Press Release Details

MINNEAPOLIS (Sept. 1, 2009) — Donaldson Company, Inc. (NYSE: DCI) announced its financial results for its fourth quarter ended July 31, 2009.

Summarized financial results for the periods ended July 31 are as follows (dollars in millions, except per share data):

Included in the above results are pre-tax restructuring expenses of $6.7 million in the quarter and $17.8 million for the year. The impact of these restructuring expenses reduced diluted EPS by $0.05 in the quarter and $0.15 for the year. Excluding the impact of these restructuring expenses, diluted EPS was $0.35 in the quarter and $1.82 for the year.

"None of us anticipated how dramatically the global recession would impact our Customers and consequently our sales levels over the past six months," said Bill Cook, Chairman, President and CEO. "However, I am very proud of how quickly and effectively our Donaldson team has responded. As a result of our restructuring efforts, cost reduction initiatives, and working capital improvement projects, we delivered a sequential improvement in our gross margin during our fourth quarter.

"In addition, we continued to improve our already-strong liquidity position as we generated substantial free cash flow of $61 million and $231 million for the fourth quarter and year, respectively. This has allowed us to continue to invest in our business for the future and reduce debt by $49 million this quarter while still increasing our global cash reserves and maintaining our dividend.

"While we continue to be significantly impacted by the global recession, we are seeing signs that some of our end markets were beginning to stabilize in our fourth quarter as our overall sales were up 2% from our third quarter.

"Compared to our very strong prior year, our overall fourth quarter sales were down 31 percent and, excluding the impact of currency translation, were down 27 percent.  In our Engine Products segment, local currency sales decreased 27 percent. In our Industrial Products segment, local currency sales also decreased 27 percent.  Market conditions were also weak globally as our local currency sales decreased by 19 percent in Asia, 25 percent in the Americas, and 35 percent in Europe.

"We continued working on our restructuring plans but did not complete all of our anticipated actions by the end of the quarter. Unfortunately, these restructuring actions included further work force reductions of 100 employees in our fourth quarter, for a total work force reduction of 2,800, or 21 percent, since the beginning of our fiscal year.  From the actions we completed, we realized savings of approximately $23 million in the quarter and $43 million for the year. We anticipate that the cumulative effect of the restructuring actions completed in FY09 will generate over $100 million of annualized cost savings at our current sales levels.

"While we project many of our businesses to remain steady at their current levels during the first half of FY10, we expect difficult year-over-year comparisons for the first two quarters of FY10 and then slowly improving comparisons in the second half of the year. Our restructuring efforts will size us appropriately if economic activity remains at these currently depressed levels for an extended period, while also providing us with the financial strength to capitalize on growth opportunities as they emerge."

Financial Statement Discussion

The impact of foreign currency translation decreased reported sales by $22.6 million, or 3.7 percent, in the quarter and $76.8 million, or 3.4 percent, for the year. The impact of foreign currency translation decreased reported net earnings by $0.9 million, or 1.9 percent, in the quarter and $3.8 million, or 2.2 percent, for the year.

Gross margin was 32.8 percent for the quarter and 31.6 percent for the year, compared to prior year margins of 33.2 percent and 32.5 percent, respectively. The decrease in this year's fourth quarter gross margin was primarily driven by lower absorption of fixed costs due to the drop in our production volumes, and additional restructuring costs of $3.2 million, partially offset by savings from completed restructuring activities, a positive year-over-year LIFO accounting impact, better execution on large project shipments, and improved distribution efficiencies.

Operating expenses for the quarter were 24.6 percent of sales, up from 22.0 percent last year. Fourth quarter operating expenses included $3.5 million in restructuring costs, and $9 million savings from restructuring actions completed during the year. For the year, operating expenses were 22.5 percent of sales, up from 21.5 percent last year. Our operating expense reduction programs remain in effect, including a hiring freeze, salary freeze, targeted restructurings, and other expense reduction actions.

The effective tax rate for the quarter was 26.0 percent, compared to the prior year rate of 26.6 percent. The decrease was primarily due to a favorable geographic mix in the quarter as our Asia Pacific entities, which generally have lower tax rates, performed relatively better than other regions.  For the year, the effective tax rate was 18.3 percent, down from 27.2 percent last year due to $19.6 million of tax benefits, primarily from the favorable resolution of tax audits as reported in prior quarters.

Free cash flow was $60.8 million in the quarter versus $51.0 million last year. For the year, we generated $231.4 million of free cash flow compared to $102.7 million last year. We repurchased no shares during the quarter and repurchased 802,000 shares during the year for $32.8 million.

FY10 Outlook

• We are planning our total FY10 sales to be between $1.65 and $1.75 billion, or approximately the pace of the past two quarters. For the full year FY10 versus FY09, sales are projected to be down 6 to 12 percent. Foreign currency translation is expected to provide a small benefit based on our planned rates for the Euro of US$1.39 and 98 Yen to the US$ for FY10.
• As noted above, we did not complete all of our anticipated restructuring actions by the end of our fourth quarter. Consequently, restructuring costs in FY10 are projected to be $12 to $17 million. Including these costs, we expect our full year operating margin to still be between 9.5 to 10.5 percent. 
• We expect our full year FY10 tax rate to be between 30 and 32 percent as we do not anticipate significant discrete tax benefits as occurred in FY09.
• We will continue to focus on our working capital improvement initiatives and expect our full year free cash flow of $120 to $140 million. We will continue to use our cash flow for dividends, capital projects, and the maintenance of our strong liquidity position.
• We forecast our full year FY10 EPS to be between $1.32 and $1.52, including our estimated full year restructuring costs of $12 to $17 million.  Excluding those restructuring charges, we forecast our full year FY10 EPS to be between $1.44 and $1.64.