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, 2001 OR
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[ ] 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 - 44,126,130 shares as of November 30, 2001
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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)
October 31
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2001 2000
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Net sales $ 288,429 $ 289,869
Cost of sales 200,111 203,913
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Gross margin 88,318 85,956
Operating expenses 59,270 58,047
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Operating income 29,048 27,909
Other (income) expense (731) 805
Interest expense 2,384 3,098
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Earnings before income taxes 27,395 24,006
Income taxes 7,671 7,202
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Net earnings $ 19,724 $ 16,804
============ ============
Weighted average shares
outstanding 44,252,026 44,560,523
Diluted shares outstanding 45,502,725 45,456,932
Net earnings per share $ .45 $ .38
Net earnings per share
assuming dilution $ .43 $ .37
Dividends paid per share $ .075 $ .07
2
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
October 31 July 31
2001 2001
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ASSETS
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CURRENT ASSETS
Cash and cash equivalents $ 57,530 $ 36,136
Accounts receivable 221,253 230,046
Inventories
Materials 47,141 50,426
Work in process 19,827 21,209
Finished products 38,328 40,999
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Total inventories 105,296 112,634
Prepaid and other current assets 35,960 28,411
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TOTAL CURRENT ASSETS 420,039 407,227
Property, plant and equipment, at cost 502,606 491,595
Less accumulated depreciation (290,876) (283,937)
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Property, plant and equipment, net 211,730 207,658
Intangible assets 58,135 58,205
Other assets 37,401 33,740
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TOTAL ASSETS $ 727,305 $ 706,830
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Short-term debt $ 57,958 $ 59,393
Current maturities of long-term debt 23 23
Trade accounts payable 100,766 100,287
Accrued employee compensation and related taxes 28,775 29,945
Warranty and accrued liabilities 20,601 17,597
Other current liabilities 13,824 10,034
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TOTAL CURRENT LIABILITIES 221,947 217,279
Long-term debt 101,415 99,259
Deferred income taxes 9,031 9,189
Other long-term liabilities 64,783 62,010
SHAREHOLDERS' EQUITY
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Preferred stock, $1 par value,
1,000,000 shares authorized, no shares issued -- --
Common stock, $5 par value, 80,000,000 shares authorized,
49,655,954 issued 248,280 248,280
Additional paid-in capital -- --
Retained earnings 218,735 203,499
Accumulated other comprehensive loss (21,501) (24,235)
Treasury stock - 5,509,457 and 5,273,121 shares at
October 31, 2001 and July 31, 2001, respectively (115,385) (108,451)
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TOTAL SHAREHOLDERS' EQUITY 330,129 319,093
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 727,305 $ 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)
Three Months Ended
October 31
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2001 2000
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OPERATING ACTIVITIES
Net earnings $ 19,724 $ 16,804
Adjustments to reconcile net earnings to
Net cash provided by operating activities:
Depreciation and amortization 7,921 10,012
Changes in operating assets and liabilities 17,667 (24,895)
Other (1,375) (156)
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Net Cash Provided by Operating Activities 43,937 1,765
INVESTING ACTIVITIES
Net expenditures on property and equipment (10,954) (6,387)
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Net Cash Used in Investing Activities (10,954) (6,387)
FINANCING ACTIVITIES
Purchase of treasury stock (8,358) (8,891)
Increase in long-term debt 1,761 9
Change in short-term debt (1,323) 19,616
Dividends paid (3,329) (3,126)
Other 266 395
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Net Cash Provided by (Used in) Financing Activities (10,983) 8,003
Effect of exchange rate changes on cash (606) (1,378)
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Increase in cash and cash equivalents 21,394 2,003
Cash and Cash Equivalents-Beginning of Year 36,136 32,017
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Cash and Cash Equivalents-End of Period $ 57,530 $ 34,020
========== ==========
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 three
month period ended October 31, 2001 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
October 31
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2001 2000
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Weighted average shares outstanding - Basic 44,252,026 44,560,523
Dilutive share equivalents 1,250,699 896,409
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Weighted average shares outstanding - Diluted 45,502,725 45,456,932
============ ============
Net earnings for basic and diluted
earnings per share computation $ 19,724,000 $ 16,804,000
------------ ------------
Net earnings per share - Basic $ .45 $ .38
============ ============
Net earnings per share - Diluted $ .43 $ .37
============ ============
5
Note C - Comprehensive Income
The Company reports accumulated other comprehensive income as a separate item in
the shareholders' equity section of the balance sheet. Other comprehensive
income consists of foreign currency translation adjustments and net gains or
losses on cash flow hedging derivatives.
