-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Obkm+elxAlvsbg641nJiiRhQLAIPqougHce136klmjfXsGREcFpUUoqsv5Phhg32 E87TyrAP5AgZudWcrmOriw== 0000897101-98-001227.txt : 19981216 0000897101-98-001227.hdr.sgml : 19981216 ACCESSION NUMBER: 0000897101-98-001227 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DONALDSON CO INC CENTRAL INDEX KEY: 0000029644 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL & COMMERCIAL FANS & BLOWERS & AIR PURIFYING EQUIP [3564] IRS NUMBER: 410222640 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07891 FILM NUMBER: 98769693 BUSINESS ADDRESS: STREET 1: 1400 W. 94TH ST. CITY: MINNEAPOLIS STATE: MN ZIP: 55431 BUSINESS PHONE: 6128873131 MAIL ADDRESS: STREET 1: 1400 W 94TH STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55431 10-Q 1 QUARTERLY REPORT 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________. Commission File Number 1-7891 DONALDSON COMPANY, INC. ----------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 41-0222640 ----------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1400 West 94th Street Minneapolis, Minnesota 55431 ---------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (612) 887-3131 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $5 Par Value -- 47,434,729 shares as of November 30, 1999 - ----------------------------------------------------------------------- 1 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)
Three Months Ended October 31 ----------------------------- 1998 1997 ------------ ------------ Net Sales $ 225,431 $ 234,067 Cost of Sales 163,102 165,677 ------------ ------------ Gross Margin 62,329 68,390 Operating Expenses 41,798 46,368 Other Income (961) (202) Interest Expense 1,831 985 ------------ ------------ Earnings Before Income Taxes 19,661 21,239 Income Taxes 6,292 7,221 ------------ ------------ Net Earnings $ 13,369 $ 14,018 ============ ============ Weighted Average Shares Outstanding Basic 47,837,351 49,463,814 Diluted 48,498,541 50,583,246 Net Earnings Per Share-Basic $ .28 $ .28 Net Earnings Per Share-Diluted $ .28 $ .27 Dividends Paid Per Share $ .05 $ .05
See Notes to Condensed Consolidated Financial Statements. 2 CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars) (Unaudited)
October 31 July 31 1998 998 ---------- ---------- ASSETS - ------ CURRENT ASSETS Cash and Cash Equivalents $ 20,308 $ 16,069 Accounts Receivable 166,689 161,914 Inventories Materials 37,369 38,346 Work in Process 13,767 14,557 Finished Products 47,203 49,114 --------- --------- Total Inventories 98,339 102,017 Prepaids and Other Current Assets 8,707 7,341 TOTAL CURRENT ASSETS 294,043 287,341 Property, Plant and Equipment, at Cost 403,841 391,381 Less Accumulated Depreciation (220,469) (212,514) --------- --------- Property, Plant and Equipment, Net 183,372 178,867 Other Assets 34,768 33,113 --------- --------- TOTAL ASSETS $ 512,183 $ 499,321 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES Short-Term Debt $ 33,170 $ 45,491 Current Maturities of Long-Term Debt 476 405 Trade Accounts Payable 59,063 59,368 Accrued Employee Compensation & Related Taxes 24,107 26,837 Warranty and Customer Support 15,988 16,096 Other Current Liabilities 25,462 19,295 -------- --------- TOTAL CURRENT LIABILITIES 158,266 167,492 Long-Term Debt 75,399 50,349 Deferred Income Taxes 1,722 1,604 Other Long-Term Liabilities 23,879 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 929 1,199 Retained Earnings 50,609 39,965 Accumulated Other Comprehensive Income (2,604) (5,135) Treasury Stock - 2,144,546 and 1,274,251 shares at October 31, 1998 and July 31, 1998, respectively (44,297) (28,638) --------- --------- TOTAL SHAREHOLDERS' EQUITY 252,917 255,671 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 512,183 $ 499,321 ========= =========
See Notes to Condensed Consolidated Financial Statements. 3 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars) (Unaudited)
Three Months Ended October 31 1998 1997 -------- -------- OPERATING ACTIVITIES Net Earnings $ 13,369 $ 14,018 Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: Depreciation and Amortization 6,498 5,965 Changes in Operating Assets and Liabilities 7,727 7,120 Other (2,016) (874) -------- -------- Net Cash Provided by Operating Activities 25,578 26,229 INVESTING ACTIVITIES Net Expenditures on Property and Equipment (9,017) (13,309) Business Acquisitions, Net of Cash Acquired (150) -- Return of Investment in Affiliate -- 1,500 -------- -------- Net Cash Used in Investing Activities (9,167) (11,809) FINANCING ACTIVITIES Purchase of Treasury Stock (17,028) (939) Net Change in Debt 11,313 3,567 Dividends Paid (2,406) (2,226) Payment Received from ESOP -- 2,730 Other 1,126 (269) -------- -------- Net Cash (Used In) Provided by Financing Activities (6,995) 2,863 Effect of Exchange Rate Changes on Cash (5,177) (5,304) -------- -------- Increase in Cash and Cash Equivalents 4,239 11,979 Cash and Cash Equivalents-Beginning of Year 16,069 14,278 -------- -------- Cash and Cash Equivalents-End of Period $ 20,308 $ 26,257 ======== ========
