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, 2002 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 - 44,186,914 shares as of February 28, 2002
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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 Six Months Ended
January 31 January 31
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales $ 264,281 $ 279,631 $ 552,710 $ 569,500
Cost of sales 183,007 193,315 383,118 397,228
------------ ------------ ------------ ------------
Gross margin 81,274 86,316 169,592 172,272
Operating expenses 52,976 58,843 112,246 116,890
------------ ------------ ------------ ------------
Operating income 28,298 27,473 57,346 55,382
Other (income) expense (955) (1,590) (1,686) (785)
Interest expense 1,190 3,199 3,574 6,297
------------ ------------ ------------ ------------
Earnings before income taxes 28,063 25,864 55,458 49,870
Income taxes 7,303 7,759 14,974 14,961
------------ ------------ ------------ ------------
Net earnings $ 20,760 $ 18,105 $ 40,484 $ 34,909
============ ============ ============ ============
Weighted average shares
outstanding 44,152,615 44,273,159 44,215,963 44,422,165
Diluted shares outstanding 45,666,536 45,212,000 45,749,289 45,413,550
Net earnings per share $ .47 $ .41 $ .92 $ .79
Net earnings per share
assuming dilution $ .45 $ .40 $ .88 $ .77
Dividends paid per share $ .075 $ .075 $ .15 $ .145
See Notes to Condensed Consolidated Financial Statements
2
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
January 31 July 31
2002 2001
---------- ----------
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 52,500 $ 36,136
Accounts receivable 199,862 230,046
Inventories
Materials 44,906 50,426
Work in process 18,887 21,209
Finished products 36,511 40,999
---------- ----------
Total inventories 100,304 112,634
Prepaid and other current assets 36,501 28,411
---------- ----------
TOTAL CURRENT ASSETS 389,167 407,227
Property, plant and equipment, at cost 508,084 491,595
Less accumulated depreciation (292,799) (283,937)
---------- ----------
Property, plant and equipment, net 215,285 207,658
Intangible assets 57,805 58,205
Other assets 34,739 33,740
---------- ----------
TOTAL ASSETS $ 696,996 $ 706,830
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Short-term debt $ 41,593 $ 59,393
Current maturities of long-term debt 23 23
Trade accounts payable 86,689 100,287
Accrued employee compensation and related taxes 23,274 29,945
Warranty and accrued liabilities 20,778 17,597
Other current liabilities 8,215 10,034
---------- ----------
TOTAL CURRENT LIABILITIES 180,572 217,279
Long-term debt 98,409 99,259
Deferred income taxes 9,058 9,189
Other long-term liabilities 66,669 62,010
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 -- --
Retained earnings 235,535 203,499
Accumulated other comprehensive loss (27,561) (24,235)
Treasury stock - 5,441,946 and 5,273,121 shares at
January 31, 2002 and July 31, 2001, respectively (113,966) (108,451)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 342,288 319,093
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 696,996 $ 706,830
========== ==========
See Notes to Condensed Consolidated Financial Statements.
3
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
Six Months Ended
January 31
2002 2001
---------- ----------
OPERATING ACTIVITIES
Net earnings $ 40,484 $ 34,909
Adjustments to reconcile net earnings to
Net cash provided by operating activities:
Depreciation and amortization 15,958 18,631
Changes in operating assets and liabilities 13,816 (30,001)
Other 3,986 2,430
---------- ----------
Net Cash Provided by Operating Activities 74,244 25,969
INVESTING ACTIVITIES
Net expenditures on property and equipment (25,115) (15,255)
---------- ----------
Net Cash Used in Investing Activities (25,115) (15,255)
FINANCING ACTIVITIES
Purchase of treasury stock (8,358) (10,297)
Increase in long-term debt 111 1,089
Decrease in long-term debt (24) (883)
Change in short-term debt (17,525) 7,871
Dividends paid (6,640) (6,444)
Other 1,035 807
---------- ----------
Net Cash Provided by (Used in) Financing Activities (31,401) (7,857)
Effect of exchange rate changes on cash (1,364) (714)
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Increase in cash and cash equivalents 16,364 2,143
Cash and Cash Equivalents-Beginning of Year 36,136 32,017
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Cash and Cash Equivalents-End of Period $ 52,500 $ 34,160
========== ==========
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 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 considered necessary
for a fair presentation have been included. Operating results for the six month
period ended January 31, 2002 are not necessarily indicative of the results that