Total comprehensive income and its components are as follows (in thousands):
Three Months Ended
October 31
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2001 2000
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Net earnings $ 19,724 $ 16,804
Foreign currency translation adjustment 3,003 (13,666)
Net gain(loss) on cash flow hedging derivatives (269) 749
-------- --------
Total other comprehensive income $ 22,458 $ 3,887
======== ========
Total accumulated other comprehensive loss and its components are as follows (in
thousands):
October 31 July 31
2001 2001
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Foreign currency translation adjustment $(21,237) $(24,240)
Net gain on cash flow hedging derivatives 77 346
Additional minimum pension liability (341) (341)
-------- --------
Total accumulated other comprehensive loss $(21,501) $(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
October 31, 2001:
Net sales $156,505 $131,924 -- $288,429
Earnings before income taxes 18,756 18,629 $ (9,990) 27,395
October 31, 2000:
Net sales 167,136 122,733 -- 289,869
Earnings before income taxes $ 15,163 $ 12,999 $ (4,156) $ 24,006
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
6
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
the hedged assets, liabilities or firm commitments are recognized through
earnings or in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. 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.
In order to comply with the implementation requirements of SFAS 133 and SFAS
138, the Company undertook a comprehensive review of its contractual
relationships to ensure that all potential free-standing and embedded
derivatives were identified. As a result, all of the Company's existing
derivative positions qualified for hedge accounting per SFAS 133 and SFAS 138,
and the impact of adoption was not considered material to the Company's results
of operations or financial position. The Company's documentation policies for
derivatives were revised as considered necessary to comply with SFAS 133
requirements. However, the Company made no substantive changes to its risk
management strategy as a result of adopting SFAS 133 and SFAS 138. As a result
of the implementation of SFAS 133 and SFAS 138, the Company has recorded a
credit to other comprehensive income of $0.1 million at October 30, 2001.
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 October
31, 2001, the interest rate swap had a fair value of $1.9 million.
Note F - New Accounting Standards
In June 2001, the Financial Accounting Standards Board issues 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; effective August 1, 2002,
goodwill is no longer subject to amortization. The Company has adopted the
provisions of these statements as of August 1, 2001. As required by SFAS 142,
the Company is in the process of performing an impairment test on goodwill as of
the adoption date. Thereafter, 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
net of income taxes for the quarter ended October 31, 2000. The Company
estimates that goodwill amortization expense would have been approximately $0.6
million net of income taxes in the first quarter of fiscal 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
October 31,
(In thousands, except per share amounts) 2001 2000 1999
------------------------------
Reported net income $19,724 $16,804 $17,008
Add: Goodwill amortization, net of tax -- 662 474
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Adjusted net income 19,724 17,466 17,482
======= ======= =======
Basic earnings per share:
Reported basic earnings per share .45 .38 .37
Add: Goodwill amortization, of tax -- .01 .01
------- ------- -------
Adjusted basic earnings per share .45 .39 .38
======= ======= =======
Diluted earnings per share:
Reported diluted earnings per share .43 .37 .36
Add: Goodwill amortization, net of tax -- .01 .01
------- ------- -------
Adjusted diluted earnings per share .43 .38 .37
======= ======= =======
As of July 31, 2001, goodwill was $57.8 million. There were no additions during
the first quarter of fiscal 2002. Other intangible assets, which include patents
and trademarks of $0.3 million as of October 31, 2001, are being amortized over
their useful lives.
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 October 31, 2001, 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 months ended October 31,
2001. 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 October 31, 2001, the balance of restructuring liabilities
recorded in conjunction with the acquisition was approximately $0.7 million of
costs associated with the closure and sale of acquired facilities as well as
termination and relocation of employees. Costs incurred and charged to these
reserves associated with the closure and sale of acquired facilities amounted to
$0.9 million and the termination and relocation of
8
employees amounted to $0.5 million for the three months ended October 31, 2001.
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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
The Company generated $43.9 million of cash and cash equivalents from operations
during the first three months of fiscal 2002. Operating cash flows increased by
$42.2 million from the same period in the prior year due to decreases in
accounts receivable and inventory compared to prior year increases in those
balances. These cash flows, plus borrowings from the Company's credit facility,
were used during the first three months of fiscal 2002 primarily to support
$11.0 million in capital additions, repurchase $8.4 million of treasury stock
and for the payment of $3.3 million in dividends. At the end of the first
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 first quarter, the Company held $57.5 million in cash and cash
equivalents. Short-term debt totaled $58.0 million, down from $59.4 million at
July 31, 2001. The amount of unused lines of credit as of October 31, 2001 was
approximately $82.8 million. Long-term debt of $101.4 million at October 31,
2001, up from $99.3 million at July 31, 2001, represented 23.5 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
9
filtration systems. The Industrial Products segment sells to various industrial
end-users, OEMs of gas-fired turbines, OEMs and end users requiring highly
purified air.
