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TMCNet:  Donaldson Reports First Quarter Results

[November 21, 2012]

Donaldson Reports First Quarter Results

MINNEAPOLIS --(Business Wire)--

Donaldson Company, Inc. (NYSE: DCI) announced its financial results for its fiscal 2013 first quarter. Summarized financial results are as follows (dollars in millions, except per share data):



Three Months Ended
October 31

2012

2011

Change

Net sales $589 $608 (3 )%
Operating income 74 90 (19 )%
Net earnings 54 69 (21 )%
Diluted EPS (*) $0.36 $0.45 (20 )%

(*) The prior year EPS amounts reflect the impact of last year's two-for-one stock split.

"Our first quarter sales and EPS were consistent with the updated outlook we announced in late October," said Bill�Cook, Chairman, President and CEO. "While we finished FY12 very strong, we saw conditions at many of our Customers decelerate in September and October. Incoming orders from our Engine OEM and Disk Drive Customers decreased as they lowered their production schedules to deal with declining end market demand and to also reduce their inventory levels. Utilization of on-road and off-road equipment also weakened during this period, resulting in lower order rates for our replacement filters. Fortunately, our Gas Turbine Products business helped offset these weaker conditions with a 33 percent year-over-year sales increase. We expect our Gas Turbine project shipments to continue increasing in our second and third quarters. Finally, foreign currency translation decreased our sales by almost 3 percent due to the stronger US dollar versus last year. Excluding the foreign exchange impact, sales decreased less than 1 percent in the quarter."

"Our operating margin was 12.5 percent due to lower fixed cost absorption and a mix shift to large Gas Turbine project shipments. We were able to partially offset these with our Continuous Improvement initiatives. Looking forward, we have initiated actions which will better align our manufacturing and operating expenses with our expected Customer demand."

"We see the current downturn as short-term primarily due to high levels of global uncertainty. We expect to return to year-over-year growth in our second quarter. A continuing benefit of our diversified portfolio of filtration businesses around the world is that regions including Latin America, South Africa, and Australia, and product groups like Gas Turbine and Integrated Venting Solutions, are all projecting strong growth. As a result, we are forecasting our Company's full-year sales to increase 0 to 4 percent, and our FY13 EPS forecast is between $1.68 and $1.88 per share."

Financial Statement Discussion

The impact of foreign currency translation decreased sales by $16.9 million, or 2.8 percent, during the first quarter compared to the same period last year. The impact of foreign currency translation decreased reported net earnings by $1.3 million, or 1.9 percent, compared to the prior year.

Gross margin was 33.7 percent, compared to 35.3 percent in last year's first quarter. The year-over-year decrease is primarily attributable to lower fixed cost absorption due to the decrease in our production volumes and the mix impact due to large Gas Turbine project shipments. These were partially offset by the benefits from our ongoing Continuous Improvement initiatives.

Operating expenses for the quarter were $124.8 million, approximately even with last year's $124.6 million. As a percent of sales, operating expenses were 21.2 percent compared to last year's 20.5 percent. Our cost containment actions helped offset higher pension expense and incremental expenses related to our strategic business systems projects.

Our effective tax rate for the quarter was 29.4 percent, compared to a prior year rate of 25.5 percent. The prior year's quarter included tax benefits primarily due to favorable settlements of tax audits of $4.3 million.

As part of our ongoing share repurchase program we repurchased 1,500,000 shares, or 1.0 percent of our diluted outstanding shares, for $50.7 million during the quarter.

FY13 Outlook

We continue to forecast full-year sales growth as strong Gas Turbine project shipments in the next two quarters and improving demand for replacement filters are anticipated to offset weaker demand from our Engine OEM and Disk Drive Customers.

  • We are projecting our full-year sales to be between $2.5 and $2.6 billion, or up 0 to 4 percent over last year's record. Our forecast is based on the Euro at US$1.27. We expect foreign currency translation to have a negative impact on our sales for most of our fiscal year.
  • Our full-year operating margin forecast is 14.2 to 15.0 percent.
  • Our FY13 tax rate is anticipated to be between 28 and 31 percent.
  • We forecast our FY13 EPS to be between $1.68 and $1.88.
  • Cash generated by operating activities is projected to be between $235 and $265 million. Our capital spending is estimated to be approximately $100 million.

Engine Products: We forecast FY13 sales to be equal to FY12, including the negative impact of foreign currency.

  • Our on-road OEM Customers are planning to build fewer heavy- and medium-duty trucks. Demand from our off-road OEM Customers is anticipated to be mixed: build rates of agriculture equipment are forecasted to remain good, build rates of construction equipment are expected to slowly improve in North America, but remain weak in Europe and China, and build rates of mining equipment are expected to decrease globally.
  • We are anticipating low single-digit sales growth of our Aftermarket Products. Current utilization rates for off-road equipment and on-road heavy trucks have softened. We should offset much of this through our continued expansion into emerging economies, from the increasing number of systems installed in the field with our proprietary filters, and from our increasing sales of liquid filtration products.
  • We forecast our Aerospace and Defense Products' sales to be equal to the prior year as the continued slowdown in military spending is anticipated to be offset by increased commercial aerospace sales.

Industrial Products: We forecast sales to increase 4 to 10 percent over FY12, including the negative impact of foreign currency.

