August 27, 2003
FROM: FOR:
The Carideo Group Inc. Donaldson Company, Inc.
1250 One Financial Plaza P.O. Box 1299
120 South Sixth Street Minneapolis, MN 55440
Minneapolis, MN 55402 (NYSE: DCI)
Tony Carideo Rich Sheffer
(612) 317-2880 (952) 887-3753
Email: tony@carideogroup.com Email: rsheffer@mail.donaldson.com
--------------------- ---------------------------
FOR IMMEDIATE RELEASE
- ---------------------
14TH CONSECUTIVE YEAR OF DOUBLE-DIGIT EARNINGS GROWTH
FOR DONALDSON COMPANY
EPS up 11 percent to $2.11on record $1.2 billion sales;
focused on delivering "Year 15" in fiscal 2004
MINNEAPOLIS, August 27, 2003 -- Donaldson Company, Inc. (NYSE: DCI),
today reported record diluted earnings per share of $0.60 for the fourth fiscal
quarter ended July 31, 2003, up 9.1 percent from $0.55 last year. Net income was
a record $27.1 million, up 8.9 percent from $24.9 million last year. Sales were
a record $330.3 million, up 8.7 percent from $303.9 million last year.
For the year, diluted earnings per share were a record $2.11, up 11.1
percent from $1.90 last year. Net income totaled a record $95.3 million, up 9.7
percent from $86.9 million last year. Sales were a record $1.218 billion, up 8.2
percent from $1.126 billion last year.
"Through their dedication and determination, the Donaldson people
delivered another year of record results - our 14th consecutive double-digit
earnings growth year," said Bill Van Dyke, Donaldson's chairman, president and
chief executive officer. "We began the year facing a significant contraction in
our gas turbine business, but the power of our diversified portfolio and the
proven ability of our people to execute under adverse conditions gave us another
year of record results. The numbers speak volumes about the capabilities of the
people who make up Donaldson."
Improvements that helped deliver "Year 14" include:
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August 27, 2003
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o Strong worldwide Engine Products results. Our new small diesel
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filtration offering, featuring our innovative PowerCore(TM)
technology, led the growth in North America. In Asia, our Japanese
business experienced strong export demand for off-road equipment and a
spike in demand of emission control products for the truck market.
o The successful integration of ultrafilter. Ultrafilter improved both
------------------------------------------
its top and bottom lines by growing sales while focusing on
manufacturing and operating infrastructure improvements. Ultrafilter's
operating margin is approaching Donaldson-like levels from what was
essentially breakeven prior to the acquisition.
o Our gas turbine business remained profitable. Gas turbine maintained
---------------------------------------------
its gross margin percentage and remained profitable on the operating
income line despite a $101 million, or 44 percent, sales drop from
last year by effectively managing its capacity utilization.
"Where we saw business conditions improving, we capitalized on those
sales growth opportunities," Van Dyke said. "In businesses where improving
conditions were not yet evident, our people continued to focus on things within
their control: manufacturing infrastructure improvements, product cost
reductions, and operating expense controls."
INCOME STATEMENT DISCUSSION
The impact of foreign currency translation during the fourth quarter,
led by the Euro, increased sales by $21.2 million and net earnings by $2.0
million. For the year, foreign currency translation increased sales by $60.0
million and net earnings by $4.5 million, the first positive translation effect
in seven years. Worldwide revenues, excluding the impact of foreign currency
translation, increased 1.7 percent during the quarter and 2.9 percent for the
year.
Excluding the impact of foreign currency translation, fourth quarter
sales outside the U.S. increased 28.9 percent, primarily reflecting the impact
of ultrafilter. For the year, sales outside the U.S. increased 26.3 percent, or
4.3 percent not including ultrafilter.
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August 27, 2003
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Gross margin of 32.5 percent for the quarter and 32.1 percent for the
year compares to prior year margins of 31.2 percent and 31.0 percent,
respectively. Ultrafilter was the main driver for the increases. Ultrafilter's
positive impact was partially offset by our ongoing costs for continuing plant
rationalization, which came to $.05 per share in the quarter compared to $.02
per share a year ago. For the year, plant rationalization costs were $.10 per
share versus $.05 per share last year.
Fourth quarter operating expenses were 21.2 percent of sales, up from
19.2 percent last year. For the year, operating expenses as a percent of sales
were 21.3 percent, up from 20.0 percent last year. The increase over last year
is attributable to the addition of ultrafilter, where operating expenses, as a
percentage of sales, are currently higher than Donaldson's existing businesses.
Operating expense management has remained one of our key initiatives across the
company. Excluding ultrafilter, and on a constant currency basis, operating
expenses were down $8.6 million, or 14.7 percent, from last year's fourth
quarter and were down $22.9 million, or 10.2 percent, for the year.