may be expected for the year ending July 31, 2002. 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, 2001. 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 Six Months Ended
January 31 January 31
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Weighted average shares outstanding - Basic 44,152,615 44,273,159 44,215,963 44,422,165
Diluted share equivalents 1,513,921 938,841 1,533,326 991,385
----------- ----------- ----------- -----------
Weighted average shares outstanding - Diluted 45,666,536 45,212,000 45,749,289 45,413,550
=========== =========== =========== ===========
Net earnings for basic and diluted
earnings per share computation $20,760,000 $18,105,000 $40,484,000 $34,909,000
----------- ----------- ----------- -----------
Net earnings per share - Basic $ .47 $ .41 $ .92 $ .79
=========== =========== =========== ===========
Net earnings per share - Diluted $ .45 $ .40 $ .88 $ .77
=========== =========== =========== ===========
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):
5
Three Months Ended Six Months Ended
January 31 January 31
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net earnings $ 20,760 $ 18,105 $ 40,484 $ 34,909
Foreign currency translation adjustment (6,765) 6,548 (3,762) (7,118)
Net gain (loss) on cash flow hedging derivatives 705 (341) 436 408
---------- ---------- ---------- ----------
Total other comprehensive income $ 14,700 $ 24,312 $ 37,158 $ 28,199
========== ========== ========== ==========
Total accumulated other comprehensive loss and its components are as follows (in
thousands):
January 31 July 31
2002 2001
---------- ----------
Foreign currency translation adjustment $ (28,002) $ (24,240)
Net gain on cash flow hedging derivatives 782 346
Additional minimum pension liability (341) (341)
---------- ----------
Total accumulated other comprehensive loss $ (27,561) $ (24,235)
========== ==========
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
-------- -------- ----------- -------
Three Months Ended
January 31, 2002:
Net sales $ 139,693 $ 124,588 -- $ 264,281
Earnings before income taxes 13,156 17,582 $ (2,675) 28,063
January 31, 2001:
Net sales 138,638 140,993 -- 279,631
Earnings before income taxes 7,794 22,957 (4,887) 25,864
Six Months Ended
January 31, 2002:
Net Sales 296,198 256,512 -- 552,710
Earnings before income taxes 31,912 36,211 (12,665) 55,458
January 31, 2001:
Net Sales 305,774 263,726 -- 569,500
Earnings before income taxes $ 22,957 $ 35,731 $ (8,818) $ 49,870
6
Note E - Derivative Instruments and Hedging Activities
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 Statement No. 133." effective beginning fiscal
2001. SFAS 133 and SFAS 138 require the 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. The Company enters into foreign exchange
contracts and other hedging activities to mitigate potential foreign currency
gains and losses relative to local currencies in the markets to which it sells.
The Company has recorded a credit to other comprehensive income related to the
foreign exchange contracts of $0.7 million and $0.4 million for the three and
six months ended January 31, 2002.
In June 2001 the Company entered into an interest rate swap agreement which was
determined to be a fair value hedge under SFAS 133 and SFAS 138. As of January
31, 2002, the interest rate swap had a fair value of $0.3 million.
Note F - New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." Major provisions of these statements are as follows: all business
combinations must now use the purchase method of accounting, the pooling of
interest method of accounting is now prohibited; intangible assets acquired in a
business combination must be recorded separately from goodwill if they arise
from contractual or other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented or exchanged, either individually
or as a part of a related contract, asset or liability; goodwill and intangible
assets with indefinite lives are not amortized, but tested for impairment
annually, except in certain circumstances, and whenever there is an impairment
indicator; all acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting. The Company has adopted
the provisions of these statements as of August 1, 2001. As required by SFAS
142, the Company has performed step one of the impairment testing of goodwill
for the balances as of July 31, 2001. The results of this test show that the
fair market value of the reporting units that the goodwill is assigned to is
higher than the book values of those reporting units resulting in no goodwill
impairment. The Company will perform impairment tests annually and whenever
events or circumstances occur indicating that goodwill or other intangible
assets might be impaired. As of August 1, 2001, the Company is no longer
amortizing goodwill. Goodwill amortization expense was $0.7 million and $1.3
million net of income taxes for the three and six months ended January 31, 2001.
