August 31, 2004
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
- ---------------------
DONALDSON COMPANY ANNOUNCES RECORD FULL-YEAR SALES AND EPS
EPS UP 12 PERCENT TO $1.18 MARKING 15TH CONSECUTIVE RECORD YEAR. RECORD
$1.4 BILLION SALES; STRONG BACKLOGS SUPPORT OUTLOOK FOR DOUBLE-DIGIT
EARNINGS GROWTH AGAIN IN FISCAL 2005
MINNEAPOLIS, August 31, 2004 -- Donaldson Company, Inc. (NYSE: DCI),
today reported diluted earnings per share of $0.29 for the fourth fiscal quarter
ended July 31, 2004, unchanged from last year. Net income was $26.2 million,
compared to $27.1 million last year. Sales were a record $384.0 million, up from
$330.3 million last year.
For the year, diluted earnings per share were a record $1.18, compared
to $1.05 last year. Net income totaled a record $106.3 million, compared to
$95.3 million last year. Record sales of $1.415 billion compared to $1.218
billion last year.
"Our fourth quarter was marked by three substantial expense
adjustments," said Bill Cook, Donaldson's president and chief executive officer.
"The cumulative impact of these unusual expenses in the quarter was $11.6
million or $0.08 per share. Obviously, these expenses had a significant impact
on our quarterly results and kept a very good fourth quarter from being another
net income record; however, we felt that it was fiscally prudent to make these
adjustments now given the facts as we see them."
The adjustments in the fourth quarter that reduced pre-tax income by
$11.6 million are as follows:
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August 31, 2004
Page 2
o On August 12, the U.S. Federal District Court ruled that damages
against Donaldson in the previously disclosed patent infringement
lawsuit brought by Engineered Products Company, Inc. should be
approximately $16 million. While we intend to vigorously challenge the
judgment and will appeal the decision to the Federal Circuit Court of
Appeals, we increased our reserve for this matter by $5.0 million.
o As a result of ongoing discussions on a specific warranty-related
matter, we increased our warranty reserve by $3.0 million.
o During our year-end closing process, we identified an adjustment of
$3.6 million relating to a fiscal 2003 transaction between several
Ultrafilter entities.
"Coupled with strong sales growth again this quarter, our results
would have been very strong without the matters discussed above," said Cook. "We
began recovering last quarter's steel price increases and worked hard to bring
our operating expense run-rate back down to prior year levels. Net of the
matters discussed above, the fourth quarter numbers show a solid gross margin
and operating expenses below the target level we discussed during the third
quarter webcast."
"The good news is that broad strength across most of our end markets
and our ability to capitalize on it drove record earnings in fiscal 2004. We
have transitioned from three years of weak conditions in many of our end markets
to rapid demand acceleration this year, and the Donaldson people responded by
ramping up operations quickly to capture the opportunity."
Factors contributing to the quarter include:
o Strong Engine Products results.
>> North American truck build rates again increased significantly
and off-road equipment markets strengthened.
>> Equipment utilization improved in both the truck and off-road
markets, spurring aftermarket parts sales growth.
>> North American regulations at both federal and state levels
continue to create strong demand for our diesel truck emission
control products.
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August 31, 2004
Page 3
>> Finally, our European and Asian businesses experienced strong
demand for both truck and off-road equipment filters.
o Continued solid demand for disk drive filters. Our disk drive filter
business remained strong, delivering another quarter of over 20 percent
sales growth as demand for computer hard drives remained high.
o Improving conditions for gas turbine. Gas turbine grew sales for the
first time in eight quarters.
"Despite the operating leverage realized from higher production
volumes, gross margin was down from last year due to the impact of the
aforementioned expense adjustments and steel price increases," said Cook. "We
began recovering a significant portion of last quarter's steel price increases
during the quarter, but saw another round of steel price increases which will
require additional price recovery from our customers."
INCOME STATEMENT DISCUSSION
The impact of foreign currency translation during the fourth quarter,
led by the Euro, increased sales by $9.4 million and net earnings by $0.7
million. For the year, currency translation increased sales by $70.0 million and
net earnings by $4.7 million. Worldwide sales, excluding the impact of currency
translation, increased 13.4 percent during the quarter and 10.4 percent for the
year.
Excluding the impact of currency translation, fourth quarter sales
outside the U.S. increased 9.3 percent, primarily reflecting strong sales growth
in Asia. For the year, excluding the impact of currency translation, sales
outside the U.S. increased 11.1 percent.