Fourth quarter interest expense was $1.3 million, down from $1.5
million last year, reflecting lower interest rates and debt levels from last
year. For the year, interest expense was $5.9 million versus $6.5 million last
year. Other income totaled $1.3 million compared to an expense of $0.8 million
last year. For the year, other income was $4.7 million, up from $1.7 million in
the prior year. Last year's other income included an expense for a discretionary
$2.5 million contribution for funding the Donaldson Foundation. The income tax
rate remained at 27 percent.
During the quarter, the company repurchased 89,000 shares for $4.0
million as part of its ongoing share repurchase plan. For the year, 710,300
shares, or 1.6 percent of outstanding shares, were repurchased for a total of
$24.9 million.
BACKLOG
Total backlog of $313 million was down 1 percent from the prior-quarter
end but up 2 percent from the same period last year; the continuing decline in
the North American gas turbine market is offsetting improvement in the rest of
the business. In Engine Products, total backlog increased 1 percent from the
prior-quarter end and 7 percent from the same period last year. In Industrial
Products, total
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August 27, 2003
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backlog decreased 4 percent from the prior-quarter end and 5 percent from the
same period last year, again reflecting the North American gas turbine downturn.
Excluding ultrafilter and North American gas turbine, the company's total
backlog rose 7 percent from last year, continuing the improvement in general
business levels seen for several quarters.
The 90-day backlog was $183 million, up 2 percent from the
prior-quarter end and up 3 percent from the same period last year. In Engine
Products, the 90-day backlog increased 2 percent from the prior-quarter end and
10 percent from the same period last year. In Industrial Products, the 90-day
backlog increased 1 percent from the prior-quarter end but decreased 6 percent
from the same period last year, reflecting the North American gas turbine
downturn. Excluding ultrafilter and North American gas turbine, the company's
90-day backlog increased 8 percent from last year.
ENGINE PRODUCTS SEGMENT
Engine Products sales for the fourth quarter were $188.3 million, an
increase of 15.2 percent from $163.4 million last year. For the year, sales
totaled $683.3 million, an increase of 11.7 percent from $611.6 million last
year.
Transportation sales for the fourth quarter totaled $35.4 million, up
39.2 percent from $25.5 million last year. North American truck sales increased
16.6 percent from last year as light-duty diesel sales more than doubled over
last year, reflecting additional sales from new PowerCore programs.
International truck sales increased 116.9 percent, including the continued high
demand for emission control products in Japan. For the year, worldwide sales
totaled $116.3 million, an increase of 29.9 percent from $89.5 million last
year.
Worldwide sales of off-road products in the quarter were $49.5 million,
up 8.3 percent from $45.7 million last year. North American sales decreased 6.4
percent on continued weak equipment demand and a strong quarter last year for
defense. Asian and European sales were up 45.0 and 32.1 percent, respectively.
Sales in Japan were strong on the continued export demand for off-road equipment
in China. For the year, worldwide sales were $194.8 million, an increase of 10.1
percent from $177.0 million last year.
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August 27, 2003
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Aftermarket sales comprised 54.9 percent of total Engine Products sales
in the quarter at $103.3 million, an increase of 12.0 percent from $92.3 million
last year. North American sales increased 7.9 percent as equipment utilization
rates improved. International sales were strong, with European and Asian sales
up 19.1 percent and 7.4 percent, respectively. For the year, aftermarket sales
were $372.1 million, an increase of 7.8 percent from $345.1 million last year.
(Please note that certain fiscal 2002 product sales amounts have been
reclassified within the Engine Products segment to conform to the current
presentation. There is no impact to the total Engine Products segment for fiscal
2002.)
INDUSTRIAL PRODUCTS SEGMENT
Industrial Products sales for the fourth quarter were $142.0 million,
an increase of 1.1 percent from $140.4 million last year. Excluding the
acquisition of ultrafilter, sales decreased 26.3 percent to $103.5 million,
reflecting the gas turbine contraction. For the year, Industrial Products sales
were $535.0 million, up 4.0 percent from $514.4 million last year. Excluding
ultrafilter, sales decreased 19.5 percent to $414.1 million.
Gas turbine product sales in the fourth quarter were $26.3 million, a
decrease of 61.6 percent from a record $68.6 million last year. Sales in North
America declined 77.5 percent. International sales declined 26.7 percent in the
quarter as Europe had orders pulled ahead by customers into the third quarter
and Asia had orders delayed into fiscal 2004. For the year, gas turbine sales
were $129.6 million, down 43.9 percent from a record $230.9 million last year.