The Company reported net earnings for the first quarter ended October 31, 2001
of $19.7 million, up from the $16.8 million recorded in the first quarter of the
prior year. Total net sales for the three months ended October 31, 2001 of
$288.4 million were down 0.5 percent from prior year sales of $289.9 million.
Foreign currency translation reduced first quarter net sales by 0.6 percent and
the exit from an unprofitable block of business in the second quarter of fiscal
2001 reduced first quarter net sales by 0.9 percent. Net of these factors, first
quarter net sales were up 1.0 percent. The increase in net earnings reflects the
Company's efforts to lower costs resulting in an increase in gross margin as
compared to the first quarter of the prior year. This along with the lowering of
the Company's effective income tax rate in the third quarter of fiscal 2001 due
to increased profitability from foreign operations helped to offset the effect
of negative effects on net sales discussed above. Diluted net earnings per share
were 43 cents, up 16.2 percent from prior year diluted net earnings per share of
37 cents as the average number of shares outstanding increased slightly compared
to the prior year period.
For the first quarter, net sales in the Industrial Products segment of $131.9
million increased 7.5 percent from $122.7 million in the prior year. This
increase was driven by the continued strength in gas turbine product sales with
an increase of 66.3 percent to net sales of $57.2 million from $34.4 million in
the prior year. Gas turbine sales grew in all major geographic regions as the
multi-year ramp up in gas turbine power plant additions continued into the first
quarter of fiscal 2002, and the Company continues to be the supplier of choice
for air inlet filtration systems. For the quarter, sales of dust collection
products were $48.2 million, a decrease of 19.3 percent from $59.8 million in
the same period in the prior year. As U.S. industrial production recorded its
13th consecutive monthly decrease and capacity utilization fell to its lowest
levels since June 1983, U.S. manufacturers capital spending remained at
recession-like levels. Caution in capital spending levels is spreading to other
geographic regions, particularly Europe. These factors have created a difficult
operating environment for industrial dust collection equipment sales. For the
quarter, sales of special application products were $26.4 million, a 7.2 percent
decrease from prior year sales of $28.5 million. Within special application
products, a modest increase in disk drive filter sales was offset by weak sales
in aircraft cabin air filtration and photolithography filtration
For the first quarter, net sales in the Engine Products segment of $156.5
million decreased 6.4 percent from $167.1 million in the prior year. The
decrease in net sales reflects U.S. economic weakness as well as weakness of
foreign currency against the U.S. dollar. Within the Engine Products segment,
net sales of medium and heavy-duty truck products of $21.6 million decreased 8.5
percent in the quarter from $23.7 million in the prior year. The decrease in the
first quarter reflects the decrease in the North American truck market and the
Company's decision in the second quarter of fiscal 2001 to discontinue a block
of business with a major customer due to unfavorable commercial terms. Excluding
this exit from a block of business in the prior year, net sales were up 3.4
percent. Truck build data continues to show that NAFTA build rates have
stabilized, but at dramatically lower levels than a year ago. Sales of off-road
products totaling $45.9 million declined slightly for the third quarter posting
a decrease of 1.1 percent from $46.5 million over the same period in the prior
year. Excluding the effects of currency translation, results were essentially
flat. Stronger defense product sales were offset by weak conditions in markets
for construction and light industrial equipment. Sales of aftermarket products
10
for the first quarter were $88.9 million, a decrease of 8.3 percent from $97.0
million in the prior year. North American and European freight volumes and
vehicle utilization rates continue to be weak, negatively affecting aftermarket
product sales.
Consolidated gross margin for the first quarter of fiscal 2002 was 30.6 percent,
up from 29.7 percent in the same quarter of the prior year. The year-over-year
improvement was attributable to improved product mix and the realized benefits
of last year's plant rationalization efforts, partially offset by on-going plant
rationalization efforts costing 2 cents per share in the quarter.
Operating expenses during the first quarter of fiscal 2002 were $59.3 million
(20.5 percent of sales), compared to $58.0 million (20.0 percent of sales) in
the same quarter of fiscal 2001. Included in operating expenses in the prior
year was $1.0 million of goodwill amortization and the positive impact from a
warranty settlement of $1.7 million. Excluding these two adjustments, operating
expenses were 20.2 percent of sales in the prior year.
Other income for the first quarter of $0.7 million increased $1.5 million from
$0.8 million of expense in the same period in the prior year. Other income for
the first quarter consisted of income from unconsolidated affiliates of $1.0
million, interest income of $0.2 million and other expense of $0.5 million. For
the quarter, interest expense was $2.4 million, down $0.7 million from the first
quarter in the prior year, reflecting lower short-term debt levels as compared
to the prior year.