The Company estimates that goodwill amortization expense would have been
approximately $0.6 million and $1.3 million net of income taxes in the three and
six months ended January 31, 2002. The following table presents a reconciliation
of net income and earnings per share adjusted for the exclusion of goodwill, net
of income taxes:
7
Three Months Ended
January 31
(In thousands, except per share amounts) 2002 2001 2000
---------- ---------- ----------
Reported net income $ 20,760 $ 18,105 $ 17,406
Add: Goodwill amortization, net of tax -- 662 474
---------- ---------- ----------
Adjusted net income 20,760 18,767 17,880
========== ========== ==========
Basic earnings per share:
Reported basic earnings per share .47 .41 .38
Add: Goodwill amortization, of tax -- .01 .01
---------- ---------- ----------
Adjusted basic earnings per share .47 .42 .39
========== ========== ==========
Diluted earnings per share:
Reported diluted earnings per share .45 .40 .37
Add: Goodwill amortization, net of tax -- .01 .01
---------- ---------- ----------
Adjusted diluted earnings per share $ .45 $ .41 $ .38
========== ========== ==========
Six Months Ended
January 31
(In thousands, except per share amounts) 2002 2001 2000
---------- ---------- ----------
Reported net income $ 40,484 $ 34,909 $ 34,414
Add: Goodwill amortization, net of tax -- 1,323 974
---------- ---------- ----------
Adjusted net income 40,484 36,232 35,388
========== ========== ==========
Basic earnings per share:
Reported basic earnings per share .92 .79 .75
Add: Goodwill amortization, of tax -- .03 .02
---------- ---------- ----------
Adjusted basic earnings per share .92 .82 .77
========== ========== ==========
Diluted earnings per share:
Reported diluted earnings per share .88 .77 .73
Add: Goodwill amortization, net of tax -- .03 .02
---------- ---------- ----------
Adjusted diluted earnings per share $ .88 $ .80 $ .75
========== ========== ==========
As of July 31, 2001, goodwill was $57.5 million. There were no additions during
the first six months of fiscal 2002.
8
Note G - Acquisitions
The Company completed the purchase of all of the outstanding shares of AirMaze
Corporation for $31.9 million in cash effective November 1, 1999. AirMaze
Corporation was merged into Donaldson Company, Inc. effective April 1, 2000.
AirMaze products include heavy-duty air and liquid filters, air/oil separators
and high purity air filter products. AirMaze manufacturing facilities are
located in Stow, Ohio and Greenville, Tennessee. The excess of purchase price
over the fair values of the net assets acquired was $26.8 million and has been
recorded as goodwill. AirMaze operations are a part of the Company's Engine
Products segment. As of January 31, 2002, the balance of restructuring
liabilities recorded in conjunction with the acquisition was approximately $0.2
million for costs associated with the termination and relocation of employees.
There were no costs incurred and charged to this reserve associated with the
termination and relocation of employees for the three and six months ended
January 31, 2002. The integration of AirMaze resulted in a reduction in the work
force of approximately 15 employees during fiscal 2001. The remaining
acquisition related restructuring activities are expected to be completed by the
end of fiscal 2002.
The Company acquired the DCE dust control business of Invensys, plc for $56.4
million effective February 1, 2000. 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 $33.2 million and has been recorded as
goodwill. DCE operations are a part of the Company's Industrial Products
segment. As of January 31, 2002, the balance of restructuring liabilities
recorded in conjunction with the acquisition was approximately $0.6 million of
costs associated with the closure and sale of acquired facilities as well as
termination and relocation of employees. There were no costs incurred and
charged to the reserve associated with the closure and sale of acquired
facilities for the three months ended January 31, 2002 and $0.9 million for the
six months ended January 31, 2002. Costs incurred and charged to the reserve
associated with the termination and relocation of employees were $0.1 million
for the three months ended January 31, 2002 and $0.6 million for the six months
ended January 31, 2002. The integration of DCE resulted in a reduction in the
work force of approximately 140 employees during fiscal 2001. The remaining
acquisition related restructuring activities are expected to be completed by the
end of fiscal 2002.
Note H - Future Accounting Changes and Developments
The Securities and Exchange Commission recently issued an interpretive financial
reporting release entitled "Cautionary Advice Regarding Disclosure About
Critical Accounting Policies" (FR-60) and a companion release "Commission
Statement About Management's Discussion and Analysis of Financial Condition and
Results of Operations" (FR-61). The Company is presently reviewing the suggested
disclosures as set forth therein. For a summary of the Company's accounting
policies see the Summary of Significant Accounting Policies in the Company's
Annual Report to Shareholders for the year ended July 31, 2001.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
The Company generated $74.2 million of cash and cash equivalents from operations
during the first six months of fiscal 2002. Operating cash flows increased by
$48.3 million from the same period in the prior year due to a decrease in
accounts receivable compared to an increase in the prior year and a higher
decrease in inventory compared to the prior year. These cash flows, plus
borrowings from the Company's credit facility, were used during the first six
months of fiscal 2002 primarily to support $25.1 million in capital additions,
repurchase $8.4 million of treasury stock and for the payment of $6.6 million in
dividends. At the end of the second quarter, the Company had remaining authority
to purchase 4.2 million shares of common stock under the share repurchase
program authorized in January 2001.
