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, 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
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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 (952) 887-3131
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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 - 44,265,791 shares as of November 30, 2000
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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)
October 31
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2000 1999
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Net sales $ 289,869 $ 246,550
Cost of sales 203,913 172,669
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Gross margin 85,956 73,881
Operating expenses 58,047 48,716
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Operating income 27,909 25,165
Other (income) expense 805 (750)
Interest expense 3,098 1,618
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Earnings before income taxes 24,006 24,297
Income taxes 7,202 7,289
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Net earnings $ 16,804 $ 17,008
============ ============
Weighted average shares
Outstanding 44,560,523 46,087,151
Diluted shares outstanding 45,456,932 46,955,529
Net earnings per share $ .38 $ .37
Net earnings per share
assuming dilution $ .37 $ .36
Dividends paid per share $ .07 $ .06
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
October 31 July 31
2000 2000
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<S> <C> <C>
ASSETS
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CURRENT ASSETS
Cash and cash equivalents $ 27,061 $ 24,149
Accounts Receivable 208,332 202,361
Inventories
Materials 44,755 45,064
Work in process 20,009 20,171
Finished products 53,634 54,128
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Total inventories 118,398 119,363
Prepaid and other current assets 35,531 29,606
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TOTAL CURRENT ASSETS 389,322 375,479
Property, plant and equipment, at cost 469,894 469,701
Less accumulated depreciation (270,430) (265,156)
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Property, plant and equipment, net 199,464 204,545
Other assets 87,361 89,633
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TOTAL ASSETS $ 676,147 $ 669,657
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LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES
Short-term debt $ 103,590 $ 85,034
Current maturities of long-term debt 207 279
Trade accounts payable 81,342 82,320
Accrued employee compensation and related taxes 27,037 29,759
Income taxes payable 2,813 58
Warranty and accrued liabilities 19,718 27,974
Other current liabilities 8,862 10,298
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TOTAL CURRENT LIABILITIES 243,569 235,722
Long-term debt 92,686 92,645
Other long-term liabilities 67,462 61,125
SHAREHOLDERS' EQUITY
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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 1,371 2,018
Retained earnings 156,847 143,125
Accumulated other comprehensive income (23,440) (10,523)
Treasury stock - 5,376,572 and 4,998,342 shares at
October 31, 2000 and July 31, 2000, respectively (110,628) (102,735)
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TOTAL SHAREHOLDERS' EQUITY 272,430 280,165
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 676,147 $ 669,657
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
October 31
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2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 16,804 $ 17,008
Adjustments to reconcile net earnings to
Net cash provided by operating activities:
Depreciation and amortization 10,012 7,524
Changes in operating assets and liabilities (25,932) 3,457
Other 1,789 (281)
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Net Cash Provided by Operating Activities 2,673 27,708
INVESTING ACTIVITIES
Net expenditures on property and equipment (6,387) (11,243)
Acquisitions and investments in unconsolidated affiliates
net of cash acquired 0 10
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Net Cash Used in Investing Activities (6,387) (11,233)
FINANCING ACTIVITIES
Purchase of treasury stock (8,891) (3,339)
Increase in long-term debt 9 4,931
Decrease in long-term debt 0 (255)
Change in short-term debt 19,616 (1,495)
Dividends paid (3,126) (2,766)
Other 396 (88)
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Net Cash Provided by (Used in) Financing Activities 8,004 (3,012)
Effect of exchange rate changes on cash (1,378) 1,009
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Increase in cash and cash equivalents 2,912 14,472
Cash and Cash Equivalents-Beginning of Year 24,149 41,944
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Cash and Cash Equivalents-End of Period $ 27,061 $ 56,416
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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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 three month period ended October 31,
2000 are not necessarily indicative of the results that may be expected for the
year ending July 31, 2001. 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, 2000.
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:
Three Months Ended
October 31
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2000 1999
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Weighted average shares outstanding - Basic 44,560,523 46,087,151
Dilutive share equivalents 896,409 868,378
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Weighted average shares outstanding - Diluted 45,456,932 46,955,529
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Net earnings for basic and diluted
earnings per share computation $16,804,000 $17,008,000
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Net earnings per share - Basic $ .38 $ .37
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Net earnings per share - Diluted $ .37 $ .36
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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 of foreign currency translation adjustments and net gains or
losses on cash flow hedging derivatives.
Total comprehensive income and its components are as follows (in thousands):
Three Months Ended
October 30
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2000 1999
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Net earnings $ 16,804 $ 17,008
Foreign currency translation adjustment (13,666) 3,315
Net gain on cash flow hedging derivatives 749 0
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Total other comprehensive income $ 3,887 $ 20,323
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Total accumulated other comprehensive income and its components are as follows
(in thousands):
October 31 July 31
2000 2000
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Foreign currency translation adjustment $(24,189) $(10,523)
Net gain on cash flow hedging derivatives 749 0
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Total accumulated other comprehensive income $(23,440) $(10,523)
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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):
Engine Industrial Corporate & Total
Products Products Unallocated Company
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Three Months Ended
October 31, 2000:
Net sales $167,136 $122,733 $289,869
Earnings before income taxes 15,163 12,999 $ (4,156) 24,006
October 31, 1999:
Net sales 161,166 85,384 246,550
Earnings before income taxes $ 19,018 $ 11,748 $ (6,469) $ 24,297
Note E - New Accounting Standards
The Company adopted Statement of Financial Accounting Standard (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities" as amended by
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB
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Statement No. 133 in the first quarter of fiscal 2001. SFAS 133 and SFAS 138
require 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 designated as 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 is immediately recognized in earnings. As a
result of the implementation of SFAS 133 and SFAS 138, the Company has recorded
an asset and other comprehensive income of $0.7 million. There has been no
impact on the earnings of the Company for the first quarter ended fiscal 2001.