Industrial air filtration sales in the fourth quarter were $46.7
million, an increase of 2.1 percent from $45.8 million last year. North American
sales decreased 14.1 percent though fourth quarter orders showed the first
year-over-year increase in almost three years, suggesting the beginning of a
turn. International sales were up 21.2 percent, primarily due to currency
translation. For the year, industrial air filtration sales were $174.3 million,
down 0.8 percent from $175.7 million last year.
Sales of special application products in the fourth quarter were $30.4
million, an increase of 16.7 percent from $26.0 million last year. Disk drive
filter sales were flat year-over-year as the
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August 27, 2003
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computer industry begins to pick up following several difficult quarters.
Membrane sales increased 67.9 percent on improvement in its core industrial
filtration markets, growing acceptance of its performance fabrics, and success
in technical product markets. For the year, special application sales were
$110.2 million, an increase of 2.2 percent from $107.8 million last year.
Sales of ultrafilter products totaled $38.6 million in the fourth
quarter and $120.9 million for the year. The fourth quarter of fiscal 2003 had a
favorable impact from conforming the quarter end of ultrafilter, which resulted
in $11.5 million additional sales in the fourth quarter.
OUTLOOK
ENGINE PRODUCTS: Overall, Donaldson expects low double-digit sales
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growth for engine products in fiscal 2004.
o The company expects North American heavy-duty truck build rates to
continue improving this quarter, and to accelerate toward the end of
the calendar year and into next year. PowerCore systems for light-duty
diesel truck programs have ramped up quickly and should continue to
lift total truck results in coming quarters. Order trends and ending
backlogs indicate continued strength in Europe and Asia-Pacific.
o Off-road sales are expected to remain strong in Asia and steady in
North America on a lackluster outlook for construction.
o North American engine aftermarket sales are expected to continue
growing as increasing economic activity improves equipment utilization
and spurs replacement filter sales. Both North American and
international aftermarket order rates have continued to improve.
Diesel emission retrofit sales in North America are anticipated to
grow as the company's technology solution gains acceptance.
INDUSTRIAL PRODUCTS: Excluding gas turbine, the company expects
--------------------
improving conditions for its industrial businesses to generate low double-digit
sales growth in fiscal 2004.
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August 27, 2003
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o The company expects North American industrial air filtration markets
to continue their slow improvement near-term as ending backlogs and
order trends are slightly stronger than last year's levels.
Internationally, the company anticipates market share gains driving
sales growth in Europe; business conditions in Asia are improving
rapidly.
o Special applications products showed continued strength in orders and
backlogs for both disk drive filters and membranes with disk drive
backlog at an all-time high.
o Ultrafilter is expecting continued sales growth, driven by additional
market penetration.
o Gas turbine volume will likely continue to decline by an additional 30
to 35 percent from fiscal 2003's $130 million.
In July 2003, the company closed on the sale of its Ome City, Japan
facility. The company has received full payment of the purchase price and
expects to report a gain on the sale of $.08 to $.10 per share in the first half
of fiscal 2004, upon completing all conditions of the sale. Most of the costs
related to the plant closing were recorded as they were incurred in fiscal 2003.
Donaldson's diversified portfolio of filtration businesses enter fiscal
2004 at various levels of economic activity; some businesses are just beginning
to recover, others are more fully entrenched in recovery, while gas turbine
faces another difficult year. The company remains committed to sustaining much
of the operating efficiencies gleaned from its businesses during the past
several years, while targeting investment to allow the company to capitalize on
improving economic conditions. The company is focused on delivering its 15th
consecutive year of double-digit earnings growth in 2004.
ABOUT DONALDSON COMPANY, INC.
Donaldson Company, Inc., headquartered in Minneapolis, Minn., is a leading
worldwide provider of filtration systems and replacement parts. Founded in 1915,
Donaldson is a technology-driven company committed to satisfying customer needs
for filtration solutions through innovative research and development. Donaldson
serves customers in the industrial and engine markets including dust collection,
power generation, specialty filtration, compressed air purification, off-road
equipment,
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August 27, 2003
Page 8
industrial compressors and trucks. Our 9,000 employees contribute to the
company's success at 35 manufacturing locations around the world. In fiscal year
2003, Donaldson reported sales of more than $1.2 billion and achieved its 14th
consecutive year of double-digit earnings growth. Donaldson is a member of the
S&P MidCap 400 Index and Donaldson shares are traded on the New York Stock
Exchange under the symbol DCI. Additional company 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 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" 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 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 substantial international
operations including key disk drive filter production facilities in China,
highly competitive markets, changes in capital spending levels by customers,
changes in product demand and changes in the geographic and product mix of
sales, acquisition opportunities and integration of recent acquisitions,
including the acquisition of ultrafilter, facility and product line
rationalization, research and development expenditures, including ongoing
information technology improvements, and governmental laws and regulations,
including diesel emissions controls. For a more detailed explanation, see
exhibit 99 to the company's Form 10-K filed with the Securities and Exchange
Commission. The company wishes to caution investors that new
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August 27, 2003
Page 9
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.