At the end of the second quarter, the Company held $52.5 million in cash and
cash equivalents. Short-term debt totaled $41.6 million, down from $59.4 million
at July 31, 2001. The amount of unused lines of credit as of January 31, 2002
was approximately $101.8 million. Long-term debt of $98.4 million at January 31,
2002, was down from $99.3 million at July 31, 2001 and represented 23.3 percent
of total long-term capital, down slightly from 23.7 percent at July 31, 2001.
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 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 three
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 filters. 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 and disk drives, and other OEMs and end users requiring
highly purified air.
10
The Company reported net earnings for the second quarter ended January 31, 2002
of $20.8 million, up from the $18.1 million recorded in the second quarter of
the prior year. Total net sales for the three months ended January 31, 2002 of
$264.3 million were down 5.5 percent from prior year sales of $279.6 million.
Foreign currency translation reduced second quarter net sales by 1.7 percent.
The increase in net earnings reflects the Company's continued efforts in
managing costs. Diluted net earnings per share were 45 cents, up
12.5 percent from prior year diluted net earnings per share of 40 cents as the
average number of shares outstanding increased slightly compared to the prior
year period.
For the six months ended January 31, 2002 net earnings were $40.5 million up
from $34.9 million in the same period of the prior year. Year-to-date the
Company shows improvements on nearly every line of the income statement despite
the decrease in sales. This again reflects the Company's efforts on cost
management and return on investment improvements. The Company has improved its
working capital and inventory levels, using cash to reduce debt levels and fund
cost efficiency initiatives, including its new manufacturing facilities in
Mexico, China and Pennsylvania. Year-to-date, diluted net earnings per share
were 88 cents, up 14.3 percent from prior year diluted net earnings per share of
77 cents.
For the second quarter, net sales in the Industrial Products segment of $124.6
million decreased 11.6 percent from a record $141.0 million in the prior year.
This decrease reflects continued low levels of industrial capital spending. For
the six month period ending January 31, 2002, sales in the Industrial Products
segment were $256.5 million, a decrease of 2.7 percent from a record $263.7
million in the prior year. Within the Industrial Products segment, for the
second quarter gas turbine product sales were a record $52.4 million, an
increase of 1.2 percent from a record $51.8 million in the prior year.
Year-to-date, gas turbine product sales were a record $109.7 million, up 27.2
percent from a record $86.2 million in the prior year. For the quarter, sales of
dust collection products were $44.1 million, a decrease of 21.7 percent from a
record $56.3 million in the same period in the prior year. Year-to-date, dust
collection product sales were $92.3 million, down 20.5 percent from a record
$116.1 million in the prior year. The decrease in dust collection product sales
is a result of the U.S. manufacturing economy remaining in a recession during
the last quarter as the industrial production, capacity utilization and machine
tool consumption weakened in the quarter. The U.K. and German manufacturing
economies remained weak as well, creating a difficult environment for European
dust collection sales. For the quarter, sales of special application products
were $28.1 million, a 14.6 percent decrease from prior year sales of $32.9
million. Within special application products, disk drive filter sales were down
from the prior year, as were photolithography filtration sales, reflecting the
weakness in the computer, electronics and semiconductor markets that began a
year ago. Year-to-date, special application product sales were $54.6 million, a
decrease of 11.2 percent from $61.4 million in the prior year.
For the second quarter, net sales in the Engine Products segment of $139.7
million increased 0.8 percent from $138.6 million in the prior year. This
increase is the first year-over-year quarterly increase since the first quarter
of fiscal 2001. For the six month period ending January 31, 2002, sales in the
Engine Products segment were $296.2 million, a decrease of 3.1 percent from
$305.8 million in the prior year. North American markets for medium and
heavy-duty truck continue to be stable at low build levels, while European
markets are weakening. For the quarter, truck sales were $19.6 million, an
increase of 24.0 percent from $15.8 million in the prior year. Year-to-date,
sales were $41.2 million, an increase of 4.5 percent from $39.5 million the
prior year. Worldwide sales of off-road products in the quarter were $44.1
million, flat with the prior year. Strength in defense and mining equipment
markets was offset by continued weakness in non-residential construction
equipment and light industrial equipment markets. Year-to-date, sales were $90.0
million, a decrease of 0.6 percent from $90.6 million in the prior year.