See Notes to Condensed Consolidated Financial Statements. 4 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 for interim financial information 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, 1998 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 Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share," which was adopted by the Company in the second quarter of fiscal 1998. 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: Three Months Ended October 31 -------------------------- 1998 1997 ----------- ----------- Weighted average shares outstanding-Basic 47,837,351 49,463,814 Dilutive share equivalents 661,190 1,119,432 Weighted average shares-Diluted 48,498,541 50,583,246 =========== =========== Net earnings for basic and diluted earnings per share computation $13,369,000 $14,018,000 ----------- ----------- Net earnings per share-Basic $ .28 $ .28 =========== =========== Net earnings per share-Diluted $ .28 $ .27 =========== =========== 5 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. Upon adoption of SFAS No. 130, the Company is reporting 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. 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): Three Months Ended October 31 -------------------- 1998 1997 -------- -------- Net earnings $ 13,369 $ 14,018 Foreign currency translation adjustment 2,531 (2,787) Total other comprehensive income $ 15,900 $ 11,231 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. A. Financial Condition The Company generated $25.6 million of cash and cash equivalents from operations during the first three months of fiscal 1999. Operating cash flows decreased 2.5% from the prior year. These cash flows plus borrowings from the Company's credit facility were used primarily to support $9.0 million in capital additions, repurchase $17.0 million of treasury stock, and pay $2.4 million in dividends during the first three months of fiscal 1999. At the end of the first quarter, the Company held $20.3 million in cash and cash equivalents. Short-term debt totaled $33.2 million, down from $45.5 million at July 31, 1998. Long-term debt of $75.4 million at October 31, 1998, represented 23.0% 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 1999. B. Results of Operations The Company reported net earnings for the first quarter ended October 31, 1998 of $13.4 million, down 4.6% from the $14.0 million recorded in the first quarter last year. Diluted net earnings per share were 28 cents, up 3.7% from prior-year diluted net earnings per share of 27 cents as the average number of shares outstanding decreased 4.1% compared to the prior year period. The decrease in net earnings was primarily due to lower sales. Total net sales of $225.4 million were down 3.7% from prior year sales of $234.1 million. Excluding the negative impact of foreign currency translation of $4.1 million, sales were down 1.9% from last year. 6 Although market conditions remain soft in some key business areas others continued strong growth. Areas of strong growth include: European operations (excluding the gas turbine business), which were up 15 percent in local currency terms relative to last year; the gas turbine business worldwide, which continues to benefit from strong demand in North America with sales up 9 percent relative to the same period last year; and the heavy duty truck market in North America, which continues to operate at maximum capacity. Areas of weakness include: Japanese operations, which posted revenue declines of about 10 percent from last year in local currency, in line with our expectations; and the agriculture sector in North America- representing less than 5 percent of our total annual revenue- which was weak due to production cut-backs by our major OEM customers. While engine product sales decreased 6.0% from the same period last year industrial products improved slightly posting a 1.3% increase from the same period last year. Overall, revenue growth has slowed and we expect modest or no growth for fiscal 1999. The gross margins for the first quarter of fiscal 1999 were 27.6%--about one and a half percentage points below the same quarter last year, but unchanged relative to the second half of last fiscal year. The lower margins relative to last year reflect a variety of negative developments, primarily in engine products, including: unfavorable sales mix, higher product cost not recovered with price increases, and general price pressure. Operating expenses during the first quarter of fiscal 1999 were $41.8 million, 18.5% of sales, compared to $46.4 million, 19.8% of sales in the same quarter of fiscal 1998. This reduction in operating expense was due primarily to lower levels of warranty expense and lower salary compensation expense. The effective income tax rate of 32% for the period ending October 31, 1998 was lower compared to 34% for the same period last year due to lower overseas tax rates. Hard order backlogs--goods scheduled for delivery in 90 days -- of $145.4 million for the first quarter of fiscal 1999 are down 6.4% from the same period last year and up 4.8% from the prior quarter end. Relative to last year, the majority of the decline in backlog is attributed to the automotive, defense and heavy duty truck market segments in North America. Excluding the impact of discontinued product lines and other special factors in these three businesses, backlogs are essentially unchanged from prior year. The