EX-99.1 2 donaldson060918_ex99-1.htm PRESS RELEASE DATED FEBRUARY 28, 2006 Donaldson Company Exhibit 99.1 to Form 8-K, Dated: February 28, 2006

Exhibit 99.1

FOR IMMEDIATE RELEASE: FOR FURTHER INFORMATION:
Tuesday, February 28, 2006 Rich Sheffer   (952) 887-3753


DONALDSON COMPANY REPORTS RECORD SECOND QUARTER RESULTS

Strong operating margin of 10.2 percent year-to-date; reaffirming full-year EPS guidance of
$1.47 to $1.57 per share

        MINNEAPOLIS, MN (Feb. 28, 2006) — Donaldson Company, Inc. (NYSE: DCI) today announced record second quarter diluted earnings per share (“EPS”) of $.32, up from $.31 last year. Net income was a record $26.9 million, versus $26.7 million last year. Sales were a record $392.9 million, up from $388.4 million in fiscal 2005.

        For the six-month period, EPS was another record at $.69, up from $.62 last year. Net income increased 9 percent to $59.1 million compared to $54.1 million last year. Sales were a record $796.3 million, up 5 percent from $761.3 million in fiscal 2005.

        “Our operating margin improved to 10.2 percent year-to-date from 9.6 percent last year, despite absorbing $2.2 million, or $.02 per share, of stock option expenses into operating profits this year,” said Bill Cook, Chairman, President and CEO. “Donaldson is running very well, with our continued focus on cost reduction efforts offsetting higher commodity prices and driving the improvement in our profit margins. We reduced our full year sales outlook mainly due to currency translation since the dollar is currently weaker against the Euro and Yen than it was in the second half of last year. However, we expect continued positive year-over-year sales growth and for operating margins to continue at these improved levels, giving us confidence in delivering our 17th consecutive year of record earnings.”

Income Statement Discussion

        Translated at constant exchange rates, sales increased $20.5 million, or 5.3 percent, during the quarter and $51.1 million, or 6.7 percent, year-to-date. Weakening foreign currencies reduced the growth in sales to $4.5 million, or 1.2 percent, in the second quarter and $35.0 million, or 4.6 percent, year-to-date. The impact of foreign currency translation decreased net earnings by $0.6 million in the second quarter and $0.5 million year-to-date.

        Gross margin of 31.8 percent and 32.2 percent for the second quarter and year-to-date, respectively, compares favorably to prior year margins of 31.1 percent and 31.2 percent, respectively. We continue to see higher costs for petroleum-based raw materials and freight being offset primarily by our cost reduction efforts. Second quarter operating expenses were 22.1 percent of sales, up from 21.6 percent in the prior year. Excluding $2.2 million of expense in the quarter from stock option grants, operating expenses as a percentage of sales were down from the prior year. Year-to-date operating expenses were 22.0 percent of sales, up from 21.6 percent last year.

        Second quarter interest expense was $2.5 million, up from $2.2 million last year due to higher short-term interest rates. Year-to-date interest expense was $4.9 million, up from $4.3 million last year. Other income was $2.3 million in the quarter, up from $1.9 million last year. Year-to-date other income was $5.2 million, down from $5.3 million last year.


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February 28, 2006
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        The effective tax rate of 28.4 percent for the second quarter and 27.5 percent for the year compares to 27.0 percent for both periods in the prior year. We continue to expect our effective tax rate to be approximately 28 percent for the balance of the year.

        We did not repurchase any shares during the second quarter. Year-to-date, we repurchased 1,602,300 shares, or 1.9 percent of outstanding shares, for $48.1 million.

Backlog

        Total order backlog is $459 million, up 10 percent relative to last year and up 6 percent compared to the first quarter.

Engine Products Segment

        Engine Products sales were $226.6 million in the quarter, an increase of 3 percent from last year. Year-to-date Engine Products sales were $465.0 million, an increase of 6 percent from last year.

