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Donaldson Reports Record First Quarter Results

17 November, 2011

13 percent sales increase and strong operating margin deliver record EPS of $0.90

Donaldson Company, Inc. (NYSE: DCI) announced its financial results for its fiscal 2012 first quarter. Summarized financial results are as follows (dollars in millions, except per share data):


   



Three Months Ended



October 31



2011     2010     Change
Net sales

$ 608

$ 537

13 %
Operating income


90


75

21 %
Net earnings


69


53

29 %









 
Diluted EPS

$ 0.90

$ 0.68

32 %












 

"We are very pleased to start our new fiscal year with another record performance," said Bill Cook, Chairman, President and CEO. "Sales in our Engine Products segment increased 18 percent as new equipment build rates at our Off-Road and On-Road OEM Customers remained robust, while continued high equipment utilization rates kept our Aftermarket Products' sales at record levels. Within our Industrial Products' segment, demand for our Torit® dust collectors remained strong."

"Our operating margin performance was very good at 14.8 percent, another record. Our ongoing Continuous Improvement initiatives are helping us offset higher raw material costs compared to a year ago. In addition, we continue to leverage our fixed cost base as our sales grow."

"While we had a strong start to our new fiscal year, recent public forecasts for global economic growth rates have been reduced. Fortunately, our order trends remain healthy so we are retaining our original sales guidance of 7 to 15 percent growth in FY12. Of course, we will monitor business conditions at our Customers and will proactively adjust our plans if necessary. We continue to execute the Strategic Growth Plan we launched a year ago and are pleased to re-confirm our forecast of another sales record in FY12. Based on our strong 1st quarter performance and current outlook, we have increased our FY12 EPS projection to be between $3.25 and $3.50, which would be a new record."

Financial Statement Discussion

The impact of foreign currency translation increased sales by $13.4 million, or 2.5 percent, during the first quarter compared to the same period last year. The impact of foreign currency translation increased reported net earnings by $1.3 million, or 2.5 percent, during the first quarter compared to the prior year.

Gross margin was 35.3 percent, compared to 35.0 percent in last year's first quarter. The increase came from our ongoing Continuous Improvement initiatives and selective price increases, which were partially offset by increases in our purchased raw material costs and a less favorable sales mix.

Operating expenses for the quarter were $124.6 million, or 20.5 percent of sales, versus $113.6 million, or 21.2 percent of sales, last year.

The effective tax rate for the quarter was 25.5 percent, compared to a prior year rate of 26.2 percent. Both the current and prior year's quarter included tax benefits primarily due to favorable settlements of tax audits of $4.3 million and $2.7 million, respectively.

As part of our ongoing share repurchase program we repurchased 1,376,000 shares, or 1.8 percent of our diluted outstanding shares, for $73.6 million during the quarter.

FY12 Outlook

We are re-confirming our FY12 sales forecast of between $2.45 and $2.60 billion, or up about 7 to 15 percent from the prior year. Our current forecast is based on the Euro at US$1.39 and 78 Yen to the US$, which, in aggregate, is slightly less favorable than our original guidance issued in August.

  • Our full year operating margin is forecast to be 13.7 to 14.5 percent. Our annual stock option expense is estimated to be between $7.0 and $9.0 million with approximately 50 percent of that incurred in our second quarter.
  • Our full year FY12 tax rate is anticipated to be between 27 and 30 percent.
  • Our full year FY12 EPS projection has been increased to be between $3.25 and $3.50.
  • Cash generated by operating activities is projected to be between $260 and $290 million in FY12. Capital spending is estimated to be approximately $100 million.

Engine Products: We expect full year sales to increase 8 to 15 percent, including the impact of foreign currency translation.

  • We anticipate sales to both our On-Road and Off-Road OEM Customers will grow at a moderate rate in FY12. We will also continue to benefit from increased market share on our Customers' new Tier IV equipment platforms.
  • Sales of our Aftermarket Products are expected to remain strong based on current utilization rates for both off-road equipment and on-road heavy trucks. We should also benefit from our continued expansion into the emerging economies and from the increasing number of systems installed in the field with our proprietary filtration systems such as PowerCore®.
  • We forecast Aerospace and Defense Products sales to be level with the prior year as the continued slowdown in military spending is anticipated to be offset by increased commercial aerospace sales.

Industrial Products: We forecast full year sales to increase 7 to 15 percent, including the impact of foreign currency translation.

