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Donaldson Reports Record Fourth Quarter and Full-Year Results

29 August, 2011

Donaldson Company, Inc. (NYSE: DCI) announced its financial results for its fiscal 2011 fourth quarter. Summarized financial results are as follows (dollars in millions, except per share data):









Three Months Ended

Twelve Months Ended


July 31

July 31


2011


2010


Change



2011


2010


Change

Net sales
$625
$515
21 %

$2,294
$1,877
22 %
Operating income
90
75
21 %

315
238
32 %
Net earnings
66
51
29 %

225
166
36 %
Diluted EPS
$0.84
$0.65
29 %

$2.87
$2.10
37 %

"We are very pleased to report that we had a very good 4th quarter with all-time quarterly sales and EPS records. We also delivered full year records on key operating metrics including sales, operating margins, and net earnings," said Bill Cook, Chairman, President and CEO. "We saw strength in both of our reporting segments as Engine and Industrial Products sales increased 26 percent and 15 percent over the prior year, respectively. Our operating margin was 14.4 percent in the fourth quarter and a record 13.7 percent for the year. We are executing very well in our manufacturing plants and distribution centers and continue to make both capital and operating investments which, along with our Continuous Improvement initiatives, position us to profitably support our Customers' global growth plans."

"Over the past four weeks, there have been many reports of a slowdown in global growth rates and the increased possibility of another recession. However, our current order trends remain healthy and, consequently, we continue to forecast that our sales will grow 7 to 15 percent in FY12. However, we will remain very vigilant and will quickly modify our plans if conditions change. Through our continued execution of our Strategic Growth Plans and by focusing on those things we can control, we forecast delivering another sales record and record EPS performance of between $3.15 and $3.45 per share in FY12."

Financial Statement Discussion

The impact of foreign currency translation increased sales by $40.3 million, or 7.8 percent, during the fourth quarter and $49.8 million, or 2.7 percent, for the year. The impact of foreign currency translation increased reported net earnings by $4.0 million, or 7.7 percent, during the fourth quarter and $6.1 million, or 3.6 percent, for the year.

Gross margin was 36.3 percent for the quarter, equal to last year's fourth quarter, and 35.5 percent for the year, 40 basis points better than last year's 35.1 percent. Increases in purchased raw material and freight costs were offset by better fixed cost absorption and our Continuous Improvement initiatives.

Operating expenses for the quarter were $137.0 million, or 21.9 percent of sales, versus $112.4 million, or 21.8 percent of sales, last year. Operating expenses for the year were $498.5 million, or 21.7 percent of sales, compared to $420.5 million, or 22.4 percent of sales, last year.

The effective tax rate for the quarter was 27.3 percent, compared to a prior year rate of 29.5 percent. The current quarter included $2.6 million of tax benefits primarily from the expiration of some statutes of limitation and the favorable impact of dividends from some foreign subsidiaries. For the year, the effective tax rate was 27.9 percent compared to a prior year rate of 27.8 percent.

As part of our ongoing share repurchase program we repurchased 1,157,000 shares for $65.8 million during the quarter. For the year, we repurchased 1,957,000 shares, or 2.5 percent of our diluted outstanding shares, for $108.9 million.

FY12 Outlook

We expect continued expansion in many of our end markets, with higher growth in emerging economies. We are planning our FY12 sales to be 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$1.42 and 81 Yen to the US$.

