increase in net sales from
the same period in the prior year. This increase is led by strong growth in the
North American Gas Turbine Market. Also, sales of filter products for computer
disk drives were up 35% from the same period in the prior year. Net sales of
Engine Products showed a slight decrease of 1.4% from the same period in the
prior year. Within the Engine Products area, transportation products posted an
8.6% increase in net sales, primarily attributed to the strong end-market demand
for heavy duty trucks in North America. This was offset by a decrease in both
off-road and aftermarket net sales. Net sales of engine products continues to be
negatively impacted by weakness in the agricultural equipment markets and, to a
lesser extent, lower production of mining and large construction equipment.
The gross margins for the third quarter of fiscal 1999 were 30.4%--3.6
percentage points above the same quarter last year. The improvement in gross
margin for the quarter reflects the positive impact of cost reduction and
productivity initiatives. The nine months figures for 1999 and 1998 are 28.8%
and 28.0%, respectively.
Operating expenses during the third quarter of fiscal 1999 were $50.0 million
(20.4% of sales), compared to $38.6 million (16.5% of sales) in the same quarter
of fiscal 1998. Year-to-date operating expense as a percentage of sales have
increased from 18.5% to 19.7% from the prior year period. This increase in
operating expense was due primarily to higher warranty reserves and other
accruals.
Other income was unchanged for the three month period ending April 30, 1999
compared to the same period in the prior year. For the nine month period ending
April 30, 1999, other income has increased $3.6 million over the same period in
the prior year. These increases are due to lower charitable contributions, the
gain on sale of surplus land in Minnesota, the sale of a product line in Hong
Kong and an increase in income from the Company's joint venture activities.
7
<PAGE>
The Company lowered the effective income tax rate for the third quarter to
26.7%, to bring the year-to-date tax rate to 30% through three quarters. The tax
rate will remain at 30% for the full year. These rates compare to 32% in the
prior quarter and 34% in the prior year. The change in the effective income tax
rate to 30% is primarily due to lower taxes related to foreign sourced income.
Hard order backlogs--goods scheduled for delivery in 90 days -- of $149.0
million for the third quarter of fiscal 1999 are down 1.6% from the same period
last year but remained the same from the prior quarter end. Relative to last
year, the majority of the decline in backlog is attributable to strong third
quarter shipments of gas turbine products partially offset by an increase in
backlog in the disk drive products. Excluding the gas turbine product line, hard
order backlogs were up 3.7% from the same period in the prior year and up 4.8%
from the prior quarter end.
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 and nine month periods ending April
30, 1999. The impact of foreign exchange rates on net income was an increase of
approximately $1.5 million over the prior year nine month period.
Year 2000
The Company initiated its planning and implementation to address the Y2K problem
several years ago. The Company has surveyed and assessed all critical business
systems and processes as part of its implementation of the Y2K plan described
below and based on those activities believes that all critical systems and
processes are now Y2K ready. All non-critical systems will be Y2K ready by the
end of October 1999. Contingency plans have been outlined and will be put in
place over the remaining months before January 1, 2000. Based on our efforts to
address this problem, the Company believes it has relatively low risk of
experiencing Y2K operational problems as we enter the Year 2000. A summary of
the Company's Y2K readiness follows.
Products
Only a small percentage of our products contain microprocessors, and we have
assessed and identified all of our products as Y2K compliant.
Information Systems
Our business information systems (financial, purchasing, manufacturing,
planning, etc.) have been inventoried and assessed. The plan to achieve Y2K
readiness included the installation of new applications in some areas and the
remediation of legacy systems as appropriate. Our new applications installation
is approximately 85% complete, and will be finalized on or before October 31,
1999. Legacy system modifications are approximately 95% complete, and will be
finalized before September 30, 1999.
8
<PAGE>
Information Systems Infrastructure
We have surveyed and evaluated our infrastructure that supports all information
technology and communication systems for the Donaldson Company worldwide. All
critical computer hardware, databases, operating systems, network equipment and
communication gear have been assessed and identified as Y2K ready for all our
global facilities. All personal computers and workstations have been inventoried
and evaluated; all non-compliant hardware and software will be replaced.
Approximately 80% of the personal computer and workstation upgrade is complete,
and the balance is scheduled to be completed before October 31, 1999.
Supply Chain
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 the our suppliers are
aware of the Y2K issue and are implementing all necessary changes, mostly
scheduled for completion by mid-1999. Vendors who have not responded to our
surveys are being evaluated in more detail, and contingency plans are being
developed as appropriate. We have initiated on-site Y2K assessments of certain
key suppliers.
Other Systems
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 Y2K ready. We surveyed and
assessed our engineering systems and based on this evaluation believe these
systems are Y2K ready. We have surveyed the machine and process control
equipment in our manufacturing plants and believe that all significant
remediation work is now complete.
Management of Y2K Effort
All Y2K issues are managed through a task force led by the Chief Financial
Officer. Regular updates are provided to Donaldson senior management. The Chief
Financial Officer reports progress to the Audit Committee of the Donaldson 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 million, of which approximately 90 percent has been spent to date. 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 Y2K 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.
9
<PAGE>
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. For a more detailed explanation of the
foregoing and other risks; see exhibit 99 which has previously been 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 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.
10
<PAGE>
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
27 - Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended April
30, 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 June 14, 1999 By /s/ James R. Giertz
------------------- ---------------------------------
James R. Giertz
Senior Vice President and
Chief Financial Officer
Date June 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> 9-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> APR-30-1999
<CASH> 20,750
<SECURITIES> 0
<RECEIVABLES> 178,049
<ALLOWANCES> 5,611
<INVENTORY> 84,170
<CURRENT-ASSETS> 285,101
<PP&E> 418,656
<DEPRECIATION> 234,723
<TOTAL-ASSETS> 505,339
<CURRENT-LIABILITIES> 145,371
<BONDS> 0
0
0
<COMMON> 248,280
<OTHER-SE> 57
<TOTAL-LIABILITY-AND-EQUITY> 505,339
<SALES> 689,899
<TOTAL-REVENUES> 0
<CGS> 491,042
<TOTAL-COSTS> 135,616
<OTHER-EXPENSES> (4,788)
<LOSS-PROVISION> 1,915
<INTEREST-EXPENSE> 5,230
<INCOME-PRETAX> 62,799
<INCOME-TAX> 18,840
<INCOME-CONTINUING> 43,959
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,959
<EPS-BASIC> .93
<EPS-DILUTED> .92
</TABLE>