  • Our Industrial Filtration Solutions Products' sales are projected to increase 0 to 5 percent. We assume manufacturing activity will remain strong in the Americas, slowly improve in Asia, and continue to be weak in Europe.
  • We anticipate our Gas Turbine Products' sales to be up 21 to 27 percent due to continued strength in both the large turbine power generation and the oil and gas markets.
  • Special Applications Products' sales are forecast to increase 1 to 7 percent, with growth expected from membranes products and integrated venting 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 approximately 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, the 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 the 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 and defaults of sovereign nations, 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 2012 2011 Net sales $588,947 $608,295 � Cost of sales 390,654 393,361 � Gross margin 198,293 214,934 � Operating expenses 124,756 124,607 � Operating income 73,537 90,327 � Other income, net (5,812) (4,860) � Interest expense 2,671 3,170 � Earnings before income taxes 76,678 92,017 � Income taxes 22,565 23,464 � Net earnings $54,113 $68,553 � Weighted average shares Outstanding (*) 149,149,429 150,513,892 � Diluted shares outstanding (*) 151,524,125 153,047,198 � Net earnings per share (*) $0.36 $0.46 � Net earnings per share assuming dilution (*) $0.36 $0.45 � Dividends paid per share (*) $0.090 $0.075 �

(*) Prior year shares and per share amounts reflect the impact of the Company's two-for-one stock split that occurred during the third quarter of Fiscal 2012.

� DONALDSON COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Thousands of dollars) (Unaudited) � � � October 31 � � July 31 2012 2012 ASSETS � Cash, cash equivalents and short-term investments $289,010 $318,151 Accounts receivable - net 415,059 438,796 Inventories - net 272,396 256,116 Prepaids and other current assets 71,948 72,599 � Total current assets 1,048,413 1,085,662 � Other assets and deferred taxes 265,187 259,511 Property, plant and equipment - net 398,898 384,909 � Total assets $1,712,498 $1,730,082 � LIABILITIES AND SHAREHOLDERS' EQUITY � Trade accounts payable $185,721 $199,182 Employee compensation and other liabilities 189,341 201,848 Short-term borrowings 67,506 95,147 Current maturity long-term debt 2,361 2,346 � Total current liabilities 444,929 498,523 � Long-term debt 202,473 203,483 Other long-term liabilities 109,914 118,062 � Total liabilities 757,316 820,068 � Equity 955,182 910,014 � Total liabilities and equity $1,712,498 $1,730,082 �
� DONALDSON COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands of dollars) (Unaudited) � � � Three Months Ended October 31 2012 � � 2011 OPERATING ACTIVITIES � Net earnings $54,113 $68,553

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

Depreciation and amortization 16,026 15,574 Changes in operating assets and liabilities 1,910 (21,932) Tax benefit of equity plans (5,527) (2,171) Stock compensation plan expense 1,476 1,690 Other, net (3,935) (4,028) Net cash provided by operating activities 64,063 57,686 � INVESTING ACTIVITIES � Net expenditures on property and equipment (21,404) (18,491) Net change in short-term investments 12,868 - Net cash used in investing activities (8,536) (18,491) � FINANCING ACTIVITIES � Purchase of treasury stock (50,731) (73,558) Net change in debt and short-term borrowings (28,703) 78,763 Dividends paid (13,292) (11,193) Tax benefit of equity plans 5,527 2,171 Exercise of stock options 5,576 2,961 Net cash used in financing activities (81,623) (856) �

Effect of exchange rate changes on cash

5,077

(9,620)

Increase/(Decrease) in cash and cash equivalents

(21,019)

28,719

Cash and cash equivalents - beginning of year

225,789

273,494

Cash and cash equivalents - end of period

$204,770

$302,213

SEGMENT DETAIL

(Thousands of dollars) (Unaudited) � � � � � � � Engine Industrial Corporate & Total Products Products Unallocated Company 3 Months Ended October 31, 2012: Net sales $370,660 $218,287 --- $588,947 Earnings before income taxes 47,424 32,562 (3,308) 76,678 � 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 � � NET (News - Alert) SALES BY PRODUCT (Thousands of dollars) (Unaudited) � Three Months Ended October 31 2012 2011 Engine Products segment: Off-Road Products $90,997 $94,108 On-Road Products 34,756 42,625 Aftermarket Products 218,396 226,897 Retrofit Emissions Products 2,897 4,637 Aerospace and Defense Products 23,614 25,458 Total Engine Products segment $370,660 $393,725 � Industrial Products segment: Industrial Filtration Solutions Products $128,576 $133,399 Gas Turbine Products 47,243 35,581 Special Applications Products 42,468 45,590 Total Industrial Products segment $218,287 $214,570 � Total Company $588,947 $608,295 �

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(Thousands of dollars, except per share amounts) (Unaudited) � � Three Months Ended October 31 2012 � � 2011 � Net cash provided by $64,063 $57,686 operating activities Net capital expenditures (21,404) (18,491) Free cash flow $42,659 $39,195 � Net earnings $54,113 $68,553 Income taxes 22,565 23,464 Interest expense (net) 1,754 2,371 Depreciation and amortization 16,026 15,574 EBITDA $94,458 $109,962 � Prior year net sales $608,295 $536,909 Change in net sales, excluding foreign currency translation (2,489) 57,966 Foreign currency translation (16,859) 13,420 Current year net sales $588,947 $608,295 � Prior year net earnings $68,553 $53,134 Change in net earnings, excluding foreign currency translation (13,119) 14,088 Foreign currency translation (1,321) 1,331 Current year net earnings $54,113 $68,553 �

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.


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