November 29, 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 REPORTS RECORD FIRST QUARTER SALES AND EPS
EPS UP 11 PERCENT TO $.31; RECORD $373 MILLION SALES; STRONG BACKLOGS SUPPORT
OUTLOOK FOR RECORD EARNINGS GROWTH AGAIN IN FISCAL 2005
MINNEAPOLIS, Nov. 29, 2004 -- Donaldson Company, Inc. (NYSE: DCI)
reported record diluted earnings per share of $.31 for the first fiscal quarter
ended October 31, 2004, up from $.28 last year. Net income was a record $27.4
million, compared to $25.6 million last year. Sales were a record $372.9
million, up from $328.2 million last year.
"As we projected during our webcast in September, strong business
conditions drove our first quarter sales up 14 percent over last year," said
Bill Cook, Donaldson's president and chief executive officer. "With our 90-day
backlog now up 20 percent and record incoming orders in October, our strong
revenue outlook for fiscal 2005 is intact."
"We started this fiscal year with margins in good shape having
recovered, through price increases, the majority of last fiscal year's steel
price rise. Then in August, we were hit with another significant steel price
spike. The time lag between when we experience material cost increases and when
we recover them from our customers undercut our first quarter gross margin. We
have been altering price lists and negotiating with our major customers over the
last several months, and new prices, which fully reflect current commodity
costs, will be in place before the end of the second quarter. Absent steel
costs, our business is running very well, and as we fix the
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Donaldson Company, Inc.
November 29, 2004
Page 2
commodity cost issue, this will become more apparent. We expect second half
gross margins to approximate our performance during the last two fiscal years."
INCOME STATEMENT DISCUSSION
Worldwide sales, excluding the impact of currency translation,
increased 10.4 percent during the quarter. The impact of foreign currency
translation during the first quarter increased sales by $10.6 million and net
earnings by $1.1 million.
U.S. sales increased 11.7 percent from last year. Excluding the impact
of currency translation, first quarter sales outside the U.S. increased 9.2
percent, primarily reflecting strong sales growth in Asia.
Gross margin was 31.2 percent for the quarter, compared to 32.5 percent
last year. Steel, plastic, packaging and freight costs all increased during the
quarter. Additional price recovery from our customers is currently being
implemented. Plant rationalization costs totaled $0.7 million in the quarter
versus $1.7 million last year. First quarter operating expenses were 21.5
percent of sales, consistent with 21.6 percent last year.
First quarter interest expense was $2.0 million, up from $1.1 million
last year. The increase was driven by the additional debt to fund the previously
announced overnight share repurchase plan and the termination of two interest
rate swaps. Other income was $3.4 million in the quarter, up from $0.4 million
last year. The increase was driven by a foreign exchange gain, higher joint
venture income and other miscellaneous items. The effective tax rate was 27.0
percent.
Free cash flow - operating cash flows less capital expenditures -
rebounded to 125 percent of net income, totaling $34.2 million versus $8.9
million last year. The increase was driven by improved working capital
utilization.
During the quarter, we repurchased 3,000,000 shares, or 3.5 percent of
outstanding shares, for $86.5 million through an overnight share repurchase plan
on September 3, 2004.
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November 29, 2004
Page 3
BACKLOG
The 90-day backlog was $225 million, up 20 percent relative to last
year and up 9 percent compared to last quarter. In Engine Products, the 90-day
backlog increased 15 percent over last year. In Industrial Products, the 90-day
backlog increased 27 percent. Notably, the worldwide industrial filtration
solutions 90-day backlog increased 33 percent.
Total backlog was $409 million, up 20 percent relative to last year. In
Engine Products, total backlog increased 27 percent from last year. In
Industrial Products, total backlog increased 10 percent from fiscal 2004.
ENGINE PRODUCTS SEGMENT
Engine Products sales were a record $217.6 million in the first
quarter, an increase of 17 percent from last year. Engine Products sales remain
very strong and have posted year-over-year increases for 10 consecutive
quarters.
