Donaldson Reports Record First Quarter Results; Operating Margin Increases To 10.8 Percent; EPS Up 19 Percent
MINNEAPOLIS, Nov. 29, 2005 -- Donaldson Company, Inc. announced record first quarter diluted earnings per share ("EPS") of $.37, up from $.31 last year. Net income increased 18 percent to a record $32.2 million compared to $27.4 million last year. Sales were a record $403.4 million, up 8 percent from $372.9 million in fiscal 2005.
"We are off to a very good start in fiscal 2006, posting all-time highs for EPS, net earnings and EBITDA," said Bill Cook, Chairman, President and CEO. "Demand remains at high levels in most of our end markets. Our focus on cost reduction efforts helped offset higher raw material costs and resulted in an operating margin of 10.8 percent in the first quarter -- the highest it's been in two years. We believe that our operating margin will remain strong, and, coupled with our solid sales outlook, we remain confident of delivering another year of record earnings."
Income Statement Discussion
Foreign currencies had a minimal impact on first quarter results. Adjusted for foreign currency translation, sales increased 8.2 percent. The impact of foreign currency translation increased net earnings by $0.2 million.
Gross margin was 32.6 percent versus 31.2 percent last year. Higher costs for petroleum-based raw materials and freight were offset by cost reduction efforts with our customers and selective price increases in some markets. First quarter operating expenses were 21.8 percent of sales, comparable to 21.5 percent in the prior year.
First quarter interest expense was $2.4 million, up from $2.0 million last year due to higher short-term interest rates. Other income was $2.9 million in the quarter versus $3.4 million last year.
The effective tax rate of 26.7 percent for the first quarter compares to 27.0 percent last year. During the quarter we filed an amended tax return related to a prior year, which resulted in additional R&D tax credits, thus lowering the tax rate for the quarter. We expect our effective tax rate to be approximately 28 percent for the balance of the year.
Consistent with our longstanding share repurchase strategy, we repurchased 1,602,300 shares in the quarter, or 1.9 percent of our outstanding shares, for $48.1 million.
Backlog Total order backlog is $432 million, up 6 percent relative to last year. Engine Products Segment
Engine Products sales were a record $238.4 million in the quarter, an increase of 10 percent from last year.
Truck product sales totaled $46.2 million, up 5 percent from last year. NAFTA truck product sales increased 12 percent due to growing new truck build rates. European truck product sales increased 3 percent and Asian sales decreased 21 percent on lower diesel emission product sales in Japan.
Worldwide sales of off-road products were $70.2 million, up 11 percent from last year. NAFTA sales increased 8 percent on continued strength in new construction and mining equipment demand. European off-road product sales increased 11 percent while Asian sales increased 24 percent.
Engine aftermarket or replacement part sales were $122.0 million, an increase of 11 percent from last year. NAFTA aftermarket sales increased 11 percent as equipment utilization rates remained strong and our sales of diesel emission retrofit equipment continued ramping up. European sales increased 8 percent and Asian sales were up 17 percent.
Industrial Products Segment
Industrial Products sales in the quarter were a record $165.0 million, an increase of 6 percent from last year.
Industrial Filtration Solutions ("IFS") sales were a record $105.9 million, an increase of 6 percent from last year, driven primarily by strong industrial dust collection sales in NAFTA.
Gas turbine product sales were $24.4 million, up 2 percent from last year. NAFTA sales decreased slightly by 1 percent while international sales were up 4 percent.
Sales of special application products were a record $34.7 million, an increase of 9 percent from last year, supported by continued strong disk drive filter sales.
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.
-- Off-road sales are expected to remain strong worldwide with robust
conditions continuing in the production of new construction and mining
equipment.
-- Both our NAFTA and international aftermarket sales are expected to
continue growing with continued strong equipment utilization,
continued growth by our OEM customers of their replacement parts
business, and the growing amount of equipment with our PowerCore(TM)
filtration systems.
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 NAFTA market is healthy and our European
market remains stable.
-- Globally, we expect full-year gas turbine sales to improve modestly.
Strength is seen in both the international and the oil and gas
markets.
-- Market conditions for special applications products are expected to
remain strong.