Aftermarket product sales in the quarter were $76.0 million, a decrease of 3.4
percent from $78.7 million in the prior year. Orders per day bottomed out midway
through the quarter, improving slightly in late January as inventory levels at
parts dealers and distributors were taken to very low levels. Year-to-date,
sales were $165.0 million, a decrease of 6.1 percent from $175.7 million in the
prior year.
11
In U.S. dollars, total international sales decreased 1.8 percent from the same
period in the prior year. Total international Industrial Product sales were down
2.3 percent from the same period in the prior year. Within this segment,
international sales in gas turbine products increased 28.6 percent from the
prior year while international dust collection products and special application
products had decreases in sales from the prior year of 13.6 percent and 4.0
percent, respectively. Total international Engine Product sales were down 1.4
percent from the same period in the prior year. Within this segment,
international sales in off-road and transportation products increased from the
prior year by 4.3 percent and 11.6 percent, respectively while international
sales in aftermarket products decreased 6.3 percent from the prior year. In
Europe and Mexico, total sales increased from the same period in the prior year
by 4.5 percent and 7.0 percent, respectively. Sales in Asia-Pacific and South
Africa decreased from the same period in the prior year by 9.3 percent and 2.6
percent, respectively.
Consolidated gross margin for the second quarter of fiscal 2002 was 30.8
percent, down only slightly from 30.9 percent in the same quarter of the prior
year. Significant product cost reduction and infrastructure improvements to the
Company's manufacturing base offset the Company's lower production volumes.
Operating expenses during the second quarter of fiscal 2002 were $53.0 million
(20.0 percent of sales), compared to $58.8 million (21.0 percent of sales) in
the same quarter of fiscal 2001. This decrease reflects the fact that worldwide
headcount has declined to 8,130 employees from 8,620 in the prior year.
Discretionary expenses, such as consulting fees and travel continue to be
managed carefully. For the year, operating expenses declined to 20.3 percent of
sales from 20.5 percent in the prior year, despite the lower sales volume.
Other income for the second quarter of $1.0 million decreased $0.6 million from
$1.6 million in the same period in the prior year. Other income for the second
quarter consisted of income from unconsolidated affiliates of $1.3 million,
interest income of $0.2 million and other expense of $0.5 million. For the
quarter, interest expense was $1.2 million, down from $3.2 million in the first
quarter of the prior year. This decrease is a result of a reduction in total
debt by $44.6 million from the prior year and lower interest rates.
Year-to-date, interest expense was $3.6 million, down 43.2 percent from $6.3
million in the prior year.
The income tax rate for the quarter was 26.0 percent, which reduced the
year-to-date rate to 27.0 percent, down from 28.0 percent for the full-year
fiscal 2001. The tax rate was adjusted in the quarter to reflect state tax
savings from infrastructure improvements. The Company anticipates maintaining
the 27.0 percent tax rate through the end of the fiscal year.
Total backlog of $341 million at January 31, 2002 was down 3 percent relative to
the same period in the prior year but was up 3 percent from the prior quarter
end. In the Industrial Products segment, total backlog decreased 4 percent from
the same period in the prior year but increased 11 percent from the prior
quarter end. In the Engine Products segment, total backlog decreased 3 percent
from the same period in the prior year and decreased 5 percent from the prior
quarter end.
12
Hard order backlog - goods scheduled for delivery in 90 days - was $175 million,
up 2 percent from the same period in the prior year and flat from the prior
quarter end. In the Industrial Products segment, hard order backlog increased 6
percent from the same period in the prior year but decreased 1 percent from the
prior quarter end. In the Engine Products segment, hard order backlog decreased
2 percent from the same period in the prior year and increased 1 percent from
the prior quarter end.
The impact of foreign currency translation, resulted in a decrease in net sales
of $4.5 million from the second quarter in the prior year and decreased net
earnings by $0.2 million. These decreases were mainly due to continued weakness
of currencies against the U.S. dollar in several of the Company's operating
locations throughout the world. The currencies impacting the Company's sales
results most were the Japanese Yen and the South African Rand, which resulted in
a decrease in net sales of $2.3 million and $1.3 million, respectively. The Euro
also had a negative impact on the Company's first quarter net sales with a
decrease in net sales of $0.7 million. Year-to-date, foreign currency
translation has decreased net sales by $6.3 million and net earnings by $0.2
million. On a local currency basis, revenues outside the U.S. were flat in the
quarter and increased 0.4 percent year-to-date. Using last year's foreign
exchange rates, total worldwide revenue would have decreased 3.9 percent in the
quarter and 1.8 percent year-to-date.
