FOR IMMEDIATE RELEASE:
Wednesday, September 14, 2005
FOR FURTHER INFORMATION:
Rich Sheffer(952) 887-3753
DONALDSON COMPANY ANNOUNCES RECORD FULL-YEAR RESULTS
Delivers 16th consecutive year of record earningsMINNEAPOLIS, Sept. 14-- Donaldson Company, Inc. (NYSE: DCI) announced fourth quarter diluted earnings per share ("EPS") of $.29, even with last year. Net income was $25.1 million compared to $26.2 million last year. Sales were a record $422.7 million, up from $384.0 million in fiscal 2004.
For the year, EPS was a record $1.27, up from $1.18 last year. Net income was a record $110.6 million, versus $106.3 million last year. Record sales of $1.6 billion were up from $1.4 billion in the prior year.
During the fourth quarter, we recognized a $4.0 million tax charge, or $.05 per share, for the previously announced $80.0 million foreign repatriation plan pursuant to the American Jobs Creation Act of 2004. We also increased our reserve related to the previously disclosed patent litigation between Donaldson and Engineered Products Company, Inc. ("EPC") by $6.4 million, or $.05 per share.
"We are very pleased to announce our 16th consecutive record year, posting all-time highs for sales, earnings and EPS despite these fourth quarter charges," said Bill Cook, Chairman, President and Chief Executive Officer. "Demand continues to be strong in most of our end markets. Although we have seen rising oil prices affect our raw material costs for petroleum-based commodities and freight, we are working with our customers to offset these increases through a variety of efforts. We enter fiscal 2006 with continued strong orders and backlogs, giving us confidence of delivering another strong year of results."
Income Statement Discussion
Stronger foreign currencies contributed to the increase in fourth quarter and full year sales. Translated at constant exchange rates, sales increased 9.2 percent during the quarter and 10.4 percent for the year. The impact of foreign currency translation increased net earnings by $0.2 million in the fourth quarter and $2.0 million for the year.
Gross margin of 31.8 percent for the fourth quarter and 31.7 percent for the year compares to prior year margins of 31.2 percent and 31.6 percent, respectively. This year's fourth quarter gross margin was affected by higher costs for petroleum-based raw materials and freight, and a slower than expected ramp up of our new Thailand plant. Last year's fourth quarter gross margin was negatively impacted by $2.3 million from the unusual expenses discussed in last year's release.
This year's fourth quarter operating expenses were 22.3 percent of sales, down from 22.5 percent in the prior year. For the year, operating expenses were 21.9 percent of sales, down from 22.1 percent last year. Included in this year's fourth quarter operating expenses is the $6.4 million increase to our reserve for the EPC patent infringement judgment. Last year's fourth quarter operating expenses included $9.3 million of unusual expenses discussed in last year's release.
Fourth quarter interest expense was $2.7 million, up from $1.3 million last year. The increase was driven by additional debt and higher short-term interest rates. For the year, interest expense was $9.4 million, up from $5.0 million last year. Other income was $1.4 million in the quarter versus $2.5 million last year on lower joint venture income. For the year, other income was $7.7 million, up from $5.2 million last year.
The effective tax rate of 35.7 percent for the fourth quarter and 28.6 percent for the year compares to prior year rates of 24.2 percent and 25.0 percent, respectively. Excluding the $4.0 million tax charge related to the $80.0 million dividend reinvestment plan pursuant to the American Jobs Creation Act of 2004, the effective tax rate was 25.4 percent for the fourth quarter and 26.0 percent for the year.
No shares were repurchased during the fourth quarter. For the year, we repurchased 3,763,700 shares, or 4.4 percent of outstanding shares, for $116.3 million.
Backlog
Total backlog is strong, setting a new fourth quarter record at $412 million, up 11 percent relative to last year.
Engine Products Segment
Engine Products sales were a record $243.6 million in the quarter, an increase of 10 percent from last year. For the year, Engine Products sales were a record $923.8 million, an increase of 14 percent from last year.
Truck product sales in the quarter totaled $45.2 million, up 15 percent from last year. NAFTA truck product sales increased 15 percent due to growing new truck build rates. European truck product sales increased 9 percent on stronger build rates and increased market share. Truck product sales in Asia increased 22 percent from strong sales in Japan. For the year, worldwide truck product sales totaled $175.0 million, an increase of 12 percent from last year.
Worldwide sales of off-road products in the quarter were $74.4 million, up 14 percent from last year. NAFTA sales increased 11 percent on continued strength in new construction, agriculture and mining equipment demand. European off-road product sales increased 12 percent while Asian sales increased 26 percent. Worldwide sales totaled $286.2 million for the year, up 17 percent from last year.
Engine aftermarket or replacement part sales in the quarter were $124.0 million, an increase of 7 percent from last year. NAFTA aftermarket sales increased 10 percent as equipment utilization rates remained strong and sales of diesel emission retrofit equipment continued ramping up. European sales increased 7 percent and Asian sales were down 6 percent. For the year, worldwide aftermarket sales were $462.6 million, up 13 percent from the prior year.
