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, 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 -- 49,571,511 shares as of February 27, 1998
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 Six Months Ended January 31 January 31 --------------------------- ---------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Net Sales $ 232,974 $ 196,849 $ 467,041 $ 384,025 Cost of Sales 168,034 138,654 333,711 269,698 ------------ ------------ ------------ ------------ Gross Margin 64,940 58,195 133,330 114,327 Operating Expenses 44,979 40,218 91,347 77,389 Other (Income) Expense 17 364 (185) 606 Interest Expense 991 464 1,976 1,073 ------------ ------------ ------------ ------------ Earnings Before Income Taxes 18,953 17,149 40,192 35,259 Income Taxes 6,444 6,173 13,665 12,693 ------------ ------------ ------------ ------------ Net Earnings $ 12,509 $ 10,976 $ 26,527 $ 22,566 ============ ============ ============ ============ Net Earnings Per Share: Weighted Average Shares Outstanding During Period 49,593,217 50,183,698 49,528,532 50,312,988 ============ ============ ============ ============ Diluted Shares Outstanding 50,697,926 50,917,647 50,594,132 51,047,211 ============ ============ ============ ============ Net Earnings Per Share - Basic $ .25 $ .22 $ .54 $ .45 ============ ============ ============ ============ Net Earnings Per Share Assuming Dilution $ .25 $ .22 $ .52 $ .44 ============ ============ ============ ============ Dividends Paid Per Share $ .05 $ .04 $ .09 $ .08 ============ ============ ============ ============ </TABLE> See Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars) (Unaudited) <TABLE> <CAPTION> January 31, July 31, 1998 1997 ---------- ---------- <S> <C> <C> ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 6,291 $ 14,278 Accounts Receivable, Net 157,716 161,440 Inventories Materials 42,177 36,178 Work in Process 13,055 11,488 Finished Products 45,190 38,253 ---------- ---------- Total Inventories 100,422 85,919 Prepaids and Other Current Assets 10,183 7,181 ---------- ---------- TOTAL CURRENT ASSETS 274,612 268,818 Property, Plant and Equipment, at Cost 374,538 354,154 Less Accumulated Depreciation (204,902) (199,559) ---------- ---------- Property, Plant and Equipment, Net 169,636 154,595 Other Assets 29,386 30,981 ---------- ---------- TOTAL ASSETS $ 473,634 $ 454,394 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-Term Debt $ 52,091 $ 42,027 Current Maturities of Long-Term Debt 105 647 Trade Accounts Payable 69,053 68,317 Accrued Employee Compensation & Related Taxes 23,616 28,760 Warranty and Customer Support 17,507 16,502 Other Current Liabilities 23,107 20,044 ---------- ---------- TOTAL CURRENT LIABILITIES 185,479 176,297 Long-Term Debt 4,108 4,201 Deferred Income Taxes 986 1,442 Other Long-Term Liabilities 27,714 28,589 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 and 54,126,814 issued January 31, 1998 and July 31, 1997, respectively 248,280 135,317 Additional Paid-In Capital 823 6,212 Retained Earnings 12,990 167,444 Cumulative Translation Adjustment (4,853) 934 Treasury Stock - 91,561 and 4,674,758 shares, at cost (1,893) (63,312) Receivable from ESOP -- (2,730) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 255,347 243,865 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 473,634 $ 454,394 ========== ========== </TABLE> See Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars) (Unaudited) <TABLE> <CAPTION> Six Months Ended January 31 ------------------------ 1998 1997 --------- --------- <S> <C> <C> OPERATING ACTIVITIES Net Earnings $ 26,527 $ 22,566 Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: Depreciation and Amortization 12,001 10,828 Changes in Operating Assets and Liabilities (14,332) (2,680) Other (2,972) (89) --------- --------- Net Cash Provided by Operating Activities 21,224 30,625 INVESTING ACTIVITIES Net Expenditures on PP&E (31,274) (20,603) Dividends & Distributions from Affiliates 1,500 3,037 --------- --------- Net Cash Used in Investing Activities (29,774) (17,566) FINANCING ACTIVITIES Purchase of Treasury Stock (6,149) (8,904) Net Change in Debt 10,049 (2,262) Dividends Paid (4,707) (4,281) Payment Received from ESOP 2,730 -- Other 157 554 --------- --------- Net Cash Provided by (Used In) Financing Activities 2,080 (14,893) Effect of Exchange Rate Changes on Cash (1,517) (2,726) --------- --------- (Decrease) in Cash and Cash Equivalents (7,987) (4,560) Cash and Cash Equivalents-Beginning of Year 14,278 30,924 --------- --------- Cash and Cash Equivalents-End of Period $ 6,291 $ 26,364 ========= ========= </TABLE> 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. Operating results for the six month period ended January 31, 1998 are not necessarily indicative of the results that may be expected for the year ended July 31, 1998. 