UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended April 30, 1996 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 -- 25,638,897 shares as of May 31, 1996 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. CONDENSED STATEMENTS OF CONSOLIDATED EARNINGS DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars Except Per Share Amounts) (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended April 30 April 30 ---------------------------- --------------------------- 1996 1995 1996 1995 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Net Sales $ 185,225 $ 186,764 $ 556,257 $ 519,800 Cost of Sales 129,853 133,058 394,547 373,378 ------------ ------------ ------------ ------------ Gross Margin 55,372 53,706 161,710 146,422 Operating Expenses 34,378 33,667 106,623 96,464 Other (Income) Expense (251) (434) 169 497 Interest Expense 819 973 2,195 2,501 ------------ ------------ ------------ ------------ Earnings Before Income Taxes 20,426 19,500 52,723 46,960 Income Taxes 7,801 8,044 20,720 18,314 ------------ ------------ ------------ ------------ Net Earnings $ 12,625 $ 11,456 $ 32,003 $ 28,646 ============ ============ ============ ============ Average Shares and Equivalents Outstanding During Period 25,941,827 26,615,154 26,060,561 26,650,793 ============ ============ ============ ============ Net Earnings Per Share $ .49 $ .43 $ 1.23 $ 1.07 ============ ============ ============ ============ Dividends Paid Per Share $ .08 $ .07 $ .22 $ .21 ============ ============ ============ ============ </TABLE> See Notes to Condensed Consolidated Financial Statements. CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars) (Unaudited) <TABLE> <CAPTION> April 30, July 31, 1996 1995 --------- --------- <S> <C> <C> ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 30,195 $ 28,565 Accounts Receivable, Net 144,984 137,155 Inventories Materials 31,048 32,225 Work in Process 11,724 12,168 Finished Products 27,975 29,035 --------- --------- Total Inventories 70,747 73,428 Prepaids and Other Current Assets 5,058 8,756 --------- --------- TOTAL CURRENT ASSETS 250,984 247,904 Property, Plant and Equipment, at Cost 298,031 292,192 Less Accumulated Depreciation 183,385 181,552 --------- --------- Property, Plant and Equipment, Net 114,646 110,640 Other Assets 22,779 22,498 --------- --------- TOTAL ASSETS $ 388,409 $ 381,042 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-Term Debt $ 12,776 $ 17,802 Current Maturities of Long-Term Debt 3,086 2,998 Trade Accounts Payable 55,968 53,576 Accrued Employee Compensation & Related Taxes 23,162 23,114 Other Current Liabilities 30,184 26,257 --------- --------- TOTAL CURRENT LIABILITIES 125,176 123,747 Long-Term Debt 13,622 10,167 Deferred Income Taxes 5,232 5,233 Other Long-Term Liabilities 21,367 20,722 SHAREHOLDERS' EQUITY Preferred Stock, $1 par value, 1,000,000 shares authorized, no shares issued -- -- Common Stock, $5 par value, 40,000,000 shares authorized, 27,063,407 issued on April 30, 1996 and July 31, 1995 135,317 135,317 Capital Surplus 3,184 2,639 Retained Earnings 119,658 93,746 Cumulative Translation Adjustment 3,791 14,824 Treasury Stock - 1,422,925 and 878,243 shares, at cost (33,688) (20,103) Receivable from ESOP (5,250) (5,250) TOTAL SHAREHOLDERS' EQUITY 223,012 221,173 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 388,409 $ 381,042 ========= ========= </TABLE> See Notes to Condensed Consolidated Financial Statements CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars) (Unaudited) Nine Months Ended April 30 -------------------- 1996 1995 -------- -------- OPERATING ACTIVITIES Net Earnings $ 32,003 $ 28,646 Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: Depreciation and Amortization 15,424 14,073 Property, Plant and Equipment Write-downs 1,398 2,392 Changes in Operating Assets and Liabilities (971) (4,723) Other (2,172) 3,832 -------- -------- 45,682 44,220 INVESTING ACTIVITIES Net Expenditures on PP&E (24,870) (17,171) Business Acquisition, Net of Cash Acquired (278) (2,417) Dividend from Affiliate 616 -- -------- -------- (24,532) (19,588) FINANCING ACTIVITIES Purchase of Treasury Stock (14,852) (5,453) Net Change in Debt (579) 272 Dividends Paid (5,674) (5,534) Other 1,396 139 -------- -------- (19,709) (10,576) Effect of Exchange Rate Changes on Cash 189 280 -------- -------- Increase in Cash and Cash Equivalents 1,630 14,336 Cash and Cash Equivalents-Beginning of Year 28,565 22,945 -------- -------- Cash and Cash Equivalents-End of Period $ 30,195 $ 37,281 ======== ======== See Notes to Condensed Consolidated Financial Statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note A - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with 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. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. A. Financial Condition Operating cash flows increased 3 percent over the prior year primarily due to higher net earnings and depreciation and amortization offset by lower property, plant and equipment write-downs. Operating cash flow was used to fund $24.9 million of capital spending primarily related to capacity expansion programs and information systems upgrades. In addition, operating cash flow was sufficient to fund an active share repurchase program; treasury stock repurchases totaled $0.2 million in the third quarter and $14.9 million for the nine month period ended April 30, 1996. At the end of the third quarter, the Company held $30.2 million in cash and cash equivalents. Cash balances net of short-term debt and current maturities of long-term debt totaled $14.3 million, up from $7.8 million at July 31, 1995. Long-term debt of $13.6 million at April 30, 1996, represented 5.8 percent of total long-term capital, up from 4.4 percent at July 31, 1995. In December 1995, the Company entered into a five year multi-currency revolving credit facility totaling $100 million with a group of international banks, led by Citibank as the agent. There were no amounts outstanding under this facility at April 30, 1996. B. Results of Operations The Company reported record net earnings for the third quarter and the nine months ended April 30, 1996. Third quarter net earnings were $12.6 million, compared to $11.5 million in the third quarter of 1995. Net earnings per share of 49 cents, were up 14.0 percent from 43 cents a year earlier. Year-to-date net earnings were $32.0 million, compared with $28.6 million in 1995. Quarterly net earnings improved primarily due to higher gross margins and a reduction in the effective income tax rate. Increased sales levels and gross margin improvements were the primary reasons for the increase in year-to-date net earnings. For the nine month period, net sales of $556.3 million were up 7.0 percent from prior year sales of $519.8 million. Third quarter net sales of $185.2 million were down approximately 1.0 percent compared to last year's exceptionally strong quarter. Year-to-date sales increased primarily due to higher demand for the Company's dust collection and gas turbine systems products. In addition, the original equipment engine business benefited from new light duty truck programs combined with solid growth in Off-Road markets worldwide. Third quarter sales increases in the engine aftermarket and off-road markets were offset by weaknesses in the North American heavy duty transportation and the worldwide gas turbine product markets. For the third quarter, gross margins increased to 29.9 percent from 28.8 percent in the third quarter of 1995. Year-to-date margins improved to 29.1 percent from 28.2 percent in the prior year. The increase in 1996 third quarter margins was partially due to improved gross margins on the new light duty truck programs. Year-to-date margins benefited from fewer manufacturing asset write-downs in 1996 as well as the improvement in light duty truck margins. Operating expenses during the third quarter of 1996 were $34.4 million, 18.6 percent of sales, compared to $33.7 million, 18.0 percent of sales in the same quarter of 1995. Operating expenses for the first nine months were $106.6 million, 19.2 percent of sales, compared to $96.5 million, 18.6 percent of sales in 1995. Operating expenses in the quarter and for the year-to-date period were higher primarily due to increased warranty reserves. Hard order backlogs -- goods scheduled for delivery in 90 days -- of $126.0 million at April 30, 1996, increased 2.4 percent from the same period last year. Strong order increases in the dust collection, high purity products and engine original equipment markets were partially offset by declines in the gas turbine systems market PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibit Index None (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended April 30, 1996. 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 6/13/96 By /s/ James R. Giertz James R. Giertz Vice President - Chief Financial Officer Date 6/13/96 By /s/ Raymond F. Vodovnik Raymond F. Vodovnik Vice President-Legal