Truck product sales in the first quarter totaled $43.9 million, up 18
percent from last year. North American truck sales increased 28 percent from
growing truck build rates and strong diesel emission sales. European truck
product sales increased 34 percent on stronger build rates and increased share.
Truck product sales in Asia decreased 16 percent as emission sales spiked in
Japan last year ahead of new emissions regulations.
Worldwide sales of off-road products in the quarter were $63.3 million,
up 20 percent from last year. North American sales increased 14 percent on
continued improvements in new construction, agriculture and mining equipment
demand. Asian sales increased 36 percent while European sales increased 25
percent in the quarter.
Aftermarket sales in the quarter were $110.4 million, an increase of 14
percent from last year. North American aftermarket sales increased 16 percent as
equipment utilization rates continued to improve and sales of diesel emission
retrofit equipment ramped up. European sales increased 15 percent and Asian
sales were up 3 percent. Evidence of our PowerCore(R) first fit success came in
a 45 percent increase in replacement PowerCore filter sales.
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November 29, 2004
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INDUSTRIAL PRODUCTS SEGMENT
Industrial Products sales in the first quarter were $155.3 million, an
increase of 10 percent from $141.5 million last year.
Industrial filtration solutions sales in the first quarter were $99.6
million, an increase of 16 percent from last year. North American sales
increased 19 percent as the manufacturing economy remains stronger than a year
ago. Sales in Europe were up 8 percent as industrial air filtration sales
improved markedly. Asian sales were up 34 percent on continued growth in China
and Japan.
Gas turbine product sales in the first quarter were $23.9 million, down
15 percent from last year, mostly from the timing of shipments this year versus
last year. The quarter end 90-day backlog was 22 percent ahead of prior year.
Sales of special application products in the first quarter were $31.8
million, an increase of 17 percent from last year. Disk drive filter sales were
up 9 percent on continued strong demand for computer hard drives. Membrane sales
were up 36 percent on strong sales in both Europe and Asia.
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 throughout fiscal 2005. 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, agriculture and mining equipment
markets are robust.
o Both North American and international aftermarket sales are expected
to continue growing as increasing equipment utilization spurs
replacement filter sales. Diesel emission retrofit sales in North
America are anticipated to continue increasing as the company's
technology solution gains acceptance.
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November 29, 2004
Page 5
INDUSTRIAL PRODUCTS: Donaldson expects improving conditions for its
industrial businesses to generate low-teens sales growth in fiscal 2005.
o Globally, 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.
o Special applications products showed continued strength in orders and
backlogs for disk drive filters and membranes.
Commenting on the outlook for the remainder of fiscal 2005, Bill Cook
said, "Our business trends are very positive as demonstrated by strong backlogs
across almost all of our businesses. We expect that increasing commodity prices,
especially steel, will be mostly offset by price recovery from our customers and
improving manufacturing efficiencies from continued strong volume. While the
size and frequency of the commodity price increases we have experienced have
created a significant headwind, we have actions underway to deal with this. Our
goal remains to deliver another earnings record this year - our 16th consecutive
record."