Industrial Products Segment
Industrial Products sales in the quarter were a record $179.1 million, an increase of 10 percent from last year. For the year, Industrial Products sales were a record $671.9 million, an increase of 11 percent from last year.
Industrial Filtration Solutions ("IFS") sales in the quarter were a record $113.5 million, an increase of 10 percent from last year. IFS sales were strong in NAFTA and Asia as sales increased 18 and 12 percent, respectively. European sales increased 3 percent over last year. For the year, worldwide IFS sales totaled a record $424.7 million, up 15 percent from last year.
Gas turbine product sales in the quarter were $31.2 million, up 5 percent from last year. Worldwide sales totaled $112.9 million in fiscal 2005, down 4 percent from last year.
Sales of special application products in the quarter were a record $34.4 million, an increase of 16 percent from last year. For the year, worldwide special application sales were a record $134.3 million, up 16 percent from last year.
Outlook
Engine Products: We expect sales growth to be approximately 10 percent in fiscal 2006.
- NAFTA heavy-duty new truck build rates should remain at their current high levels as truck manufacturers are near capacity. Market share gains should continue to fuel international sales growth.
- Off-road sales are expected to remain strong worldwide with robust conditions continuing in the production of new construction and mining equipment.
- Both NAFTA and international aftermarket sales are expected to continue growing as continued strong equipment utilization drives replacement filter sales.
Industrial Products: We expect high single-digit sales growth in fiscal 2006.
- IFS sales growth is expected to moderate following two consecutive years of strong growth. Our American and Asian markets remain healthy and our European market remains stable.
- Globally, we expect full-year gas turbine sales to improve modestly. Strength is seen in the Middle East and in the oil and gas markets.
- Market conditions for special applications products are expected to remain strong.
Other: We will begin expensing stock options in our first quarter of fiscal 2006, and expect the full year EPS impact to be $.03 to $.06 per share.
About Donaldson Company, Inc.
Donaldson is a leading worldwide provider of filtration systems and replacement parts. Donaldson is a technology-driven company committed to satisfying customer needs for filtration solutions through innovative research and development. Donaldson serves customers in the diesel engine and industrial markets including in-plant air cleaning, compressed air and gas purification, power generation, disk drive filtration, off-road equipment and trucks. Our 11,000 employees contribute to the company's success at over 30 manufacturing locations around the world. Donaldson is a member of the S&P MidCap 400 Index and Donaldson shares are traded on the NYSE under the symbol DCI. Additional company information is available at http://www.donaldson.com .
SAFE HARBOR STATEMENT UNDER THE SECURITIES REFORM ACT OF 1995
The company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "Act") 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 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, forecasts and projections which reflect the company's current views with respect to future events and financial performance but involve uncertainties that could significantly impact results. The words "believe," "expect," "anticipate," "intends," "estimate," "forecast," "outlook," "plan," "promises," "project," "should," "will be" and similar expressions are intended to identify "forward- looking statements" within the meaning of the Act.
The company wishes to caution investors that any forward-looking statements are subject to uncertainties and other risk factors that could cause actual results to differ materially from such statements, including but not limited to risks associated with: currency fluctuations, commodity prices, world economic factors, political factors, the company's international operations, including production facilities in China, highly competitive markets, changes in capital spending levels by customers, changes in product demand, cancellations of orders, litigation, including the EPC litigation disclosed in the Company's SEC filings, integration of 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, see the company's 2004 Form 10-K filed with the Securities and Exchange Commission. The company wishes to caution investors that 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.
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED EARNINGS
(Thousands of dollars, except share and per share amounts)
(Unaudited)
Three Months Ended Year Ended
July 31 July 31
2005 2004 2005 2004
Net sales $422,739 $383,962 $1,595,733 $1,414,980
Cost of sales 288,157 264,346 1,090,158 967,254
Gross margin 134,582 119,616 505,575 447,726
Operating expenses 94,248 86,289 349,085 311,754
Gain on sale of Ome
land and building - - - (5,616)
Operating income 40,334 33,327 156,490 141,588
Other income, net (1,376) (2,505) (7,657) (5,202)
Interest expense 2,680 1,288 9,414 4,954
Earnings before income
taxes 39,030 34,544 154,733 141,836
Income taxes 13,919 8,353 44,179 35,519
Net earnings $25,111 $26,191 $110,554 $106,317
Weighted average
shares
outstanding 84,565,352 87,621,312 84,990,739 87,960,423
Diluted shares