The income tax rate for the quarter was 28 percent, down from 30 percent in
fiscal 2001. The tax rate was adjusted in the third quarter of fiscal 2001 to
provide for the increased contributions from the Company's international
operations and reflects the foreign tax credit generated by the receipt of a
dividend from the Company's operations in Japan and the reduction of a net
operating loss valuation allowance in our Mexico operations. The Company
anticipates that it will continue to have a higher proportion of income coming
from its international operations located in Europe and Asia. As a result, the
Company anticipates maintaining the 28 percent tax rate through the end of the
fiscal year.
Total backlog of $331 million at October 31, 2001 was up 5 percent relative to
the same period in the prior year and down 7 percent from the prior quarter end.
In the Industrial Products segment, total backlog increased 6 percent from the
same period in the prior year but decreased 11 percent from the prior quarter
end. In the Engine Products segment, total backlog increased 4 percent from the
same period in the prior year but increased 2 percent from the prior quarter
end.
Hard order backlog - goods scheduled for delivery in 90 days - was $176 million,
down 4 percent from the same period in the prior year and down 2 percent from
the prior quarter end. In the Industrial Products segment, hard order backlog
decreased 7 percent from the same period in the prior year and decreased 1
percent from the prior quarter end. In the Engine Products segment, hard order
backlog decreased 1 percent from the same period in the prior year and decreased
4 percent from the prior quarter end.
The impact of foreign currency translation, resulted in a decrease in net sales
of $1.8 million and virtually no impact on net earnings for the first quarter.
The decrease in net sales was a direct result of the weakness of currencies
against the U.S. dollar in several of the Company's operating locations
throughout the world. The currencies that impacted the Company's sales results
the most were the Japanese Yen and the South African Rand, which resulted in a
decrease in net sales of $2.4 million and $0.9
11
million, respectively. The Australian Dollar also had a negative impact on the
Company's first quarter net sales with a decrease in net sales of $0.4 million.
The negative impact of these currencies was offset by the foreign exchange
impact of the Euro, which resulted in a gain of $1.9 million for the quarter. On
a local currency basis, revenues outside the U.S. were flat. Using last year's
foreign exchange rates, total worldwide revenue would have been flat versus the
reported decrease of 0.5 percent.
Outlook
Within the Industrial Products segment, the Company expects continued strength
in gas turbine sales throughout calendar year 2002, although the year-over-year
growth rates are expected to level off from the recent high levels. The
difficult operating conditions for dust collection product sales and portions of
special applications products are expected to persist for at least the next
quarter. Within the Engine Products segment, the Company anticipates continued
weak economic conditions, but easing year-over-year comparisons should begin
following last year's second quarter slowdown in the end markets for Engine
Products.
Recognizing the difficult economic conditions for many of the end markets, the
Company will continue to focus on managing its cost structure through continued
discretionary expense controls, lower spending for plant rationalization efforts
compared to the prior year, and other initiatives designed 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
Shareholders, any Form 10-K, 10-Q or Form 8-K of the Company or any other
written or oral statements made by or on behalf of the Company may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. The words "believe,"
"expect," "anticipate," "intends," "estimate," "forecast," "plan," "project,"
"should" and similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All forecasts and projections are "forward-looking statements" and are
based on management's current expectations of the Company's near-term results,
based on current information available pertaining to the Company, including the
risk factors noted below.
The Company wishes to caution investors that any forward-looking statements made
by or on behalf of the Company are subject to uncertainties and other factors
that could cause actual results to differ materially from such statements. These
uncertainties and other risk factors include, but are not limited to: risks
associated with currency fluctuations, commodity prices, world economic factors,
political factors, 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,
12
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.
13
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 October 31,
2001, 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 $3.2 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 had no affect on interest expense for the
quarter ended October 31, 2001.
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.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
None
(b) Reports on Form 8-K.
(1) The Company filed Form 8-K on August 13, 2001, filing
the Company's press release dated August 13, 2001 as
exhibit 99.1 of the Form 8-K.
(2) The Company filed Form 8-K on August 28, 2001, filing
the Company's press release dated August 28, 2001 as
exhibit 99.1 of the Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DONALDSON COMPANY, INC.
-----------------------
(Registrant)
Date December 17, 2001 By /s/ William M. Cook
---------------------- -------------------------------------
William M. Cook
Senior Vice President and
Chief Financial Officer
Date December 17, 2001 By /s/ Thomas A. Windfeldt
---------------------- -------------------------------------
Thomas A. Windfeldt
Vice President,
Controller and Treasurer,
Chief Accounting Officer
15