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 in-plant air cleaning, compressed air and gas purification, power
generation, specialty filtration, 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
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November 29, 2004
Page 6
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," "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
including increases in steel and oil 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, 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 the
company's 2004 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
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November 29, 2004
Page 7
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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November 29, 2004
Page 8
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
------------------------------------
2004 2003
-------------- --------------
Net sales $372,906 $328,220
Cost of sales 256,477 221,643
-------------- --------------
Gross margin 116,429 106,577
Operating expenses 80,298 70,884
-------------- --------------
Operating income 36,131 35,693
Other income, net (3,419) (387)
Interest expense 2,024 1,072
-------------- --------------
Earnings before income taxes 37,526 35,008
Income taxes 10,132 9,452
-------------- --------------
Net earnings $27,394 $25,556
============== ==============
Weighted average shares
outstanding 85,721,197 86,754,154
Diluted shares outstanding 88,038,004 90,606,700
Net earnings per share $.32 $.29
Net earnings per share
assuming dilution $.31 $.28
Dividends paid per share $.055 $.048
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November 29, 2004
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
October 31 July 31
2004 2004
----------- -----------
ASSETS
Cash and cash equivalents $118,741 $99,504
Accounts receivable - net 279,531 274,120
Inventories - net 153,680 143,418
Prepaid expenses and other current assets 37,335 40,338
----------- -----------
Total current assets 589,287 557,380
Other assets and deferred taxes 186,058 182,700
Property, plant and equipment - net 266,167 261,529
----------- -----------
Total assets $1,041,512 $1,001,609
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Trade accounts payable $127,061 $124,401
Employee compensation and other liabilities 86,779 87,385
Notes payable 92,699 19,736
Income taxes payable 19,424 9,656
Current maturity long-term debt 34,960 34,346
----------- -----------
Total current liabilities 360,923 275,524
Long-term debt 70,196 70,856
Other long-term liabilities 106,013 105,936
----------- -----------
Total liabilities 537,132 452,316
Equity 504,380 549,293
----------- -----------
Total liabilities and equity $1,041,512 $1,001,609
=========== ===========
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
Three Months Ended
October 31
--------- ---------
2004 2003
--------- ---------
OPERATING ACTIVITIES
Net earnings $27,394 $25,556
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 11,041 10,974
Changes in operating assets and liabilities 4,634 (17,490)
Other, net (1,770) 3,411
--------- --------
Net cash provided by operating activities 41,299 22,451
INVESTING ACTIVITIES
Net expenditures on property and equipment (7,050) (13,516)
Acquisitions and investments in unconsolidated
affiliates, net of cash acquired --- (4,397)
--------- --------
Net cash used in investing activities (7,050) (17,913)
FINANCING ACTIVITIES
Purchase of treasury stock (86,542) (5,697)
Net change in debt 72,528 12,291
Dividends paid (4,746) (4,128)
Other, net 145 1,622
--------- --------
Net cash used in financing activities (18,615) 4,088
Effect of exchange rate changes on cash 3,603 3,302
--------- --------
Increase in cash and cash equivalents 19,237 11,928
Cash and cash equivalents - beginning of year 99,504 67,070
--------- --------
Cash and cash equivalents - end of period $118,741 $78,998
========= ========
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November 29, 2004
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SEGMENT DETAIL
(Thousands of dollars)
(Unaudited)
Engine Industrial Corporate & Total
Products Products Unallocated Company
---------- ------------ ------------- -----------
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
3 Months Ended October 31, 2003:
Net sales $186,739 $141,481 --- $328,220
Earnings before income taxes 27,931 10,361 (3,284) 35,008
NET SALES BY PRODUCT
(Thousands of dollars)
(Unaudited)
Three Months Ended
October 31
2004 2003
----------- -----------
Engine Products segment:
Off-road products $63,272 $52,816
Transportation products 43,906 37,288
Aftermarket products 110,407 96,635
----------- -----------
Total Engine Products Segment $217,585 $186,739
----------- -----------
Industrial Products segment:
Industrial filtration solutions products $99,630 $86,153
Gas turbine products 23,876 28,236
Special applications products 31,815 27,092
----------- -----------
Total Industrial Products segment $155,321 $141,481
----------- -----------
Total Company $372,906 $328,220
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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Thousands of dollars)
(Unaudited)
Three Months Ended
October 31
----------------------------
2004 2003
----------- -----------
Free cash flow $34,249 $8,935
Net capital expenditures 7,050 13,516
----------- -----------
Net cash provided
by operating activities $41,299 $22,451
=========== ===========
EBITDA $50,172 $46,827
Income taxes (10,132) (9,452)
Interest expense (net) (1,605) (845)
Depreciation
and amortization (11,041) (10,974)
----------- -----------
Net earnings $27,394 $25,556
=========== ===========
Net sales, excluding foreign
currency translation $362,349 $309,605
Foreign currency translation 10,557 18,615
----------- -----------
Net sales $372,906 $328,220
=========== ===========
Net earnings, excluding
foreign currency translation $26,305 $23,931
Foreign currency translation 1,089 1,625
----------- -----------
Net earnings $27,394 $25,556
=========== ===========
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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