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 January 31, 2000 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 - 45,875,427 shares as of February 29, 2000
- ----------------------------------------------------------------------
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 Six Months Ended
January 31 January 31
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 259,256 $ 220,249 $ 505,806 $ 445,680
Cost of sales 179,661 157,987 352,330 321,035
------------ ------------ ------------ ------------
Gross margin 79,595 62,262 153,476 124,645
Operating expenses 53,431 43,484 102,147 85,736
Other (income) expense (489) (2,353) (1,239) (3,714)
Interest expense 1,787 1,761 3,405 3,592
------------ ------------ ------------ ------------
Earnings before income taxes 24,866 19,370 49,163 39,031
Income taxes 7,460 6,198 14,749 12,490
------------ ------------ ------------ ------------
Net earnings $ 17,406 $ 13,172 $ 34,414 $ 26,541
============ ============ ============ ============
Weighted average shares
outstanding 46,035,692 47,125,314 46,061,422 47,481,330
Diluted shares outstanding 46,823,032 47,896,535 46,948,225 48,223,003
Net earnings per share $ .38 $ .28 $ .75 $ .56
Net earnings per share
assuming dilution $ .37 $ .27 $ .73 $ .55
Dividends paid per share $ .07 $ .06 $ .13 $ .11
</TABLE>
2
<PAGE>
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
January 31 July 31
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 49,447 $ 41,944
Accounts Receivable 184,588 178,419
Inventories
Materials 37,468 32,722
Work in process 15,924 13,758
Finished products 40,277 35,618
------------ ------------
Total inventories 93,669 82,098
Prepaid and other current assets 29,209 23,927
------------ ------------
TOTAL CURRENT ASSETS 356,913 326,388
Property, plant and equipment, at cost 457,773 421,425
Less accumulated depreciation (263,810) (239,245)
------------ ------------
Property, plant and equipment, net 193,963 182,180
Other Assets 60,443 34,701
------------ ------------
TOTAL ASSETS 611,319 $ 543,269
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 45,781 $ 20,287
Current maturities of long-term debt 364 409
Trade accounts payable 66,248 63,36l
Accrued employee compensation & related taxes 23,881 24,720
Income taxes payable 26,570 28,448
Warranty and accrued liabilities 26,468 22,680
Other current liabilities 11,631 6,150
------------ ------------
TOTAL CURRENT LIABILITIES 200,943 166,055
Long-term debt 92,654 86,691
Deferred income taxes 751 1,155
Other long-term liabilities 28,828 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 3,659 1,611
Retained earnings 114,574 87,909
Accumulated other comprehensive income (5,743) (5,670)
Treasury stock - 3,623,825 and 3,458,670 shares at
January 31, 2000 and July 31, 1999, respectively (72,627) (69,367)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 288,143 262,763
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 611,319 $ 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>
SIX MONTHS ENDED
JANUARY 31
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 34,414 $ 26,541
Adjustments to reconcile net earnings to
Net cash provided by operating activities:
Depreciation and amortization 15,318 14,045
Changes in operating assets and liabilities 159 10,811
Other (837) (1,785)
---------- ----------
Net Cash Provided by Operating Activities 49,054 49,612
INVESTING ACTIVITIES
Net expenditures on property and equipment (20,112) (17,070)
Acquisitions and investments in unconsolidated affiliates (30,099) (153)
---------- ----------
Net Cash Used in Investing Activities (50,211) (17,223)
FINANCING ACTIVITIES
Purchase of treasury stock (4,186) (33,586)
Change in long-term debt 421 24,769
Change in short-term debt 26,438 (13,490)
Dividends paid (5,988) (5,250)
Other (260) 1,154
---------- ----------
Net Cash Provided by (Used in) Financing Activities 16,425 (26,403)
Effect of exchange rate changes on cash (7,765) (2,237)
---------- ----------
Increase in cash and cash equivalents 7,503 3,749
Cash and Cash Equivalents-Beginning of Year 41,944 16,069
---------- ----------
Cash and Cash Equivalents-End of Period $ 49,447 $ 19,818
========== ==========
</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
accounting principles generally accepted in the United States 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 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 six month period ended January 31, 2000
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 dilutive shares
relating to stock options.