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, 1997. Note B - New Accounting Standards In February, 1997, 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. Upon adoption of SFAS No. 128, the Company is presenting basic earnings per share and diluted earnings per share. Basic earnings per share is computed based on the weighted average number of shares outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares outstanding during the period increased by the effect of dilutive stock options using the treasury stock method, and shares issuable under its Performance and Incentive Plans. The following table presents information necessary to calculate basic and diluted earnings per common and common equivalent share: <TABLE> <CAPTION> Three Months Ended Six Months Ended January 31, January 31, ------------------------- ------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Weighted average shares outstanding-Basic 49,593,217 50,183,698 49,528,532 50,312,988 Dilutive share equivalents 1,104,709 733,949 1,065,600 734,223 ----------- ----------- ----------- ----------- Weighted average shares - Diluted 50,697,926 50,917,647 50,594,132 51,047,211 =========== =========== =========== =========== Net earnings for basic and diluted earnings per share computation $ 12,509 $ 10,976 $ 26,527 $ 22,566 ----------- ----------- ----------- ----------- Basic earnings per share $ .25 $ .22 $ .54 $ .45 =========== =========== =========== =========== Diluted earnings per share $ .25 $ .22 $ .52 $ .44 =========== =========== =========== =========== </TABLE> Earnings per share amounts and share amounts have been restated to reflect the Company's 2-for-1 stock split on January 13, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. A. Financial Condition The Company generated $21.2 million of cash and cash equivalents from operations during the first six months of fiscal 1998. Operating cash flows decreased 30.7% from the prior year period primarily due to higher inventory requirements to support higher sales levels. In addition to the operating cash flow, $1.5 million was received as a return-of-capital from an unconsolidated affiliate. These cash flows were used primarily to support $31.3 million in capital additions (a 51.8% increase from the prior year), repurchase $6.1 million of treasury stock, and pay $4.7 million in dividends during the first six months of fiscal 1998. Increase in capital expenditures is due to productivity enhancing projects at various plants in the United States and overseas, capacity expansion and continuing upgrades to information systems. Expenditures for domestic plants and distribution centers totaled $17.7 million for the first six months of fiscal 1998. Expenditures for overseas operations totaled $9.5 million for the same period. At the end of the second quarter, the Company held $6.3 million in cash and cash equivalents. Short-term debt totaled $52.1 million, up from $42.0 million at July 31, 1997. Long-term debt of $4.1 million at January 31, 1998, represented 1.6% of total long-term capital, down from 1.7% at July 31, 1997. The Board of Directors on November 21, 1997 declared a 2-for-1 stock split of its common stock, effected in the form of a 100 percent stock dividend. The stock split was distributed January 13, 1998, to shareholders of record as of December 19, 1997. B. Results of Operations The Company reported record net earnings for the second quarter ended January 31, 1998 of $12.5 million, up 14.0% from the $11.0 million recorded in the second quarter last year. Diluted earnings per share were 25 cents, up 13.6% from prior-year diluted earnings per share of 22 cents as the average number of shares outstanding decreased 0.4%. Increase in net earnings was primarily due to higher sales and a reduction in the effective income tax rate offset by slightly lower margins. Total net sales for the three months ended January 31, 1998 of $233.0 million were up 18.4% from the same period last year of $196.8 million. For the six months, net earnings were a record $26.5 million, up 17.6% from fiscal 1997. Diluted earnings per share were 52 cents, up 18.2% from last year's diluted earnings per share of 44 cents. Year-to-date sales are up 21.6% to $467.0 million.