  • Our Industrial Filtration Solutions' sales are projected to increase 7 to 14 percent and assume a continuing improvement in general manufacturing activity.
  • We anticipate our Gas Turbine Products' sales to be up 18 to 25 percent due to the recent strengthening in the large turbine power generation market and ongoing strength in the oil and gas market segment.
  • Special Applications Products' sales are forecast to decrease 1 to 7 percent as the recent flood in Thailand is expected to temporarily reduce demand for our disk drive filters.

About Donaldson Company

Donaldson is a leading worldwide provider of filtration systems that improve people's lives, enhance our Customers' equipment performance, and protect our environment. We are a technology-driven Company committed to satisfying our Customers' needs for filtration solutions through innovative research and development, application expertise, and global presence. Our 12,900 employees contribute to the Company's success by supporting our Customers at our more than 100 sales, manufacturing, and distribution locations around the world.

Donaldson is a member of the S&P MidCap 400 and Russell 1000 indices, and our shares trade on the NYSE under the symbol DCI. Additional information is available at 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 announcement contains forward-looking statements, including forecasts, plans, and projections relating to our business and financial performance and global economic conditions, which involve uncertainties that could materially impact results.

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: world economic factors and the ongoing economic uncertainty, reduced demand for hard disk drive products with the increased use of flash memory, the potential for some Customers to increase their reliance on their own filtration capabilities, currency fluctuations, commodity prices, political factors, the Company's international operations, highly competitive markets, governmental laws and regulations including the impact of various economic stimulus and financial reform measures, the implementation of our new information technology systems, potential global events resulting in market instability including financial bailouts of sovereign nations, political changes, military and terrorist activities, health outbreaks, natural disasters, and other factors included in our Annual and Quarterly Reports. We undertake no obligation to publicly update or revise any forward-looking statements.

 
 
CONDENSED STATEMENTS OF CONSOLIDATED EARNINGS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
(Thousands of dollars, except share and per share amounts)
(Unaudited)

     
   




Three Months Ended




October 31




2011

2010
Net sales


$ 608,295


$ 536,909







 
Cost of sales


  393,361  

  348,819  







 
Gross margin



214,934



188,090







 
Operating expenses


  124,607  

  113,587  







 
Operating income



90,327



74,503







 
Other income, net



(4,860 )


(1,107 )







 
Interest expense


  3,170  

  3,653  







 
Earnings before income taxes



92,017



71,957







 
Income taxes


  23,464  

  18,823  







 
Net earnings


$ 68,553  

$ 53,134  







 
Weighted average shares






outstanding



75,256,946



77,169,260







 
Diluted shares outstanding



76,523,599



78,484,455







 
Net earnings per share


$ 0.91


$ 0.69







 
Net earnings per share






assuming dilution


$ 0.90


$ 0.68







 
Dividends paid per share


$ 0.150


$ 0.125











 
 
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
 

    October 31     July 31



2011

2011
ASSETS










 
Cash and cash equivalents

$ 302,213
$ 273,494
Accounts receivable – net


439,571

445,700
Inventories – net


274,172

271,476
Prepaids and other current assets

  74,795
  75,912





 
Total current assets


1,090,751

1,066,582





 
Other assets and deferred taxes


271,314

268,009
Property, plant and equipment – net

  384,106
  391,502





 
Total assets

$ 1,746,171

$ 1,726,093






 
LIABILITIES AND SHAREHOLDERS' EQUITY











 
Trade accounts payable

$ 203,445

$ 215,918
Employee compensation and other liabilities


200,921

219,326
Notes payable


92,132

13,129
Current maturity long-term debt

  47,536
  47,871





 
Total current liabilities


544,034

496,244





 
Long-term debt


204,881

205,748
Other long-term liabilities

  109,061
  89,390





 
Total liabilities


857,976

791,382






 
Equity

  888,195

  934,711






 
Total liabilities and equity

$ 1,746,171

$ 1,726,093








 
 
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
 

    Three Months Ended



October 31



2011     2010
OPERATING ACTIVITIES











 
Net earnings

$ 68,553


$ 53,134
Adjustments to reconcile net earnings to net cash





provided by operating activities:





Depreciation and amortization


15,574



14,918
Changes in operating assets and liabilities


(21,932 )


1,220
Tax benefit of equity plans


(2,171 )