  • Our full year operating margin is forecasted to be 13.7 to 14.5 percent.
  • Our full year FY12 tax rate is anticipated to be between 28 and 30 percent.
  • We forecast our full year FY12 EPS to be between $3.15 and $3.45.
  • Cash generated by operating activities is projected to be between $275 and $305 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 our agricultural, mining, and construction equipment OEM Customers to grow at a more moderate pace in FY12 compared to FY11's growth rate of 47 percent. We will also continue to benefit from increased market share on our Customers' new Tier IV equipment platforms.
  • In our On-Road Products' business, we believe that build rates for heavy- and medium-duty trucks at our OEM Customers will be higher than FY11 levels but grow at a more normal rate than last year's 55 percent growth rate.
  • 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 as our distribution networks continue to expand in the emerging economies and from the increasing number of systems installed in the field with our proprietary filtration systems.
  • We forecast modest sales gains in Aerospace and Defense Products for FY12 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 assuming demand for new filtration equipment and replacement filters both continue to improve with increased global general industrial capital activity and spending.
  • We anticipate our Gas Turbine Products' sales to be up 14 to 22 percent due to an improvement in the power generation market and ongoing strength in the oil and gas market segment.
  • Special Applications Products' sales are forecast to increase 2 to 9 percent primarily due to growing sales of our membranes products.

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 over 13,000 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, 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



Twelve Months Ended



July 31

July 31


2011
2010

2011
2010
Net sales
$625,450

$515,243


$2,294,029

$1,877,064










Cost of sales
398,445

328,213


1,480,233

1,218,316










Gross margin
227,005

187,030


813,796

658,748










Operating expenses
136,998

112,364


498,513

420,504










Operating income
90,007

74,666


315,283

238,244










Other income, net
(3,515 )
(1,164 )

(9,505 )
(3,907 )










Interest expense
3,039

3,274


12,525

11,975










Earnings before income taxes
90,483

72,556


312,263

230,176










Income taxes
24,716

21,386


86,972

64,013










Net earnings
$65,767

$51,170


$225,291

$166,163










Weighted average shares








outstanding
76,774,299

77,389,950


77,196,370

77,848,528










Diluted shares outstanding
78,126,167

78,697,443


78,598,459

79,177,772










Net earnings per share
$0.86

$0.66


$2.92

$2.13










Net earnings per share








assuming dilution
$0.84

$0.65


$2.87

$2.10










Dividends paid per share
$0.150

$0.120


$0.535

$0.470

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



July 31
July 31


2011
2010
ASSETS







Cash, cash equivalents and short-term investments
$273,494 $232,000
Accounts receivable – net
445,700 358,917
Inventories – net
271,476 203,631
Prepaids and other current assets
75,912 65,667




Total current assets
1,066,582 860,215




Other assets and deferred taxes
268,009 273,399
Property, plant and equipment – net
391,502
365,892




Total assets
$1,726,093
$1,499,506

LIABILITIES AND SHAREHOLDERS' EQUITY








Trade accounts payable
$215,918
$165,907
Employee compensation and other liabilities
219,326 167,813
Notes payable
13,129 50,000
Current maturity long-term debt
47,871 5,536




Total current liabilities
496,244 389,256




Long-term debt
205,748 256,192
Other long-term liabilities
89,390 107,425




Total liabilities
791,382 752,873





Equity
934,711
746,633





Total liabilities and equity
$1,726,093
$1,499,506

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




Twelve Months Ended


July 31


2011
2010
OPERATING ACTIVITIES






Net earnings
$225,291
$166,163

Adjustments to reconcile net earnings to net cash provided by operating activities:




Depreciation and amortization
60,491
59,232
Changes in operating assets and liabilities
(26,469 ) (23,116 )
Tax benefit of equity plans
(9,873 ) (4,625 )
Stock compensation plan expense
9,234
8,253
Other, net
(12,619 ) (2,902 )
Net cash provided by operating activities
246,055
203,005

INVESTING ACTIVITIES







Net expenditures on property and equipment
(59,851 ) (42,659 )
Acquisitions and divestitures, net
3,493
(250 )
Net cash used in investing activities
(56,358 ) (42,909 )

FINANCING ACTIVITIES







Purchase of treasury stock
(108,929 ) (66,696 )
Net change in debt
(43,182 ) 15,736
Dividends paid
(41,013 ) (36,242 )
Tax benefit of equity plans
9,873
4,625
Exercise of stock options
15,899

13,053
Net cash used in financing activities
(167,352 )
(69,524 )