US dollar continues to be strong relative to the currencies of foreign countries where the Company operates. The strong dollar continues to have a negative impact on overseas results because foreign exchange denominated sales and earnings translate into less U.S. dollars. The impact of foreign exchange translation on net sales was a negative $4.1 million for the three months ended October 31, 1998. The impact of foreign exchange translation on net sales was a negative $6.3 million for the three months ended October 31, 1997. Year 2000 and Euro Currency Issues The Company has developed plans to address the potential for business interruption related to the impact of Year 2000 on computer systems. Financial, information and operating systems (including any equipment with embedded microprocessors) have been surveyed and assessed. In 7 most cases, identified problems have already been rectified or detailed plans are in place to modify impacted systems prior to the end of 1998. In some cases identified problems will be addressed with repair projects to be completed in 1999. Progress against these plans is monitored and reported to senior management and to the Audit Committee of the Board of Directors on a regular basis. Implementation of required changes to, and testing of, critical business systems is expected to be complete by the end of 1998. Changes to all other systems are expected to be complete by July 1999. Testing of non-critical systems will be performed on a spot basis; more extensive testing may be initiated if it is deemed appropriate. The Company has also surveyed its 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 to these surveys are incomplete at this time. Responses received to date indicate that our suppliers are aware of the Year 2000 issue and are implementing all necessary changes, mostly scheduled for completion by mid-1999. 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 $5 million, of which approximately 70 percent has been spent to date. The source of funds for these costs is operating cash flow. In general, only a small percentage of our products contain microprocessors and all of our product range is now Year 2000 compliant. Our information systems (financial, purchasing, manufacturing planning, etc.) are easily inventoried and detailed modification plans exist and are being executed. Our manufacturing systems are, in general, standard pieces of equipment with relatively few proprietary or unique operating systems or controls. At this time, the Company does not have in place a comprehensive, global contingency plan relative to potential Year 2000 disruptions. Rather, each significant system either has been repaired and tested, or is being repaired. For systems currently being reworked, contingency plans exist to address the most reasonably likely negative scenarios. 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 or its suppliers or customers are not fully Year 2000 compliant is not reasonably determinable. However, since we are depending on our ability to execute modification plans and our vendors to continue material supply without interruption, there can be no assurance that unforeseen difficulties will not arise for the Company or its customers and that related costs will not thereby be incurred. This dependence on the performance of our employees, contractors and vendors, as it relates to the Year 2000 issue, does not appear significantly different from our dependence on these groups relative to a wide range of other expectations (e.g., product quality, dependable delivery, technical support, etc.) The Company has a significant number of customers located in the European Union countries participating in the conversion on January 1, 1999 to a new European Currency (the "Euro Conversion"). The Company does not expect the costs of any modifications to its internal systems to have a material effect on the Company's results of operations or financial condition. The Euro Conversion may also have competitive implications for the sale of the Company's products, which could be material in nature, however, any such impact is not known at this time. There can be no assurance that unforeseen difficulties will not arise for the Company or its customers and that related costs will not thereby be incurred. 8 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 (including any associated with the conversion of various European currencies into the "Euro" in 1999). Though the Company has attempted to list comprehensively these import factors, 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 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 None 9 (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended October 31, 1998. 10 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 15, 1998 By /s/ James R. Giertz ------------------------- ------------------- James R. Giertz Senior Vice President and Chief Financial Officer 11 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JUL-31-1999 AUG-01-1998 OCT-31-1998 20,308 0 170,824 4,135 98,339 294,043 403,841 220,469 512,183 158,266 0 0 0 248,280 4,637 512,183 225,431 0 163,102 41,798 (961) 972 1,831 19,661 6,292 13,369 0 0 0 13,369 .28 .28
-----END PRIVACY-ENHANCED MESSAGE-----