In general, business conditions remain strong in North America and Europe; Japan and certain surrounding markets are flat. Specifically, in the first six months of the year, revenue in local currency terms is up 31.2% in North America and 30.6% in Europe relative to last year; revenue from our Japanese subsidiary was unchanged relative to last year. Engine products revenues were $155.2 million, a 20.1% increase over second quarter last year and $316.4 million for the six month period, an increase of 20.3% over prior year. Significant factors supporting the growth in engine products include growth in replacement part sales and the addition of $5.0 million in revenue from the Armada Tube Group acquired in the third quarter of fiscal 1997. Industrial products revenues were $77.8 million, a 15.0% increase over second quarter last year and $150.7 million for the six month period, a 24.4% increase over prior year. Significant contributors to revenue growth in industrial products include an increase in Torit dust collection sales due to strong market conditions in the United States and Europe, strong gas turbine growth, and the acquisition of the assets of the Aercology business in the fourth quarter of fiscal 1997. The gross margins for the second quarter of fiscal 1998 decreased to 27.9% from 29.6% in the same period last year. The six months figures are 28.5% and 29.8%, respectively. The decrease was due to product mix changes resulting in lower profitability in the automotive business and integration cost related to the Armada Tube acquisition, but was partially offset by higher margins in industrial products. Operating expenses during the second quarter of fiscal 1998 were $45.0 million, 19.3% of sales, compared to $40.2 million, 20.4% of sales in the same quarter of 1997. Year-to-date operating expenses as a percentage of sales have decreased from 20.2% to 19.6%, primarily due to lower reserves for warranty expense and pension obligations. Hard order backlogs -- goods scheduled for delivery in 90 days -- of $154.6 million at January 31, 1998, increased 7.8% from the same period last year and are down slightly in the quarter. Only the gas turbine and high purity markets have softened against the prior year. All other significant business markets have increased relative to one year ago and indicate continued revenue growth in the near term. The U. S. 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 earnings translate into less U. S. dollars. The impact of foreign exchange translation on net sales was a negative $6.6 million and $12.9 million for the three and six months ended January 31, 1998. C. Year 2000 Issues A task force was formed approximately one year ago to assess the Company's exposure to the "year 2000" issue -- all computer hardware and software systems have been evaluated to determine whether date-dependent functions will remain operable through the year 2000. In summary, the Company has implemented measures to have all critical business systems year-2000-ready by December 31, 1998. Several auxiliary or non-critical systems will be modified in 1999. Costs incurred and expected to be incurred related exclusively to addressing year-2000
issues at the Company total approximately $5.0 million. Based on the Company's analysis of the year 2000 issues, it appears that the amount spent to remediate its year 2000 issues will not have a material effect on the operations or financial results of the Company. D. Risk Factors Except for the historical information contained herein, certain of the matters discussed in this Form 10-Q are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties, including, but 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, and continued access to capital markets. 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 aforementioned risk factors. Actual results could differ materially both due to the risk factors mentioned here and to other factors not so referenced.
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 Novemnger 21, 1997. A total of 24,732,385 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 --- -------- Jack W. Eugster 21,366,251 230,442 William G. Van Dyke 21,346,464 250,229 (ii) Approved the adoption of the amendment of the Company's Certificate of Incorporation to increase the number of authorized shares of Company Common Stock from 40,000,000 to 80,000,000 with the following vote: For - 20,043,851; Against - 1,457,677; Abstaining - 95,165. (iii) Ratified selection of Ernst & Young LLP as Registrant's independent public auditors for the fiscal year ending July 31, 1998 with the following vote: For - 21,380,591; Against - 49,384; Abstaining - 166,718. (d) Not Applicable.
Item 6. Exhibits and Reports on Form 8-K (a) Exhibit Index 3-A Certificate of Incorporation of Registrant as currently in effect 10-E ESOP Restoration Plan (Amended and Restated) 10-Q Deferred Compensation and 401(K) Excess Plan Note: Exhibits have been furnished only to the Securities and Exchange Commission. Copies will be furnished to individuals upon request and payment of $20 representing Registrant's reasonable expense in furnishing such exhibits. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended January 31, 1998. 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 3/13/98 By /s/James R. Giertz ------------------ James R. Giertz Vice President - Chief Financial Officer Date 3/13/98 By /s/Norman C. Linnell -------------------- Norman C. Linnell General Counsel and Secretary