Other: We began expensing stock options in our first quarter of fiscal 2006 and expect the full year EPS impact to be $.02 to $.03 per share, with 70 percent of the full-year impact expected in the second quarter due to the timing of our annual option grants. For the year, we expect EPS to be in the range of $1.47 to $1.57 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, highly competitive markets, changes in product demand, and governmental laws and regulations. For a more detailed explanation, see the Company's 2005 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
October 31
2005 2004
Net sales $403,396 $372,906
Cost of sales 271,864 256,667
Gross margin 131,532 116,239
Operating expenses 88,138 80,108
Operating income 43,394 36,131
Other income, net (2,929) (3,419)
Interest expense 2,425 2,024
Earnings before income taxes 43,898 37,526
Income taxes 11,700 10,132
Net earnings $32,198 $27,394
Weighted average shares outstanding 84,024,553 85,721,197
Diluted shares outstanding 86,122,289 88,038,004
Net earnings per share $.38 $.32
Net earnings per share
assuming dilution $.37 $.31
Dividends paid per share $.080 $.055
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
October 31 July 31
2005 2005
ASSETS
Cash and cash equivalents $93,331 $134,066
Accounts receivable - net 271,367 294,016
Inventories - net 148,349 151,599
Prepaid expenses and other current assets 44,614 39,141
Total current assets 557,661 618,822
Other assets and deferred taxes 217,838 217,458
Property, plant and equipment - net 277,483 275,493
Total assets $1,052,982 $1,111,773
LIABILITIES AND SHAREHOLDERS' EQUITY
Trade accounts payable $128,969 $134,063
Employee compensation and other liabilities 98,780 98,083
Notes payable 86,528 102,004
Income taxes payable 12,604 12,280
Current maturity long-term debt 12,538 7,772
Total current liabilities 339,419 354,202
Long-term debt 97,710 103,302
Other long-term liabilities 113,731 129,653
Total liabilities 550,860 587,157
Equity 502,122 524,616
Total liabilities and equity $1,052,982 $1,111,773
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
Three Months Ended
October 31
2005 2004
OPERATING ACTIVITIES
Net earnings $32,198 $27,394
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 11,442 11,041
Changes in operating assets and liabilities 1,796 2,951
Payment of litigation judgment (14,170) --
Other, net (513) (87)
Net cash provided by operating activities 30,753 41,299
INVESTING ACTIVITIES
Net expenditures on property and equipment (13,343) (7,050)
Net cash used in investing activities (13,343) (7,050)
FINANCING ACTIVITIES
Purchase of treasury stock (48,126) (86,542)
Net change in debt (15,630) 72,528
Dividends paid (6,706) (4,746)
Tax benefit of equity plans 11,549 --
Other, net 592 145
Net cash used in financing activities (58,321) (18,615)
Effect of exchange rate changes on cash 176 3,603
Increase/(decrease) in cash and cash equivalents (40,735) 19,237
Cash and cash equivalents -- beginning of year 134,066 99,504
Cash and cash equivalents -- end of year $93,331 $118,741
SEGMENT DETAIL
(Thousands of dollars)
(Unaudited)
Engine Industrial Corporate & Total
Products Products Unallocated Company
3 Months Ended
October 31, 2005:
Net sales $238,424 $164,972 -- $403,396
Earnings before income
taxes 31,174 15,084 (2,360) 43,898
3 Months Ended
October 31, 2004:
Net sales $217,585 $155,321 -- $372,906
Earnings before income
taxes 30,873 12,694 (6,041) 37,526
NET SALES BY PRODUCT
(Thousands of dollars)
Three Months Ended
October 31
2005 2004
Engine Products segment:
Off-road products $70,166 $63,272
Transportation products 46,210 43,906
Aftermarket products 122,048 110,407
Total Engine Products Segment $238,424 $217,585
Industrial Products segment:
Industrial filtration solutions products $105,888 $99,630
Gas turbine products 24,363 23,876
Special applications products 34,721 31,815
Total Industrial Products segment $164,972 $155,321
Total Company $403,396 $372,906
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Thousands of dollars)
(Unaudited)
Three Months Ended
October 31
2005 2004
Free cash flow $17,410 $34,249
Net capital expenditures 13,343 7,050
Net cash provided by
operating activities $30,753 $41,299
EBITDA $57,083 $50,172
Income taxes (11,700) (10,132)
Interest expense (net) (1,743) (1,605)
Depreciation and amortization (11,442) (11,041)
Net earnings $32,198 $27,394
Net sales, excluding foreign
currency translation $403,479 $362,349
Foreign currency translation (83) 10,557
Net sales $403,396 $372,906
Net earnings, excluding
foreign currency translation $32,005 $26,305
Foreign currency translation 193 1,089
Net earnings $32,198 $27,394
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.