Gross margin of 31.3 percent for the quarter compared to 32.5 percent
last year. For the year, gross margin was 31.8 percent, compared to 32.1 percent
last year. Steel price increases offset the operating leverage gained from
higher production volumes. We recovered a significant portion of the third
quarter's steel price increases this quarter, but another round of steel price
increases experienced in the fourth quarter will require additional price
recovery from our customers. Gross margin was also negatively impacted by $2.3
million from the intercompany
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August 31, 2004
Page 4
matter discussed above. There were no plant rationalization costs in the quarter
versus $0.02 last year. For the year, plant rationalization costs were $0.05 per
share, unchanged from last year.
Fourth quarter operating expenses were 22.6 percent of sales, up from
21.2 percent last year. For the year, operating expenses as a percent of sales
were 22.2 percent, up from 21.3 percent last year. Included in fourth quarter
operating expenses were the following adjustments: a $5.0 million increase to
our reserve for the patent infringement judgment; a $3.0 million increase to our
warranty reserve; and $1.3 million from the intercompany matter discussed above.
Fourth quarter interest expense was $1.3 million, flat with last year.
For the year, interest expense was $5.0 million versus $5.9 million last year.
Other income was $2.5 million in the quarter, up from $1.3 million last year,
driven by a small foreign exchange gain versus a loss last year and higher
interest income. For the year, other income was $5.2 million, compared to $4.7
million last year.
The tax rates of 24.2 percent for the quarter and 25.0 percent for the
year compare to prior year tax rates of 27.0 percent for both the quarter and
the year. The decrease in the quarter reflects the increased contribution from
our international operations. We expect the tax rate to return to approximately
27 percent in fiscal 2005.
During the quarter, we repurchased 281,000 shares for $7.6 million as
part of our ongoing share repurchase plan. For the year, 1,071,000 shares, or
1.2 percent of outstanding shares, were repurchased for a total of $29.8
million.
BACKLOG
The 90-day backlog, reflecting continued strong demand in the upcoming
quarter, was $209 million, up 14 percent, or $26 million, relative to last year.
In Engine Products, the 90-day backlog increased 13 percent over last year. In
Industrial Products, the 90-day backlog increased 15 percent. Notably, the
worldwide industrial air filtration 90-day backlog increased 32 percent.
Total backlog was $376 million, up 20 percent, or $62 million, relative
to last year. In Engine Products, total backlog increased 28 percent from last
year. In Industrial Products, total backlog increased 7 percent from fiscal
2003.
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August 31, 2004
Page 5
ENGINE PRODUCTS SEGMENT
Engine Products sales were a record $226.7 million in the fourth
quarter, an increase of 20.4 percent from $188.2 million last year. For the
year, sales were a record $832.3 million, an increase of 21.8 percent from
$683.2 million in fiscal 2003.
Truck sales in the fourth quarter totaled $39.2 million, up 10.5
percent from $35.4 million last year. North American truck sales increased 25
percent from growing truck build rates and strong diesel emission sales.
European truck sales increased 34 percent as build rates improved in Europe.
Truck sales in Asia decreased 29 percent as emission sales had spiked in Japan
last year. For the year, worldwide truck sales totaled $156.4 million, an
increase of 34.4 percent from $116.3 million last year.
Worldwide sales of off-road products in the quarter were $63.5 million,
up 28.4 percent from $49.5 million last year. North American sales increased 30
percent on continued improvements in new construction and agriculture equipment
demand. Asian sales increased 25 percent while European sales increased 27
percent in the quarter. For the year, worldwide sales were $236.9 million, an
increase of 21.6 percent from $194.8 million last year.
Aftermarket sales in the quarter were $124.0 million, an increase of
20.0 percent from $103.3 million last year. North American aftermarket sales
increased 14 percent as equipment utilization rates continued to improve and our
investment into additional staff, training tools and additional product coverage
continued to drive sales results. Both European and Asian sales were up 29
percent. For the year, aftermarket sales were $439.0 million, an increase of
18.0 percent from $372.1 million in fiscal 2003.
INDUSTRIAL PRODUCTS SEGMENT
Industrial Products sales in the fourth quarter were $157.3 million, an
increase of 10.7 percent from $142.0 million last year. For the year, Industrial
Products sales were $582.7 million, up 8.9 percent from $535.0 million last
year.
Gas turbine product sales in the fourth quarter were $29.9 million, up
13.4 percent from $26.3 million last year, the first year-over-year increase in
two years. While fourth quarter sales in North America declined 42 percent,
international sales grew 51 percent on strong sales in
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August 31, 2004
Page 6
Europe and Asia. For the year, gas turbine sales were $117.7 million, down 9.2
percent from $129.6 million last year.
