December 1, 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) 455-1720 (952) 887-3753
E-mail: tony@carideogroup.com E-mail: rsheffer@mail.donaldson.com
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FOR IMMEDIATE RELEASE
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DONALDSON COMPANY ACHIEVES RECORD
FIRST QUARTER REVENUE, EARNINGS
RECORD FIRST QUARTER EPS AT 56 CENTS, UP 12 PERCENT ON STRONG SALES OF ENGINE
PRODUCTS AND DISK DRIVE FILTERS
MINNEAPOLIS, Dec. 1 -- Donaldson Company, Inc. (NYSE: DCI), today reported
record diluted earnings per share of $0.56 for the first fiscal quarter ended
October 31, 2003, up 12.0 percent from $0.50 last year. Net income was a record
$25.6 million, up 11.9 percent from $22.8 million last year. Record sales were
$328.2 million, up 9.0 percent from $301.1 million last year.
"We are off to a great start as evidenced by our strong revenue and
earnings growth in the first quarter," commented Bill Van Dyke, chairman,
president and chief executive officer. "We began the year with improving
conditions in many of our businesses and the continuation of those trends
reinforces our confidence regarding the full year."
Factors contributing to the record quarter included:
o Strong worldwide Engine Products results. The strength in our engine
business continued unabated from last year. Our innovative
PowerCore(TM) filtration technology continues to drive sales increases
in our new North American diesel pickup truck business. In North
America and Japan, regulations at both the federal and local levels
continue to create strong demand for our diesel emission control
products for trucks.
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Donaldson Company, Inc.
December 1, 2003
Page 2
o A sharp rebound for disk drive filters. Our disk drive filter business
delivered record sales, orders and backlogs in the first quarter as
demand for computer hard drives improved with the recovery of the
computer market.
o Overseas operations. Japan, Australia and South Africa grew sales 27
percent, 43 percent and 50 percent, respectively, and all increased
operating profits in excess of their sales growth. Greater operating
efficiency, along with increasing production volumes, drove the
profitability improvements. These improvements underline the growing
importance of our international operations, now in excess of 50
percent of total sales.
The impact of foreign currency translation during the first quarter,
led by the Euro, Yen and Rand, increased sales by $18.6 million and net earnings
by $1.6 million. Worldwide sales, excluding the impact of foreign currency
translation, increased 2.8 percent during the quarter. Excluding the impact of
foreign currency translation, first quarter sales outside the U.S. increased 9.0
percent, primarily reflecting strong sales growth in Asia.
Gross margin improved to 32.5 percent, a new first quarter record,
versus 31.5 percent in the prior year, driven by ongoing efforts to reduce
product costs and improve the manufacturing infrastructure. Current plant
rationalization activities cost $.03 per share in the quarter and relate to
ongoing work in Japan and Mexico. Last year, plant rationalization activities
had no impact on first quarter earnings.
Operating expenses were 21.6 percent of sales, up from 21.0 percent
last year. The majority of the increase over last year is attributable to the
effect of currency translation.
Interest expense was $1.1 million, down from $2.0 million last year,
reflecting lower short-term debt levels from a year ago and lower short-term
interest rates. Other income was $0.4 million in the quarter, down from $1.6
million last year. Lower joint venture and interest income contributed to the
decrease. The income tax rate remained at 27 percent.
Free cash flow - operating cash flows less capital expenditures -
totaled $8.9 million versus $40.1 million last year. We invested $17.5 million
into working capital; last year, working capital generated $17.8 million of
cash. Both accounts receivable and inventory grew in-line with the sales
increases in our disk drive and diesel emission businesses in the quarter.
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December 1, 2003
Page 3
During the quarter, we repurchased 103,500 shares for $5.7 million as
part of its ongoing share repurchase program.
BACKLOG
Total backlog was a first quarter record of $351 million, up 10
percent, or $33 million, relative to the same period last year. Excluding North
American gas turbine volume, total backlog was up 26 percent. In the Engine
Products segment, total backlog increased 18 percent from the same period last
year. In the Industrial Products segment, total backlog was flat with the same
period last year, despite a $36 million decrease in North American gas turbine.