The following table presents information necessary to calculate basic and
diluted net earnings per common share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31 January 31
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding - Basic 46,035,692 47,125,314 46,061,422 47,481,330
Dilutive share equivalents 787,340 771,221 886,803 741,673
----------- ----------- ----------- -----------
Weighted average shares outstanding - Diluted 46,823,032 47,896,535 46,948,225 48,223,003
=========== =========== =========== ===========
Net earnings for basic and diluted
earnings per share computation $17,406,000 $13,172,000 $34,414,000 $26,541,000
----------- ----------- ----------- -----------
Net earnings per share - Basic $ .38 $ .28 $ .75 $ .56
=========== =========== =========== ===========
Net earnings per share - Diluted $ .37 $ .27 $ .73 $ .55
=========== =========== =========== ===========
</TABLE>
5
<PAGE>
Note C - Comprehensive Income
The Company reports Accumulated Other Comprehensive Income as a separate item in
the shareholders' equity section of the balance sheet. Other comprehensive
income consists solely of foreign currency translation adjustments. Total
comprehensive income and its components are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31 January 31
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings $ 17,406 $ 13,172 $ 34,414 $ 26,541
Foreign currency translation adjustment (3,388) 4,013 (73) 6,544
-------- -------- -------- --------
Total other comprehensive income $ 14,018 $ 17,185 $ 34,341 $ 33,085
======== ======== ======== ========
</TABLE>
Note D - Segment Reporting
The Company has two reportable segments, Engine Products and Industrial
Products, that have been identified based on the internal organization
structure, management of operations and performance evaluation. Segment detail
is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Engine Industrial Corporate & Total
Products Products Unallocated Company
-------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Three Months Ended
January 31, 2000:
Net sales $ 160,212 $ 99,044 $ 259,256
Earnings before income taxes 14,357 15,952 $ (5,443) 24,866
January 31, 1999:
Net sales 141,860 78,389 220,249
Earnings before income taxes 13,044 8,464 (2,138) 19,370
Six Months Ended
January 31, 2000:
Net sales 321,378 184,428 505,806
Earnings before income taxes 33,375 27,700 (11,912) 49,163
January 31, 1999:
Net sales 292,484 153,196 445,680
Earnings before income taxes $ 29,499 $ 13,316 $ (3,784) $ 39,031
</TABLE>
6
<PAGE>
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, although it is not expected to have a material impact
on the Company's financial position or results of operations.
Note F - Subsequent Event
Subsequent to the second quarter, the Company completed the acquisition of the
DCE dust control business of Invensys plc, for cash consideration of
approximately $54 million. DCE, headquartered in Leicester, England (UK) is a
major participant in the global industrial dust collection industry. The
acquisition strengthens the Company's presence in the industrial dust collection
market complementing the capability of the Company's Torit business unit. DCE
operations will be a part of the Company's Industrial Products segment and will
be accounted for as a purchase. The Company previously filed a report on Form
8-K on December 14, 1999 describing the acquisition.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
The Company generated $49.1 million of cash and cash equivalents from operations
during the first six months of fiscal 2000. Operating cash flows decreased
slightly from the prior year period primarily due to an increase in inventory
levels compared to a decrease for the same period in the prior year. This
decrease in cash flows was offset by an increase in accounts payable and other
accruals compared to a decrease the prior year. These cash flows, plus
borrowings from the Company's credit facility, were used primarily to support
$20.1 million in capital additions (a 17.9% increase from prior year), complete
business acquisitions totaling $30.1 million, repurchase $4.2 million of
treasury stock, and for the payment of $6.0 million in dividends during the
first six months of fiscal 2000. At the end of the second quarter, the Company
had remaining authority to purchase approximately 3.4 million shares of common
stock under the share repurchase program authorized in November 1998.
7
<PAGE>
At the end of the second quarter, the Company held $49.4 million in cash and
cash equivalents. Short-term debt totaled $45.8 million, up from $20.3 million
at July 31, 1999. Long-term debt of $92.7 million at January 31, 2000 (an
increase of $6.0 million since July 31, 1999), represented 24.3% of total
long-term capital, down slightly from 24.8% at July 31, 1999.
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.
On November 1, 1999 the Company completed the purchase of all of the outstanding
shares of AirMaze Corporation, 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 and expands its
presence in the industrial compressor market. AirMaze is headquartered in Stow,
Ohio and has manufacturing facilities in Stow, OH, Greeneville, TN, and
Carpinteria, CA. AirMaze operations are a part of the Company's Engine
Products segment. The results of operations of AirMaze were not material in
relation to the Company's consolidated results of operations for the quarter
ended January 31, 2000.
Results of Operations
The Company reported net earnings for the second quarter ended January 31, 2000
of $17.4 million, up 32.1% from the $13.2 million recorded in the second quarter
last year. Total net sales for the three months ended January 31, 2000 of $259.3
million were up 17.7% from prior year sales of $220.2 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 37 cents, up 37.0% from prior year diluted net earnings
per share of 27 cents as the average number of shares outstanding decreased 2.2%
compared to the prior year period.
For the six months ended January 31, 2000, net earnings were $34.4 million, up
29.7% from the $26.5 million recorded in the same period in the prior year.
Total net sales for the six months ended January 31, 2000 of $505.8 million were
up 13.5% from prior year sales of 445.7 million. Diluted net earnings per share
were 73 cents, up 32.7% from the prior year's diluted net earnings per share of
55 cents.