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August 27, 2003
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CONDENSED STATEMENTS OF CONSOLIDATED EARNINGS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
(Thousands of Dollars, except per share amounts)
(Unaudited)
Three Months Ended Year Ended
July 31 July 31
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales $ 330,294 $ 303,872 $ 1,218,252 $ 1,126,005
Cost of sales 223,020 208,948 827,101 776,513
------------ ------------ ------------ ------------
Gross margin 107,274 94,924 391,151 349,492
Operating expenses 70,174 58,443 259,386 225,642
------------ ------------ ------------ ------------
Operating income 37,100 36,481 131,765 123,850
Other (income) expense (1,343) 797 (4,691) (1,699)
Interest expense 1,261 1,540 5,889 6,531
------------ ------------ ------------ ------------
Earnings before income taxes 37,182 34,144 130,567 119,018
Income taxes 10,039 9,219 35,253 32,135
------------ ------------ ------------ ------------
Net earnings $ 27,143 $ 24,925 $ 95,314 $ 86,883
============ ============ ============ ============
Weighted average shares
outstanding 43,366,220 44,060,632 43,495,338 44,158,074
Diluted shares outstanding 45,059,159 45,671,462 45,234,983 45,714,409
Net earnings per share $ .62 $ .57 $ 2.19 $ 1.97
Net earnings per share
assuming dilution $ .60 $ .55 $ 2.11 $ 1.90
Dividends paid per share $ .090 $ .080 $ .350 $ .310
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
July 31 July 31
2003 2002
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ASSETS
Cash and cash equivalents $ 67,070 $ 45,586
Accounts receivable - net 226,815 251,417
Inventories - net 114,890 117,691
Prepaid expenses and other current assets 45,930 41,790
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Total current assets 454,705 456,484
Other assets and deferred taxes 171,856 152,734
Property, plant and equipment - net 255,436 240,913
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Total assets $881,997 $850,131
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LIABILITIES AND SHAREHOLDERS' EQUITY
Trade accounts payable $122,759 $115,299
Employee compensation and other liabilities 68,906 77,274
Notes payable 14,152 60,337
Income taxes payable 7,613 19,823
Current maturity long-term debt 646 57
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Total current liabilities 214,076 272,790
Long-term debt 105,156 105,019
Other long-term liabilities 115,372 89,701
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Total liabilities 434,604 467,510
Equity 447,393 382,621
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Total liabilities and equity $881,997 $850,131
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
Year Ended
July 31
----------------------
2003 2002
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OPERATING ACTIVITIES
Net earnings $ 95,314 $ 86,883
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 37,557 31,751
Changes in operating assets and liabilities 26,129 43,836
Other (1,449) (9,435)
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Net cash provided by operating activities 157,551 153,035
INVESTING ACTIVITIES
Net expenditures on property and equipment (44,126) (40,529)
Acquisitions and investments in unconsolidated
affiliates, net of cash acquired (1,577) (68,349)
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Net cash used in investing activities (45,703) (108,878)
FINANCING ACTIVITIES
Purchase of treasury stock (24,874) (21,271)
Net change in debt (53,189) 3,045
Dividends paid (15,263) (13,713)
Other 1,083 1,426
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Net cash used in financing activities (92,243) (30,513)
Effect of exchange rate changes on cash 1,879 (4,194)
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Increase in cash and cash equivalents 21,484 9,450
Cash and cash equivalents-beginning of year 45,586 36,136
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Cash and cash equivalents-end of period $ 67,070 $ 45,586
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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Thousands of Dollars)
(Unaudited)
Three Months Ended Year Ended
July 31 July 31
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Free cash flow $ 45,428 $ 41,829 $ 113,425 $ 112,506
Capital expenditures 8,861 4,755 44,126 40,529
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Net cash provided by
operating activities $ 54,289 $ 46,584 $ 157,551 $ 153,035
========= ========= ========= =========
EBITDA $ 48,241 $ 43,279 $ 172,817 $ 156,381
Income taxes (10,039) (9,219) (35,253) (32,135)
Interest expense (net) (1,086) (1,246) (4,693) (5,612)
Depreciation and
amortization (9,973) (7,889) (37,557) (31,751)
--------- --------- --------- ---------
Net earnings $ 27,143 $ 24,925 $ 95,314 $ 86,883
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