The 90-day backlog was a first quarter record of $189 million, up 15
percent, or $24 million, relative to the same period last year. Excluding North
American gas turbine volume, the 90-day backlog was up 24 percent. In the Engine
Products segment, the 90-day backlog increased 24 percent from the same period
last year. In the Industrial Products segment, the 90-day backlog was up 3
percent from the same period last year, despite a $10 million decrease in North
American gas turbine.
ENGINE PRODUCTS SEGMENT
Engine Products sales in the first quarter were $191.3 million, up
14.6 percent from $167.0 million last year. Our Engine Products remain very
strong and have reported year-over-year sales increases for six consecutive
quarters.
Truck sales in the first quarter were $37.3 million, an increase of
39.4 percent from $26.7 million last year. North American truck sales increased
26 percent from last year, reflecting the continued growth of our diesel
emission business and the ramp-up of new PowerCore programs. International truck
sales increased 78 percent, as demand for emission control products remained
strong in Japan.
Worldwide sales of off-road products in the first quarter were $51.0
million, an increase of 5.6 percent from $48.3 million last year. North American
market conditions for construction
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Donaldson Company, Inc.
December 1, 2003
Page 4
equipment improved slightly during the quarter, as sales increased 2 percent.
International sales were up 10 percent.
Aftermarket product sales in the first quarter were $103.0 million, an
increase of 12.2 percent from $91.9 million last year. Flat North American
results were offset by strong sales growth in Europe and Asia. INDUSTRIAL
PRODUCTS SEGMENT
Industrial Products sales in the first quarter were $136.9 million, an
increase of 2.1 percent from $134.1 million in the prior year.
Gas turbine sales for the first quarter were $28.2 million, a decrease
of 26.8 percent from $38.6 million last year. New equipment sales declined 49
percent in North America. International equipment sales were stable and global
replacement parts sales were up over 20 percent, softening the impact of the
North American downturn.
Ultrafilter sales for the first quarter were $29.5 million, up 13.4
percent from $26.0 million last year. Sales were up in Europe despite the weak
industrial economy. Asian sales improved during the quarter while North American
conditions remain weak.
Industrial air filtration sales for the first quarter were $46.6
million, an increase of 8.7 percent from $42.8 million last year. North American
business conditions have stabilized. Sales in Europe were up slightly, and sales
in Asia were up on strong growth in China.
Sales of special application products in the first quarter were $32.6
million, an increase of 22.1 percent from $26.7 million last year. Both disk
drive filter sales and industrial hydraulic sales were up sharply.
OUTLOOK
ENGINE PRODUCTS: Overall, we expect low double-digit sales growth for
Engine Products in fiscal 2004.
o We expect North American heavy-duty truck build rates to continue
improving over the next three quarters. 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 international strength.
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December 1, 2003
Page 5
o Off-road sales are expected to remain strong in Asia and steady in
North America on a slowly improving outlook for new construction and
agriculture equipment.
o North American engine aftermarket sales are expected to continue
growing as improving freight shipments and construction spending
increase equipment utilization and spur replacement filter sales. Both
North American and international aftermarket order rates have
continued to improve. We have already received orders or commitments
for over half of our anticipated $10 million sales of North American
diesel emission retrofit systems and began shipping these in the first
quarter.
INDUSTRIAL PRODUCTS: Excluding gas turbine, we expect conditions to
continue improving for its industrial businesses, which should
generate low double-digit sales growth in fiscal 2004.
o Gas turbine volume will likely continue to decline by an additional 30
to 35 percent from fiscal 2003's $130 million.
o We expect North American industrial air filtration markets to continue
slowly improving near-term as ending backlogs and order trends are
slightly stronger than last year's levels. Internationally, we
anticipate market share gains driving sales growth in Europe; business
conditions in Asia are improving, especially in China.
o Ultrafilter is expecting continued sales growth, driven by recovering
industrial markets and additional market penetration.
o Special applications products show continued strength in orders and
backlogs for both disk drive filters and membranes. Disk drive's
backlog remains at an all-time high.
In July 2003, we closed on the sale of its Ome City, Japan facility.
We have received full payment of the purchase price and expect to report a gain
on the sale of $.08 to $.10 per share in the second quarter, 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 and the first quarter of fiscal
2004.
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Donaldson Company, Inc.
