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Donaldson Company Announces First Quarter Results

26 November, 2001
FROM:
Padilla Speer Beardsley
224 Franklin Avenue West
Minneapolis, Minnesota 55404
FOR:
Donaldson Company, Inc.
P.O. Box 1299
Minneapolis, Minnesota 55440
(NYSE: DCI)
CONTACTS:
Tony Carideo
Padilla Speer Beardsley
612-872-3720
Rich Sheffer
952-887-3753

FOR IMMEDIATE RELEASE



Record first-quarter EPS at 43 cents, up 16 percent on strong gas turbine product sales, continued aggressive cost management

 

MINNEAPOLIS, November 26 — Donaldson Company, Inc. (NYSE: DCI), today reported first quarter revenue of $288.4 million for the quarter ended October 31, 2001, down 0.5 percent from $289.9 million in the same period last year. Net earnings were $19.7 million, up 17.4 percent from $16.8 million last year. Record diluted earnings per share of 43 cents were up 16.2 percent from 37 cents in the prior year.

 

Foreign currency translation reduced first quarter revenue by 0.6 percent; additionally, last year's second quarter exit from an unprofitable block of truck-related business reduced revenue by 0.9 percent. Net of these factors, first quarter revenue was up 1.0 percent.

 

"Our first-quarter results get us off to a good start in fiscal 2002," commented Bill Van Dyke, chairman, president and chief executive officer. "Our gas turbine filter business turned in another strong performance, and we saw modest growth in our disk drive filter business despite a difficult market. These performances offset the weakness in industrial capital spending, while sales to original equipment manufacturers in our diesel engine-related business ran about even with this time last year."

 

Van Dyke added that all areas of the company's operations have continued to focus on aggressive cost management in the face of difficult economic conditions.

 

"We have been working aggressively to structure Donaldson for lower costs," he said. "Our work over the past 18 months in plant rationalization, while on-going, has already delivered improved gross margins. This work, including one plant closure announced this quarter and our continued progress toward opening new plants with lower cost structures, will help us stay ahead of the curve in the face of continuing price pressures. We are maintaining a firm grip on operating expense management, with an eye towards improving ROI throughout our business. Our strong cash flow has served to reduce short-term debt and, coupled with declining interest rates, has allowed us to significantly reduce interest expense from last year's levels."

 

Income Statement Discussion

The impact of foreign currency translation, mainly due to the weakness of the Yen and the South African Rand against the U.S. Dollar offset by a strengthening Euro, resulted in a decrease in net sales of $1.8 million and virtually no impact to net earnings. 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.

 

Gross margin was 30.6 percent, up from 29.7 percent in the same period in 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 were 20.5 percent of sales, up slightly from 20 percent last year. Included in last year's operating expenses were $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 last year.

 

Interest expense was $2.4 million, down from $3.1 million last year, reflecting lower short-term debt levels from a year ago and lower short-term interest rates.

 

Other income was $0.7 million in the quarter, an improvement of $1.5 million from last year's $0.8 million expense. Other income benefited from the return of joint venture income to normal levels following the prior year's decline.

 

The income tax rate was 28 percent, which was reduced in the third quarter last year from 30 percent. The company anticipates maintaining the 28 percent tax rate going forward.

 

Cash generated by operations was $43.9 million, an improvement of $42.2 million from last year, primarily driven by improvements in receivables and inventory levels compared to last year's increases in those levels. EBITDA for the quarter was a record $37.5 million compared with $36.9 million in the first quarter of last year.

 

Backlog

Total backlog of $331 million was up 5 percent relative to the same period last year and down 7 percent from the prior-quarter end. In the Industrial Products segment, total backlog increased 6 percent from the same period last year but decreased 11 percent from the prior-quarter end. In the Engine Products segment, total backlog increased 4 percent from the same period last year but decreased 2 percent from the prior-quarter end.

 

The 90-day backlog was $176 million, down 4 percent from the same period last 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 last 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 last year and 4 percent from the prior-quarter end.

 

Industrial Products Segment

The continued strength of gas turbine sales drove another good quarter for Industrial Products, with sales in the first quarter of $131.9 million, an increase of 7.5 percent from $122.7 million in the prior year.

 

Gas turbine product sales for the first quarter were $57.2 million, an increase of 66.3 percent from $34.4 million last 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 current quarter, and Donaldson continues to be the supplier of choice for air inlet filtration systems.

 

Dust collection product sales for the first quarter were $48.2 million, a decrease of 19.3 percent from $59.8 million last 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.

 

Sales of special application products in the first quarter were $26.4 million, a decrease of 7.2 percent from $28.5 million last year. Sales were weak for aircraft cabin air filtration and photolithography filtration, offsetting a modest increase in disk drive filter sales.

 

Engine Products Segment

Engine Product sales for the first quarter were $156.5 million, a decrease of 6.4 percent from $167.1 million last year. U.S. economic weakness and the previously-mentioned currency weakness of the Yen and Rand against the U.S. Dollar were contributing factors to the decline.

 

As expected, the company experienced a difficult year-over-year comparison in on-road medium- and heavy-duty truck products with sales in the first quarter of $21.6 million, a decrease of 8.5 percent from $23.7 million last year. Excluding last year's second quarter exit from a block of business due to unfavorable commercial terms, sales were up 3.4 percent. Truck build data continues to show that NAFTA build rates have stabilized, albeit at dramatically lower levels than a year ago.