outstanding 86,626,761 90,053,066 86,883,408 90,429,956
Net earnings
per share $.30 $.30 $1.30 $1.21
Net earnings
per share
assuming dilution $.29 $.29 $1.27 $1.18
Dividends paid
per share $.060 $.055 $.235 $.205
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
July 31 July 31
2005 2004
ASSETS
Cash and cash equivalents $134,066 $99,504
Accounts receivable - net 294,016 274,120
Inventories - net 151,599 143,418
Prepaid expenses and other current assets 39,141 40,338
Total current assets 618,822 557,380
Other assets and deferred taxes 217,458 182,700
Property, plant and equipment - net 275,493 261,529
Total assets $1,111,773 $1,001,609
LIABILITIES AND SHAREHOLDERS' EQUITY
Trade accounts payable $134,063 $124,401
Employee compensation and other liabilities 98,083 87,385
Notes payable 102,004 19,736
Income taxes payable 12,280 9,656
Current maturity long-term debt 7,772 34,346
Total current liabilities 354,202 275,524
Long-term debt 103,302 70,856
Other long-term liabilities 129,653 105,936
Total liabilities 587,157 452,316
Equity 524,616 549,293
Total liabilities and equity $1,111,773 $1,001,609
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
Year Ended
July 31
2005 2004
OPERATING ACTIVITIES
Net earnings $110,554 $106,317
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Gain on sale of Ome land and building - (5,616)
Depreciation and amortization 44,284 41,555
Changes in operating assets and liabilities (14,050) (31,812)
Other, net 1,800 7,608
Net cash provided by operating activities 142,588 118,052
INVESTING ACTIVITIES
Net expenditures on property and equipment (50,198) (43,030)
Acquisitions and investments in unconsolidated
affiliates, net of cash acquired (13,362) (4,397)
Net cash used in investing activities (63,560) (47,427)
FINANCING ACTIVITIES
Purchase of treasury stock (116,268) (29,765)
Net change in debt 87,973 3,322
Dividends paid (19,757) (17,779)
Other, net 2,703 3,298
Net cash used in financing activities (45,349) (40,924)
Effect of exchange rate changes on cash 883 2,733
Increase in cash and cash equivalents 34,562 32,434
Cash and cash equivalents - beginning of year 99,504 67,070
Cash and cash equivalents - end of year $134,066 $99,504
SEGMENT DETAIL
(Thousands of dollars)
(Unaudited)
Engine Industrial Corporate & Total
Products Products Unallocated Company
3 Months Ended
July 31, 2005:
Net sales $243,611 $179,128 --- $422,739
Earnings before
income taxes 29,528 15,715 (6,213) 39,030
3 Months Ended
July 31, 2004:
Net sales $221,089 $162,873 --- $383,962
Earnings before
income taxes 33,039 11,311 (9,806) 34,544
Year Ended
July 31, 2005:
Net sales $923,840 $671,893 --- $1,595,733
Earnings before
income taxes 125,454 53,709 (24,430) 154,733
Year Ended
July, 2004:
Net sales $811,543 $603,437 --- $1,414,980
Earnings before
income taxes 114,662 42,985 (15,811) 141,836
NET SALES BY PRODUCT
(Thousands of dollars)
(Unaudited)
Three Months Ended Year Ended
July 31 July 31
2005 2004 2005 2004
Engine Products
segment:
Off-road products $74,381 $65,559 $286,230 $244,749
Transportation products 45,201 39,164 175,048 156,373
Aftermarket products 124,029 116,366 462,562 410,421
Total Engine
Products Segment $243,611 $221,089 $923,840 $811,543
Industrial Products
segment:
Industrial filtration
solutions products $113,469 $103,361 $424,727 $370,095
Gas turbine products 31,249 29,858 112,872 117,705
Special applications
products 34,410 29,654 134,294 115,637
Total Industrial
Products segment $179,128 $162,873 $671,893 $603,437
Total Company $422,739 $383,962 $1,595,733 $1,414,980
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Thousands of dollars)
(Unaudited)
Three Months Ended Year Ended
July 31 July 31
2005 2004 2005 2004
Free cash flow $30,899 $39,023 $92,390 $75,022
Net capital
expenditures 15,763 6,470 50,198 43,030
Net cash provided
by operating
activities $46,662 $45,493 $142,588 $118,052
EBITDA $51,647 $45,376 $205,765 $186,486
Income taxes (13,919) (8,353) (44,179) (35,519)
Interest expense (net) (1,827) (221) (6,748) (3,095)
Depreciation and
amortization (10,790) (10,611) (44,284) (41,555)
Net earnings $25,111 $26,191 $110,554 $106,317
Net sales, excluding
foreign currency
translation $419,373 $374,528 $1,561,626 $1,345,020
Foreign currency
translation 3,366 9,434 34,107 69,960
Net sales $422,739 $383,962 $1,595,733 $1,414,980
Net earnings, excluding
foreign currency
translation $24,945 $25,528 $108,516 $101,603
Foreign currency
translation 166 663 2,038 4,714
Net earnings $25,111 $26,191 $110,554 $106,317
Although free cash flow, EBITDA, net sales excluding foreign currency
translation and net earnings excluding foreign currency translation are
not measures of financial performance under GAAP, the company believes
they are useful in understanding its financial results. Free cash flow is
a commonly used measure of a company's ability to generate cash in excess
of its operating needs. EBITDA is a commonly used measure of operating
earnings less non-cash expenses. Both net sales and net earnings
excluding foreign currency translation provide a comparable measure for
understanding the operating results of the company's foreign entities
excluding the impact of foreign exchange. A shortcoming of these
financial measures is that they do not reflect the company's actual
results under GAAP. Management does not intend these items to be
considered in isolation or as a substitute for the related GAAP measures.