Note F - Acquisitions
During the second quarter of fiscal 2000, the Company completed the purchase of
all of the outstanding shares of AirMaze Corporation for $31.9 million in cash.
AirMaze is a privately held supplier of heavy-duty air and liquid filters,
air/oil separators and high purity air filter products. AirMaze has
manufacturing facilities in Stow, Ohio and Greenville, Tennessee. The excess of
purchase price over the fair values of the net assets acquired was $27.2 million
and has been recorded as goodwill which is being amortized on a straight-line
basis over 20 years. AirMaze operations are a part of the Company's Engine
Products segment. The purchase price allocation is final as of the first quarter
of fiscal 2001. As of the first quarter of fiscal 2001, the balance of
restructuring reserves recorded as goodwill is $1.2 million.
During the third quarter of fiscal 2000, the Company acquired the DCE dust
control business of Invensys, plc for $56.4 million. DCE, headquartered in
Leicester, England (UK) with smaller facilities in Germany and the United States
and assembly operations in South Africa, Australia and Japan, is a major
participant in the global dust collection industry. The excess of purchase price
over the fair values of the net assets acquired was $31.5 million and has been
recorded as goodwill which is being amortized on a straight-line basis over 20
years. DCE operations are a part of the Company's Industrial Products segment.
As of the first quarter of fiscal 2001, the purchase price allocation period
remains open and the purchase price allocation is not final. As of the first
quarter of fiscal 2001, the balance of restructuring reserves recorded as
goodwill is $5.2 million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
The Company generated $2.7 million of cash and cash equivalents from operations
during the first three months of fiscal 2001. Operating cash flows decreased
from the prior year period primarily due to an increase in accounts receivable
compared to a decrease for the same period in the prior year in addition to an
increase in prepaid and other assets and a decrease in payables and other
accruals. These cash flows, plus borrowings from the Company's credit facility,
were used primarily to support $6.4 million in capital additions, repurchase
$8.9 million of treasury stock and for the payment of $3.1 million in dividends
during the first three months of fiscal 2001. At the end of the first quarter,
the Company had remaining authority to purchase approximately 1.6
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million shares of common stock under the share repurchase program authorized in
November 1998.
At the end of the first quarter, the Company held $27.1 million in cash and cash
equivalents. Short-term debt totaled $103.6 million, up from $85.0 million at
July 31, 2000. Long-term debt of $92.7 million at October 31, 2000 (up slightly
from July 31, 2000), represented 25.4 percent of total long-term capital, up
slightly from 24.9 percent at July 31, 2000.
The Company believes that the combination of present capital resources,
internally generated funds, and unused financing sources are adequate to meet
cash requirements for the next twelve month period.
Results of Operations
The Company is a leading worldwide manufacturer of filtration systems and
replacement parts. The Company's product mix includes air and liquid filters and
exhaust and emission control products for mobile equipment; in-plant air
cleaning systems; air intake systems and exhaust products for industrial gas
turbines; and specialized filters for such diverse applications as computer disk
drives, aircraft passenger cabins and semiconductor processing. Products are
manufactured at more than three dozen plants around the world and through five
joint ventures. The Company has two reporting segments engaged in the design,
manufacture and sale of systems to filter air and liquid and other complementary
products. The two segments are Engine Products and Industrial Products. Products
in the Engine Products segment consist of air intake systems, exhaust systems,
liquid filtration systems and replacement parts. The Engine Products segment
sells to original equipment manufacturers (OEMs) in the construction,
industrial, mining, agriculture and transportation markets and to independent
distributors, OEM dealer networks, private label accounts and large private
fleets. Products in the Industrial Products segment consist of dust, fume and
mist collectors, static and pulse-clean air filter systems for industrial gas
turbines, computer disk drive filter products and other specialized air
filtration systems. The Industrial Products segment sells to various industrial
end-users, OEMs of gas-fired turbines, OEMs and end users requiring highly
purified air.
The Company reported net earnings for the first quarter ended October 31, 2000
of $16.8 million, down slightly from the $17.0 million recorded in the first
quarter of the prior year. Total net sales for the three months ended October
31, 2000 of $289.9 million were up 17.6 percent from prior year sales of $246.6
million. Businesses acquired in the prior fiscal year contributed $23.4 million
of revenue in the first quarter of fiscal 2000. Excluding the impact of
businesses acquired in the prior year, sales were up 8.1 percent from the
comparable quarter last year. Relative to the prior year, the positive impact of
higher revenue was offset by higher non-operating expenses. Diluted net earnings
per share were 37 cents, up 2.8 percent from prior year diluted net earnings per
share of 36 cents as the average number of shares outstanding decreased 3.2
percent compared to the prior year period.