 

Worldwide sales of off-road products in the first quarter were $45.9 million, a decrease of 1.1 percent from $46.5 million last 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.

 

Aftermarket product sales in the first quarter were $88.9 million, a decrease of 8.3 percent from $97.0 million last year. North American and European freight volumes and vehicle utilization rates continue to be weak, negatively affecting aftermarket product sales.

 

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, as discussed above, 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.

 

About Donaldson Company, Inc.

Donaldson Company, Inc., headquartered in Minneapolis, Minn., is a leading worldwide provider of filtration systems and replacement parts. Founded in 1915, Donaldson is a technology-driven company committed to satisfying customer needs for filtration solutions through innovative research and development. Donaldson serves customers in the industrial and engine markets including dust collection, power generation, specialty filtration, off-road equipment and trucks. More than 8,200 employees contribute to the company's success at 40 manufacturing locations around the world. In fiscal year 2001, Donaldson reported record sales of more than $1.1 billion and achieved its 12th consecutive year of double-digit earnings growth. Donaldson is a member of the S&P MidCap 400 Index and Donaldson shares are traded on the New York Stock Exchange under the symbol DCI. Additional company information is available at www.donaldson.com.

 

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 earnings release, the Annual Report to Shareholders, any Form 10-K, 10-Q, Form 8-K or press release 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 t risks associated with currency fluctuations, commodity prices, world economic factors, political factors, 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.

 

CONDENSED STATEMENTS OF CONSOLIDATED EARNINGS

 

DONALDSON COMPANY, INC. AND SUBSIDIARIES

 








 

(Thousands of dollars, except per share amounts)

     

(Unaudited)

   
             
     

Three Months Ended

 
     

October 31

 
     

2001

 

2000

 

Net sales

   

$288,429

 

$289,869

 
             

Cost of sales

 

200,111

 

203,913

 
             

Gross margin

 

88,318

 

85,956

 
             

Operating expenses

 

59,270

 

58,047

 
             

Operating income

 

29,048

 

27,909

 
             

Other (income) expense

(731)

 

805

 
             

Interest expense

 

2,384

 

3,098

 
             

Earnings before income taxes

27,395

 

24,006

 
             

Income taxes

 

7,671

 

7,202

 
             

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

 

$.070

 
         

Capital expenditures

$10,954

 

$6,387

 

Depreciation and amortization

$7,921

 

$10,012

 

EBITDA

$37,491

 

$36,851

 
         

 














DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands of Dollars)

     

(Unaudited)

               
                       
       

October 31

   

July 31

       
       

2001

   

2001

       

ASSETS

                     
                       

Cash and cash equivalents

 

57,530

   

36,136

       

Accounts receivable – net

 

221,253

   

230,046

       

Inventories – net

   

105,296

   

112,634

       

Prepaid expenses and other current assets

35,960

   

28,411

       
                   
 

TOTAL CURRENT ASSETS

420,039

   

407,227

       
                 

Other assets and deferred taxes

95,536

   

91,945

       

Property, plant and equipment – net

211,730

   

207,658

       
                       
 

TOTAL ASSETS

 

727,305

   

706,830

       
                       

LIABILITIES AND SHAREHOLDERS' EQUITY

               
                       

Trade accounts payable

 

100,766

   

100,287

       

Employee compensation and other liabilities

60,678

   

57,576

       

Notes payable

 

57,958

   

59,393

       

Income taxes payable

 

2,522

   

-

       

Current maturity long-term debt

23

   

23

       
                   
 

TOTAL CURRENT LIABILITIES

221,947

   

217,279

       
                       

Long-term debt

   

101,415

   

99,259

       

Other long-term liabilities

 

73,814

   

71,199

       
                   
 

TOTAL LIABILITIES

397,176

   

387,737

       
                       
 

EQUITY

 

330,129

   

319,093

       
                       
 

TOTAL LIABILITIES & EQUITY

727,305

   

706,830

       
                       
                       

 

DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of Dollars)

(Unaudited)







 

Three Months Ended

 
 

October 31

 
 

2001

   

2000

 
           

OPERATING ACTIVITIES

         
           

Net earnings

$19,724

   

$16,804

 

Adjustments to reconcile net earnings to net

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)

 

Net Cash Provided by Operating Activities

43,937

   

1,765

 
           

INVESTING ACTIVITIES

         
           

Net expenditures on property and equipment

(10,954)

   

(6,387)

 

Net Cash Used in Investing Activities

(10,954)

   

(6,387)

 
           

FINANCING ACTIVITIES

         
           

Purchase of treasury stock

(8,358)

   

(8,891)

 

Net change in debt

438

   

19,625

 

Dividends paid

(3,329)

   

(3,126)

 

Other

266

   

395

 

Net Cash Provided by (Used in) Financing Activities

(10,983)

   

8,003

 
           
           

Effect of exchange rate changes on cash

(606)

   

(1,378)

 
           

Increase in cash and cash equivalents

21,394

   

2,003

 
           

Cash and Cash Equivalents-Beginning of Year

36,136

   

32,017

 
           

Cash and Cash Equivalents-End of Period

$57,530

   

$34,020

 

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