Effect of exchange rate changes on cash


19,149



(2,259

)








Increase in cash and cash equivalents


41,494



88,313









Cash and cash equivalents – beginning of year


232,000



143,687









Cash and cash equivalents – end of period


$273,494



$232,000



SEGMENT DETAIL
(Thousands of dollars)
(Unaudited)











Engine
Products


Industrial
Products


Corporate &
Unallocated


Total
Company

3 Months Ended July 31, 2011:







Net sales
$397,995
$227,455
---

$625,450
Earnings before income taxes
62,132
31,635
(3,284 )
90,483









3 Months Ended July 31, 2010:







Net sales
$316,946
$198,297
---

$515,243
Earnings before income taxes
48,000
29,766
(5,210 )
72,556


















12 Months Ended July 31, 2011:







Net sales
$1,440,495
$853,534
---

$2,294,029
Earnings before income taxes
211,255
123,871
(22,863 )
312,263









12 Months Ended July 31, 2010:







Net sales
$1,126,007
$751,057
---

$1,877,064
Earnings before income taxes
155,833
91,084
(16,741 )
230,176

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



Three Months Ended
Twelve Months Ended


July 31
July 31


2011
2010
2011
2010
Engine Products segment:







Off-Road Products
$90,885
$65,096
$327,557
$222,329
Aerospace and Defense Products
27,111
27,170
104,883
111,977
On-Road Products
38,381
24,146
127,107
81,874
Aftermarket Products
236,351
196,984
861,393
691,899
Retrofit Emissions Products
5,267
3,550
19,555
17,928
Total Engine Products segment
$397,995
$316,946
$1,440,495
$1,126,007









Industrial Products segment:







Industrial Filtration Solutions Products
$138,637
$112,691
$507,646
$423,050
Gas Turbine Products
40,119
41,458
154,726
150,131
Special Applications Products
48,699
44,148
191,162
177,876
Total Industrial Products segment
$227,455
$198,297
$853,534
$751,057









Total Company
$625,450
$515,243
$2,294,029
$1,877,064

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

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







Three Months Ended
Twelve Months Ended


July 31
July 31


2011
2010
2011
2010









Free cash flow
$60,061

$38,809

$186,204

$160,346
Net capital expenditures
17,451

15,429

59,851

42,659
Net cash provided by operating activities
$77,512

$54,238

$246,055

$203,005









EBITDA
$107,409

$89,482

$381,995

$300,067
Income taxes
(24,716 )
(21,386 )
(86,972 )
(64,013 )
Interest expense (net)
(1,711 )
(2,852 )
(9,241 )
(10,659 )
Depreciation and amortization
(15,215 )
(14,074 )
(60,491 )
(59,232 )









Net earnings
$65,767

$51,170

$225,291

$166,163









Net sales, excluding foreign currency translation
$585,110

$523,471

$2,244,198

$1,833,863
Foreign currency translation
40,340

(8,228 )
49,831

43,201









Net sales
$625,450

$515,243

$2,294,029

$1,877,064









Net earnings, excluding foreign currency translation
$61,813

$51,419

$219,236

$162,612
Foreign currency translation
3,954

(249 )
6,055

3,551









Net earnings
$65,767

$51,170

$225,291

$166,163

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







Three Months Ended
Twelve Months Ended


July 31
July 31


2011
2010
2011
2010

Net earnings, excluding
special items


$65,767
$51,233

$225,857

$173,350

Restructuring and asset
impairment charges,
net of tax


-


(63 )
(566 )
(7,187 )









Net earnings
$65,767
$51,170

$225,291

$166,163

Net earnings per share
assuming dilution,
excluding special items


$0.84
$0.65

$2.88

$2.19

Restructuring and asset
impairment charges per
share, net of tax


-


-



(0.01 )
(0.09 )









Net earnings per share
assuming dilution


$0.84
$0.65

$2.87

$2.10












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

Aug 29, 2011
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