For the first quarter, net sales in the Industrial Products segment of $122.7
million showed a 43.7 percent increase from $85.4 million in the prior year.
Excluding the acquisition of DCE, sales
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were $106.4, up 24.7 percent from the same period in prior year. Within the
Industrial Products segment, gas turbine products continued to show strong net
sales growth in all major geographic regions with sales up 64.2 percent from the
same period in the prior year. Sales of dust collection products increased 57.3
percent from that same period in the prior year and excluding the acquisition of
DCE, increased 14.4 percent. Geographically, sales in dust collection products
were strong in all regions with especially strong growth in North America and
Asia Pacific. Sales in special application products posted an 8.0 percent
increase from the same period in the prior year primarily due to continued
strength in the disk drive market including new disk drive releases in Asia,
strong lithography markets in the United States and Europe and an increase in
expanded PTFE membrane demand overseas.
For the first quarter, net sales in the Engine Products segment of $167.1
million increased 3.7 percent from $161.2 million in the prior year. Excluding
the acquisition of AirMaze, sales were flat. The modest increase was led by
continued strong sales in aftermarket products which increased by 20.8 percent
from the first quarter in the prior year. Sales in off-road products also
contributed to the modest sales growth in the Engine Products segment with an
increase of 9.4 percent from the first quarter in the prior year. These
increases were offset by a sharp decrease in net sales of transportation
products of 46.1 percent from the first quarter in the prior year and is
attributed to a dramatic contraction in the U.S. heavy truck build rate.
Consolidated gross margin for the first quarter of fiscal 2001 was 29.7 percent,
down slightly from 30.0 percent in the same quarter of the prior year. Margins
improved slightly due to the recent acquisitions, but were offset by several
factors including costs associated with plant and product rationalizations and
integration of acquisitions.
Operating expenses during the first quarter of fiscal 2001 were $58.0 million
(20.0 percent of sales), compared to $48.7 million (19.8 percent of sales) in
the same quarter of fiscal 2000. This increase is primarily a result of the
impact from businesses acquired in the prior year. Additionally, about $0.7
million of goodwill related to the acquisition of DCE and AirMaze was recorded
in the first quarter of fiscal 2001.
Other expense for the first quarter of $3.9 million increased $3.0 million
compared to the same period in the prior year. Other expense for the current
three month period consisted of interest expense of $3.1 million offset by
interest income of $0.3 million, income from unconsolidated affiliates of $0.4
million and other expense of $1.5 million.
The income tax rate of 30 percent was unchanged from fiscal 2000.
Hard order backlogs - goods scheduled for delivery in 90 days - of $183.3
million for the first quarter of fiscal 2001 were up 7.6 percent from the same
period in the prior year and flat from the prior quarter end. The increase in
backlog from the prior year was led by an increase in gas turbine products
within the Industrial Products segment but offset by a decrease in
transportation products within the Engine Products segment.
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The impact of foreign currency translation resulted in a decrease in net sales
of $8.3 million and a decrease in net earnings of $0.3 million. This was mainly
due to the continued weakness of the Euro against the U.S. dollar.
Outlook
Overall, the Company expects that activity in the Industrial Products segment
will remain strong, especially in gas turbine and special application products.
Within the Engine Products segment, Donaldson anticipates continued growth in
aftermarket product sales, but expects continued weakness in transportation
products. Globally, the Company expects revenue to remain strong in local
currencies, partially offset by the stronger dollar, and anticipates the effects
of the Euro to be minimal.
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. This Form 10-Q,
earnings releases or other press releases, the Company's Annual Report to
Shareholders, any Form 10-K, 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," "plan," "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 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: risks
associated with currency fluctuations, commodity prices, world economic factors,
political factors, international operations, highly competitive markets, changes
in product demand and changes in the geographic and product mix of sales,
acquisition opportunities and integration of recent acquisitions, facility and
product line rationalization, research and development expenditures, including
ongoing information technology improvements, and governmental laws and
regulations, including diesel emissions controls. For a more detailed
explanation of the foregoing and other risks, see Exhibit 99, 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.
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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.
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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, 2000.
See further discussion of these market risks in the Donaldson Company,
Inc. Annual Report on Form 10-K for the year ended July 31, 2000.
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.
The Company filed Form 8-K on October 19, 2000, including an
item 9 Regulation FD Disclosure regarding the public
availability of its annual report for the fiscal year ending
July 31, 2000. The Company's press release dated October 19,
2000 was filed as exhibit 99.1 of the Form 8-K.
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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.
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(Registrant)
Date December 15, 2000 By /s/ Thomas W. VanHimbergen
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Thomas W. VanHimbergen
Senior Vice President and
Chief Financial Officer
Date December 15, 2000 By /s/ Thomas A. Windfeldt
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Thomas A. Windfeldt
Vice President,
Treasurer and Controller
13