Ultrafilter sales in the fourth quarter were $32.1 million, down 16.9
percent from $38.6 million last year. In the fourth quarter of 2003, additional
revenue of $11.5 million was recorded as a result of conforming Ultrafilter to
Donaldson's year end. For the year, Ultrafilter sales were $122.2 million, up
1.1 percent from $120.9 million last year.
Industrial air filtration sales in the fourth quarter were $58.7
million, an increase of 25.6 percent from $46.7 million last year. North
American sales increased 33 percent as the manufacturing economy improved. Sales
in Europe were up 22 percent as six months of increasing order rates resulted in
higher shipments in the quarter. Asian sales were up 13 percent on growth in
China and Japan. For the year, industrial air filtration sales were $202.2
million, up 16.0 percent from $174.3 million last year.
Sales of special application products in the fourth quarter were $36.6
million, an increase of 20.5 percent from $30.4 million last year. Disk drive
filter sales were up 21 percent on continued strong demand for computer hard
drives. Industrial hydraulic sales were up 68 percent, helped by the LHA
acquisition in the first quarter. For the year, special application sales were
$140.6 million, an increase of 27.6 percent from $110.2 million in fiscal 2003.
OUTLOOK
ENGINE PRODUCTS: Overall, Donaldson expects low-teens sales growth for
Engine Products in fiscal 2005.
o The company expects continued growth in North American heavy-duty truck
build rates in fiscal 2005. Order rates and backlogs for diesel
emission products continue to ramp up. Business conditions remain
strong in Europe and Asia.
o Off-road sales are expected to remain strong in Asia and North America
as conditions in construction and agriculture equipment markets have
brightened.
o Both North American and international aftermarket sales are expected to
continue growing as increasing equipment utilization spurs replacement
filter sales. Diesel
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August 31, 2004
Page 7
emission retrofit sales in North America are anticipated to continue
increasing as the company's technology solution gains acceptance.
INDUSTRIAL PRODUCTS: Donaldson expects improving conditions for its
industrial businesses to generate low-teens sales growth in fiscal 2005.
o Global business conditions for gas turbine are expected to be stable.
Full-year sales are expected to be unchanged compared to fiscal 2004.
o Industrial filtration solutions sales are expected to be strong in
fiscal 2005. American and European industrial air and compressed air
filtration markets are expected to continue improving near-term, as
order trends are stronger than last year's levels. Business conditions
in Asia remain strong. Industrial hydraulic order trends continue to be
favorable.
o Special applications products showed continued strength in orders and
backlogs for disk drive filters and membranes, although disk drive's
growth rate is expected to be lower following fiscal 2004's strong
recovery.
Commenting on fiscal 2005's outlook, Cook said, "Despite the difficult
comparisons we will face this year, the strong business trends from 2004 are
still present as we enter 2005 and should provide the opportunity for continued
top-line growth. We expect that increasing commodity prices, especially steel,
will be mostly offset by price increases and improving manufacturing
efficiencies from continued strong volume. We will continue to focus on
operating expense controls and expect that the charges that hampered 2004 will
not repeat in 2005."
"We are increasingly persuaded that investors are acknowledging our
demonstrated commitment to increasing shareholder value. Through our 15
consecutive record years, Donaldson's earnings have compounded at better than 15
percent, and that operating success has been translated into a 21 percent growth
rate in Donaldson's share price. We are committed to making 2005 the 16th year
in that string."