        Truck product sales in the quarter totaled $42.5 million, up 5 percent from last year. NAFTA truck product sales increased 2 percent. European truck product sales increased 10 percent and Asian sales increased 17 percent due to improved new truck build rates. Year-to-date worldwide sales totaled $88.7 million, an increase of 5 percent from last year.

        Worldwide sales of off-road products in the quarter were $71.7 million, up 4 percent from last year. NAFTA sales increased 6 percent on continued strength in new construction and mining equipment demand. European off-road sales remained consistent with prior year while Asian sales increased 2 percent. Year-to-date worldwide sales totaled $141.8 million, up 7 percent from last year.

        Engine aftermarket or replacement part sales in the quarter were $112.4 million, an increase of 2 percent from last year. NAFTA aftermarket sales increased 7 percent as equipment utilization rates and sales of diesel emission retrofit equipment remained strong. European sales decreased 4 percent and Asian sales were up 2 percent. Year-to-date worldwide sales totaled $234.4 million, up 7 percent from last year.

Industrial Products Segment

        Industrial Products sales in the quarter were $166.3 million, a decrease of 2 percent from last year. Year-to-date Industrial Products sales were $331.3 million, an increase of 2 percent from last year.

        Industrial Filtration Solutions (“IFS”) sales in the quarter were $103.8 million, a decrease of 2 percent from last year. IFS NAFTA sales increased 7 percent while European and Asian sales decreased 10 and 3 percent, respectively. Year-to-date worldwide IFS sales totaled $209.6 million, up 2 percent from last year.

        Gas turbine product sales in the quarter were $28.4 million, down 5 percent from last year. Year-to-date worldwide sales totaled $52.8 million, down 2 percent from last year.


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February 28, 2006
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        Sales of special application products in the quarter were a record $34.2 million, an increase of 2 percent from last year. Year-to-date worldwide special application sales were a record $68.9 million, up 6 percent from last year.

Outlook

Engine Products:   We expect mid- to high-single digit sales growth in the second half of fiscal 2006.
  • NAFTA heavy-duty new truck build rates should remain at their current high levels as our truck manufacturer OEMs are near capacity.
  • Strong worldwide conditions are expected to continue in the production of new construction and mining equipment by our customers.
  • 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™ filtration systems.
Industrial Products:   We expect mid-single digit sales growth in the second half of fiscal 2006.
  • IFS sales growth is expected to moderate following two consecutive years of strong growth. Our NAFTA market is healthy. Based on current business conditions and our backlog position, we expect IFS sales in Europe and Asia to be significantly stronger in the second half of fiscal 2006.
  • Globally, we expect mid-single digit sales growth for gas turbine for the full year. 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 expect foreign currency translation to negatively impact international sales growth during the second half of fiscal 2006. We expect the full year EPS impact from expensing stock options to be $.02 to $.03 per share, with over 80 percent of the impact already reflected in the year-to-date results. For the year, we expect EPS to be in the range of $1.47 to $1.57 per share, compared to $1.27 per share in fiscal 2005.

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 www.donaldson.com.


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Donaldson Company, Inc.
February 28, 2006
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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.





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Donaldson Company, Inc.
February 28, 2006
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CONDENSED STATEMENTS OF CONSOLIDATED EARNINGS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
(Thousands of dollars, except share and per share amounts)
(Unaudited)

Three Months Ended
January 31		 Six Months Ended
January 31
2006 2005 2006 2005
Net sales     $ 392,915   $ 388,424   $ 796,311   $ 761,330  
 
Cost of sales    268,133    267,470    539,997    524,137  
 
Gross margin    124,782    120,954    256,314    237,193  
 
Operating expenses    86,978    83,983    175,116    164,091  
 
Operating income    37,804    36,971    81,198    73,102  
 
Other income, net    (2,301 )  (1,866 )  (5,230 )  (5,285 )
 