For the second quarter, growth in net sales continued in both the Engine
Products and Industrial Products segment. The Engine Products segment showed a
12.9% increase in net sales from the same period in the prior year. All products
within the Engine Products segment contributed to such sales growth. This
increase was led by strong sales in aftermarket products which increased by
17.4%. Excluding the impact of the AirMaze acquisition, aftermarket product
sales were up almost 10%. Off road and transportation products showed increased
sales of 10.5% and 7.5%, respectively. The Industrial Products segment showed a
26.3% increase in net sales from the same period in the prior year. Within the
Industrial Products segment, the gas turbine products
8
<PAGE>
showed strong net sales growth with sales almost doubling from the same period
in the prior year resulting largely from strong customer demand in North
America. Sales in high purity products posted a 22.2% increase from the same
period in the prior year primarily reflecting a strong disk drive market.
Consolidated gross margin for the second quarter of fiscal 2000 was 30.7%, which
was 2.4% above the same quarter last year. The higher gross margin for the
quarter reflects the growth in net sales achieved in both operating segments of
the Company as well as benefit from higher capacity utilization and continued
efforts of cost reduction and productivity improvement efforts. Gross margin for
the six months ended January 31, 2000 and January 31, 1999 was 30.3% and 28.0%,
respectively.
Operating expenses during the second quarter of fiscal 2000 were $53.4 million
(20.6% of sales), compared to $43.5 million (19.7% of sales) in the same quarter
of fiscal 1999. This increase was due primarily to increased sales activity and
increases in warranty reserves and other accruals.
Other income for the current three month period ended has decreased $1.9 million
compared to the same period in the prior year. Other income for the current
three month period consisted of interest income of $0.5 million, income from
unconsolidated affiliates of $1.1 million, offset by charitable contributions of
$0.7 million and other expense of $0.4 million. For the year, other income
decreased $2.5 million compared to the same period in the prior year.
The effective income tax rate of 30% is consistent with the 1999 fiscal year
rate.
Hard order backlogs -- goods scheduled for delivery in 90 days -- of $165.2
million for the first quarter of fiscal 2000 are up 10.8% from the same period
in the prior year and down 3.0% from the prior quarter end. The increase in
backlog from the prior year indicates that the revenue pace remains strong. The
slight decrease in backlog from the prior quarter is attributable to the
Industrial Products segment as strong shipments in the prior quarter reduced
historically high levels of backlog.
The US dollar has had a mixed impact for the quarter and year to date relative
to the currencies of foreign countries where the Company operates. The weakening
of the dollar, in Japan, has had positive effects on net income while the
strengthening of the dollar in Europe contributed negatively for the both the
second quarter and year to date. The impact of foreign exchange translation on
net sales was a negative $2.8 million for the three months ended January 31,
2000 and a negative $0.5 million for the six months ended January 31, 2000.
Year 2000
Nothing has come to the Company's attention that would cause it to believe that
its Year 2000 compliance effort was not successful. To date, no significant Year
2000 issues have been encountered and the Company does not expect further Year
2000 issues to arise.
9
<PAGE>
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, 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 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
The Company does not enter into market risk-sensitive instruments for
trading purposes to generate revenues. 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.
10
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security holders
(a) The Annual meeting of shareholders of Registrant was held on
November 19, 1999. A total of 46,032,230 shares were
outstanding and entitled to vote at the meeting.
(b) Not Applicable.
(c) Matters Submitted and Voting Results:
(i) Election of Directors:
Name of Nominee Vote Tabulation
For Withheld
--- --------
F. Guillaume Bastiaens 40,989,619 223,108
Janet M. Dolan 40,943,670 269,057
S. Walter Richey 40,997,959 214,768
(ii) Ratified selection of Ernst & Young LLP as
Registrant's independent public auditors for the
fiscal year ending July 31, 2000 with the following
vote: For - 40,919,971; Against - 167,750; Abstaining
- 125,006.
(d) Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index.
None
(b) Reports on Form 8-K.
A report on Form 8-K was filed on December 14, 1999 for the
acquisition of the DCE dust control business of Invensys, plc.
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 March 16, 2000 By /s/ James R. Giertz
---------------------- -------------------------------
James R. Giertz
Senior Vice President and
Chief Financial Officer
Date March 16, 2000 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> 6-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> JAN-31-1999
<CASH> 49,447
<SECURITIES> 0
<RECEIVABLES> 189,006
<ALLOWANCES> 4,418
<INVENTORY> 93,669
<CURRENT-ASSETS> 356,913
<PP&E> 457,773
<DEPRECIATION> 263,810
<TOTAL-ASSETS> 611,319
<CURRENT-LIABILITIES> 200,943
<BONDS> 0
0
0
<COMMON> 248,280
<OTHER-SE> 39,863
<TOTAL-LIABILITY-AND-EQUITY> 611,319
<SALES> 505,806
<TOTAL-REVENUES> 0
<CGS> 352,330
<TOTAL-COSTS> 102,147
<OTHER-EXPENSES> (1,239)
<LOSS-PROVISION> 52
<INTEREST-EXPENSE> 3,405
<INCOME-PRETAX> 49,163
<INCOME-TAX> 14,749
<INCOME-CONTINUING> 34,414
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,414
<EPS-BASIC> .75
<EPS-DILUTED> .73
</TABLE>