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August 31, 2004
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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 and trucks. Our 10,000 employees contribute
to the company's success at over 30 manufacturing locations around the world. In
fiscal year 2004, Donaldson reported sales of more than $1.4 billion and grew
earnings for the 15th consecutive year. 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 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
including increases in steel and oil prices, world economic factors, political
factors, the company's substantial international operations including key disk
drive filter
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August 31, 2004
Page 9
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, cancellations of orders, acquisition
opportunities and integration of recent acquisitions, 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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August 31, 2004
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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
-------------------------------------- --------------------------------------
2004 2003 2004 2003
---------------- ---------------- --------------- ----------------
Net sales $383,962 $330,294 $1,414,980 $1,218,252
Cost of sales 263,769 223,020 964,539 827,101
---------------- ---------------- --------------- ----------------
Gross margin 120,193 107,274 450,441 391,151
Operating expenses 86,866 70,174 314,469 259,386
Gain on sale of Ome land and
building - - (5,616) -
---------------- ---------------- --------------- ----------------
Operating income 33,327 37,100 141,588 131,765
Other income, net (2,505) (1,343) (5,202) (4,691)
Interest expense 1,288 1,261 4,954 5,889
---------------- ---------------- --------------- ----------------
Earnings before income taxes 34,544 37,182 141,836 130,567
Income taxes 8,353 10,039 35,519 35,253
---------------- ---------------- --------------- ----------------
Net earnings $26,191 $27,143 $106,317 $95,314
================ ================ =============== ================
Weighted average shares
outstanding 87,621,312 86,732,440 87,960,423 86,990,676
Diluted shares outstanding 90,053,066 90,118,318 90,429,956 90,469,966
Net earnings per share $.30 $.32 $1.21 $1.10
Net earnings per share
assuming dilution $.29 $.29 $1.18 $1.05
Dividends paid per share $.055 $.045 $.205 $.175
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
July 31 July 31
2004 2003
------------------ ----------------
ASSETS
Cash and cash equivalents $99,504 $67,070
Accounts receivable - net 274,120 226,815
Inventories - net 143,418 114,890
Prepaid expenses and other current assets 40,338 45,930
------------------ ----------------
Total current assets 557,380 454,705
Other assets and deferred taxes 182,700 171,856
Property, plant and equipment - net 261,529 255,436
------------------ ----------------
Total assets $1,001,609 $881,997
================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Trade accounts payable $124,401 $122,759
Employee compensation and other liabilities 87,385 68,906
Notes payable 19,736 14,152
Income taxes payable 9,656 7,613
Current maturity long-term debt 34,346 646
------------------ ----------------
Total current liabilities 275,524 214,076
Long-term debt 70,856 105,156
Other long-term liabilities 105,936 115,372
------------------ ----------------
Total liabilities 452,316 434,604
Equity 549,293 447,393
------------------ ----------------
Total liabilities and equity $1,001,609 $881,997
================== ================
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August 31, 2004
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
Year Ended
July 31
------------------------------------
2004 2003
-------------- -------------
OPERATING ACTIVITIES
Net earnings $106,317 $95,314
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Gain on sale of Ome land and building (5,616) -
Depreciation and amortization 41,555 37,557
Changes in operating assets and liabilities (27,871) 15,296
Other, net 3,667 (1,449)
-------------- -------------
Net cash provided by operating activities 118,052 146,718
INVESTING ACTIVITIES
Net expenditures on property and equipment (43,030) (33,293)
Acquisitions and investments in unconsolidated
affiliates, net of cash acquired (4,397) (1,577)
-------------- -------------
Net cash used in investing activities (47,427) (34,870)
FINANCING ACTIVITIES
Purchase of treasury stock (29,765) (24,874)
Net change in debt 3,322 (53,189)
Dividends paid (17,779) (15,263)
Other, net 3,298 1,083
-------------- -------------
Net cash used in financing activities (40,924) (92,243)
Effect of exchange rate changes on cash 2,733 1,879
-------------- -------------
Increase in cash and cash equivalents 32,434 21,484
Cash and cash equivalents - beginning of year 67,070 45,586
-------------- -------------
Cash and cash equivalents - end of period $99,504 $67,070
============== =============
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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Thousands of dollars)
(Unaudited)
Three Months Ended Year Ended
----------------------------------- ------------------------------------
July 31 July 31
2004 2003 2004 2003
-------------- -------------- --------------- ---------------
Free cash flow $39,023 $45,428 $75,022 $113,425
Net capital expenditures 6,470 (1,972) 43,030 33,293
-------------- -------------- --------------- ---------------
Net cash provided
by operating activities $45,493 $43,456 $118,052 $146,718
============== ============== =============== ===============
EBITDA $45,376 $48,241 $186,486 $172,817
Income taxes (8,353) (10,039) (35,519) (35,253)
Interest expense (net) (221) (1,086) (3,095) (4,693)
Depreciation
and amortization (10,611) (9,973) (41,555) (37,557)
-------------- -------------- --------------- ---------------
Net earnings $26,191 $27,143 $106,317 $95,314
============== ============== =============== ===============
Net sales, excluding foreign
currency translation $374,528 $309,091 $1,345,020 $1,158,257
Foreign currency translation 9,434 21,203 69,960 59,995
-------------- -------------- --------------- ---------------
Net sales $383,962 $330,294 $1,414,980 $1,218,252
============== ============== =============== ===============
Net earnings, excluding
foreign currency translation $25,528 $25,128 $101,603 $90,773
Foreign currency translation 663 2,015 4,714 4,541
-------------- -------------- --------------- ---------------
Net earnings $26,191 $27,143 $106,317 $95,314
============== ============== =============== ===============
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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