(2,933 )
Stock compensation plan expense


1,690



1,461
Other, net

  (4,028 )

  (5,037 )
Net cash provided by operating activities


57,686



62,763






 
INVESTING ACTIVITIES











 
Net expenditures on property and equipment

  (18,491 )

  (10,048 )
Net cash used in investing activities


(18,491 )


(10,048 )






 
FINANCING ACTIVITIES











 
Purchase of treasury stock


(73,558 )


(6,491 )
Net change in debt


78,763



(17,191 )
Dividends paid


(11,193 )


(9,553 )
Tax benefit of equity plans


2,171



2,933
Exercise of stock options

  2,961  

  3,950  
Net cash used in financing activities


(856 )


(26,352 )










 

Effect of exchange rate changes on cash



 

(9,620

)



 

9,238

 










 

Increase in cash and cash equivalents




28,719





35,601












 

Cash and cash equivalents – beginning of year



 

273,494

 

 

232,000

 










 

Cash and cash equivalents – end of period



$

302,213

 

$

267,601

 










 
 
SEGMENT DETAIL
(Thousands of dollars)
(Unaudited)

   
   
   
   



Engine

Industrial

Corporate &

Total



Products

Products

Unallocated

Company
3 Months Ended October 31, 2011:











Net sales

$ 393,725

$ 214,570


---


$ 608,295
Earnings before income taxes


59,878


34,299


(2,160 )


92,017












 
3 Months Ended October 31, 2010:











Net sales

$ 333,769

$ 203,140


---


$ 536,909
Earnings before income taxes


48,451


30,035


(6,529 )


71,957












 












 
NET SALES BY PRODUCT
(Thousands of dollars)
(Unaudited)









 






Three Months Ended






October 31









2011

2010
Engine Products segment:











Off-Road Products







$ 94,108


$ 72,646
Aerospace and Defense Products








25,458



26,854
On-Road Products








42,625



29,055
Aftermarket Products








226,897



201,867
Retrofit Emissions Products







  4,637  

  3,347
Total Engine Products segment







$ 393,725  

$ 333,769












 
Industrial Products segment:











Industrial Filtration Solutions Products







$ 133,399


$ 119,353
Gas Turbine Products








35,581



35,505
Special Applications Products







  45,590  

  48,282
Total Industrial Products segment







$ 214,570  

$ 203,140












 
Total Company







$ 608,295  

$ 536,909















 
 

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(Thousands of dollars, except per share amounts)
(Unaudited)

   



Three Months Ended



October 31



2011     2010






 
Free cash flow

$ 39,195


$ 52,715
Net capital expenditures

  18,491  

  10,048  
Net cash provided by operating activities

$ 57,686  

$ 62,763  






 
EBITDA

$ 109,962


$ 90,008
Income taxes


(23,464 )


(18,823 )
Interest expense (net)


(2,371 )


(3,133 )
Depreciation and amortization

  (15,574 )

  (14,918 )






 
Net earnings

$ 68,553  

$ 53,134  






 
Net sales, excluding foreign currency translation

$ 594,875


$ 540,636
Foreign currency translation

  13,420  

  (3,727 )






 
Net sales

$ 608,295  

$ 536,909  






 
Net earnings, excluding foreign currency translation

$ 67,222


$ 53,015
Foreign currency translation

  1,331  

  119  






 
Net earnings

$ 68,553  

$ 53,134  










 
 
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (CONTINUED)
(Thousands of dollars, except per share amounts)
(Unaudited)

     




Three Months Ended




October 31




2011     2010
Net earnings, excluding









special items


$ 68,553

$ 53,700
Restructuring charges,









net of tax


  ---

  (566 )







 
Net earnings


$ 68,553

$ 53,134  










 
Net earnings per share









assuming dilution,









excluding special items


$ 0.90

$ 0.69
Restructuring charges per









share, net of tax


  ---

  (0.01 )







 
Net earnings per share









assuming dilution


$ 0.90

$ 0.68  










 

Although free cash flow, EBITDA, net sales excluding foreign currency translation, net earnings excluding foreign currency translation, net earnings excluding restructuring charges and net earnings per share assuming dilution excluding restructuring charges 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. Both net earnings excluding restructuring charges and earnings per share excluding restructuring charges provide a comparable measure for understanding the results of the Company as compared to prior periods. 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.

Donaldson Company, Inc.
Rich Sheffer, 952-887-3753

Nov 17, 2011
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