December 1, 2003
Page 6
Donaldson's business model - a diversified portfolio of filtration
businesses - continues to perform, delivering consistent earnings growth. While
gas turbine faces another difficult year, our other industrial businesses are
beginning to recover, and our engine and disk drive businesses see significant
strength. We remain committed to sustaining much of the operating efficiencies
gleaned from its businesses during the past several years and remain focused on
delivering its 15th consecutive year of double-digit earnings growth in 2004.
ABOUT DONALDSON COMPANY, INC.
Donaldson Company, Inc., headquartered in Minneapolis, 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, industrial compressors and trucks. Our 9,000 employees contribute to
the company's success at over 30 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
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Donaldson Company, Inc.
December 1, 2003
Page 7
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 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 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 2003 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.
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Donaldson Company, Inc.
December 1, 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
October 31
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2003 2002
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Net sales $ 328,220 $ 301,054
Cost of sales 221,643 206,173
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Gross margin 106,577 94,881
Operating expenses 70,884 63,180
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Operating income 35,693 31,701
Other income, net (387) (1,581)
Interest expense 1,072 1,998
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Earnings before income taxes 35,008 31,284
Income taxes 9,452 8,447
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Net earnings $ 25,556 $ 22,837
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Weighted average shares
outstanding 43,377,077 43,823,839
Diluted shares outstanding 45,303,350 45,324,846
Net earnings per share $ .59 $ .52
Net earnings per share
assuming dilution $ .56 $ .50
Dividends paid per share $ .095 $ .085
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December 1, 2003
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
October 31 July 31
2003 2003
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ASSETS
Cash and cash equivalents $ 78,998 $ 67,070
Accounts receivable - net 240,798 226,815
Inventories - net 125,515 114,890
Prepaid expenses and other current assets 35,969 45,930
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Total current assets 481,280 454,705
Other assets and deferred taxes 179,487 171,856
Property, plant and equipment - net 262,051 255,436
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Total assets $922,818 $881,997
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LIABILITIES AND SHAREHOLDERS' EQUITY
Trade accounts payable $108,704 $122,759
Employee compensation and other liabilities 76,969 68,906
Notes payable 26,779 14,152
Income taxes payable 10,217 7,613
Current maturity long-term debt 627 646
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Total current liabilities 223,296 214,076
Long-term debt 107,811 105,156
Other long-term liabilities 116,403 115,372
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Total liabilities 447,510 434,604
Equity 475,308 447,393
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Total liabilities and equity $922,818 $881,997
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December 1, 2003
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
Three Months Ended
October 31
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2003 2002
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OPERATING ACTIVITIES
Net earnings $ 25,556 $ 22,837
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 10,974 8,485
Changes in operating assets and liabilities (17,490) 17,813
Other, net 3,411 1,278
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Net cash provided by operating activities 22,451 50,413
INVESTING ACTIVITIES
Net expenditures on property and equipment (13,516) (10,350)
Acquisitions and investments in unconsolidated
affiliates, net of cash acquired (4,397) (1,259)
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Net cash used in investing activities (17,913) (11,609)
FINANCING ACTIVITIES
Purchase of treasury stock (5,697) (13,144)
Net change in debt 12,291 (15,590)
Dividends paid (4,128) (3,733)
Other, net 1,622 302
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Net cash used in financing activities 4,088 (32,165)
Effect of exchange rate changes on cash 3,302 5,827
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Increase in cash and cash equivalents 11,928 12,466
Cash and cash equivalents-beginning of year 67,070 45,586
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Cash and cash equivalents-end of period $ 78,998 $ 58,052
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December 1, 2003
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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Thousands of dollars)
(Unaudited)
Three Months Ended
October 31
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2003 2002
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Free cash flow $ 8,935 $ 40,063
Net capital expenditures 13,516 10,350
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Net cash provided by
operating activities $ 22,451 $ 50,413
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EBITDA $ 46,827 $ 41,127
Income taxes (9,452) (8,447)
Interest expense (net) (845) (1,358)
Depreciation and
amortization (10,974) (8,485)
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Net earnings $ 25,556 $ 22,837
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Net sales, excluding foreign
currency translation $ 309,605 $ 295,467
Foreign currency translation 18,615 5,587
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Net sales $ 328,220 $ 301,054
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Net earnings, excluding foreign
currency translation $ 23,931 $ 22,407
Foreign currency translation 1,625 430
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Net earnings $ 25,556 $ 22,837
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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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