Accounting Policies
Note A to the consolidated financial statements in the Company's annual report
on Form 10-K for the year ended July 31, 2001 provides a summary of the
significant accounting policies followed in the preparation of the Company's
financial statements. Note A and the other notes to the financial statements
describe the good faith estimates and assumptions made by the Company in
conformity with generally accepted accounting principles in the United States
based on its understanding and analysis of the relevant circumstances.
Outlook
Within the Industrial Products segment, the Company has good visibility on gas
turbine sales and expects revenue to remain strong throughout fiscal 2002 and
into early fiscal 2003, although year-over-year growth rates have begun to
moderate and there is an increased risk of customer cancellations. The Company
expects difficult operating conditions to persist for dust collection equipment
sales, although replacement filter sales are expected to trend up in the near
term as manufacturers begin to replenish depleted inventories. Conditions are
expected to moderate for disk drive filtration in light of the Company's view
that market declines have bottomed out. Within the Engine Products segment, the
Company anticipates the current trends continuing: build rates have stabilized
for on-road trucks and off-road markets are awaiting recovery in industrial
construction. Sales growth in engine aftermarket products is expected to
increase as inventories are already low and freight volumes are beginning to
recover.
Until general economic conditions improve, the Company will continue managing
its cost structure as it did during the first six months of fiscal 2002. Focus
will remain on discretionary expense controls, lowered spending on plant
rationalization efforts and continued work on initiatives to increase the
operating efficiencies of the business.
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
13
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 to the Company.
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, the Company's substantial 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 part of the Company's Form 10-K 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.
14
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company's exposure to market risks for changes in interest rates
relates primarily to our short-term investments, short-term borrowings
and interest rate swap agreement. We have no earnings or cash flow
exposure due to market risks on our long-term debt obligations as a
result of the fixed-rate nature of the debt. However, interest rate
changes would affect the fair market value of the debt. At January 31,
2002, the fair value of the Company's long-term debt approximates
market. Market risk is estimated as the potential decrease in fair
value resulting from a hypothetical one-half percent increase in
interest rates and amounts to approximately $2.8 million.
On June 6, 2001, the Company entered into an interest rate swap
agreement effectively converting a portion of the Company's interest
rate exposure from a fixed rate to a variable rate basis to hedge
against the risk of higher borrowing costs in a declining interest rate
environment. The Company does not enter into interest rate swap
contracts for speculative or trading purposes; as the differential to
be paid or received on the interest rate swap agreement is accrued and
recognized as an adjustment to interest expense as interest rates
change. The interest rate swap agreement has an aggregate notional
amount of $27.0 million maturing on July 15, 2008. The variable rate is
based on the current six-month London Interbank Offered Rates
("LIBOR"). This transaction decreased interest expense by $0.5 million
for the six months ended January 31, 2002.
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, 2001.
See further discussion of these market risks in the Donaldson Company,
Inc. Annual Report on Form 10-K for the year ended July 31, 2001.
15
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 16, 2001. A total of 44,097,328 shares were outstanding
and entitled to vote at the meeting. A total of 40,618,200 shares
were represented at the meeting.
(b) Not Applicable.
(c) Matters Submitted and Voting Results:
(i) Election of Directors:
Name of Nominee Vote Tabulation
For Withheld
--- --------
Paul B. Burke 40,239,812 378,388
Kendrick B. Melrose 40,238,144 380,056
Stephen W. Sanger 40,226,104 392,097
(ii) Ratified appointment of Arthur Andersen LLP as Registrant's
independent public auditors for the fiscal year ending July
31, 2002 with the following vote: For -- 40,231,620; Against --
263,014; Abstaining -- 123,567.
(iii) Approved 2001 Master Stock Incentive Plan with the following
vote: For -- 24,806,566; Against -- 11,956,162; Abstaining --
296,904; Broker Non-Vote -- 3,558,568.
(d) Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
None
(b) Reports on Form 8-K.
None
16
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 18, 2002 By /s/ William M. Cook
--------------------- ---------------------
William M. Cook
Senior Vice President and
Chief Financial Officer
Date March 18, 2002 By /s/ Thomas A. Windfeldt
-------------------- -------------------------
Thomas A. Windfeldt
Vice President and Controller
and chief accounting officer
17