Interest expense    2,508    2,240    4,933    4,264  
 
Earnings before income taxes    37,597    36,597    81,495    74,123  
 
Income taxes    10,688    9,881    22,388    20,013  
 
Net earnings   $ 26,909   $ 26,716   $ 59,107   $ 54,110  
 
Weighted average shares outstanding    82,992,797    84,907,607    83,506,118    85,314,400  
 
Diluted shares outstanding    85,101,072    87,269,110    85,641,920    87,613,582  
 
Net earnings per share   $ .32   $ .31   $ .71   $ .63  
 
Net earnings per share assuming dilution   $ .32   $ .31   $ .69   $ .62  
 
Dividends paid per share   $ .080   $ .060   $ .160   $ .115  


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Donaldson Company, Inc.
February 28, 2006
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)

January 31
2006		 July 31
2005
ASSETS            
 
  Cash and cash equivalents   $ 76,362   $ 134,066  
  Accounts receivable – net    279,675    294,016  
  Inventories – net    146,817    151,599  
  Prepaid expenses and other current assets    45,252    39,141  
 
            Total current assets    548,106    618,822  
 
  Other assets and deferred taxes    218,977    217,458  
  Property, plant and equipment – net    285,884    275,493  
 
            Total assets   $ 1,052,967   $ 1,111,773  
 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
 
  Trade accounts payable   $ 119,193   $ 134,063  
  Employee compensation and other liabilities    104,255    98,083  
  Notes payable    73,285    102,004  
  Income taxes payable    6,575    12,280  
  Current maturity long-term debt    12,498    7,772  
 
            Total current liabilities    315,806    354,202  
 
  Long-term debt    97,401    103,302  
  Other long-term liabilities    114,619    129,653  
 
            Total liabilities    527,826    587,157  
 
  Equity    525,141    524,616  
 
            Total liabilities and equity   $ 1,052,967   $ 1,111,773  

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February 28, 2006
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)

Six Months Ended
January 31
2006 2005
OPERATING ACTIVITIES            
 
   Net earnings   $ 59,107   $ 54,110  
   Adjustments to reconcile net earnings to net cash provided by operating activities:  
        Depreciation and amortization    22,661    22,009  
        Changes in operating assets and liabilities    (11,673 )  (20,232 )
        Payment of litigation judgment    (14,170 )  —  
        Tax benefit of equity plans    (11,965 )  —  
        Stock option expense    2,424    —  
        Other, net    5,157    9,289  
           Net cash provided by operating activities    51,541    65,176  
 
INVESTING ACTIVITIES  
 
   Net expenditures on property and equipment    (28,611 )  (22,521 )
   Acquisitions and investments in unconsolidated affiliates, net of cash acquired    (4,436 )  (6,075 )
           Net cash used in investing activities    (33,047 )  (28,596 )
 
FINANCING ACTIVITIES  
 
   Purchase of treasury stock    (48,126 )  (86,542 )
   Net change in debt    (29,045 )  81,213  
   Dividends paid    (13,293 )  (9,757 )
   Tax benefit of equity plans    11,965    —  
   Other, net    2,207    1,317  
           Net cash used in financing activities    (76,292 )  (13,769 )
 
Effect of exchange rate changes on cash    94    6,962  
 
Increase (decrease) in cash and cash equivalents    (57,704 )  29,773  
 
Cash and cash equivalents - beginning of year    134,066    99,504  
 
Cash and cash equivalents - end of period   $ 76,362   $ 129,277  

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February 28, 2006
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SEGMENT DETAIL
(Thousands of dollars)
(Unaudited)

Engine
Products		 Industrial
Products		 Corporate &
Unallocated		 Total Company
3 Months Ended January 31, 2006:                    
Net sales   $ 226,584   $ 166,331    —   $ 392,915  
Earnings before income taxes    25,030    13,067    (500 )  37,597  
 
3 Months Ended January 31, 2005:  
Net sales   $ 219,432   $ 168,992    —   $ 388,424  
Earnings before income taxes    27,384    10,908    (1,695 )  36,597  
 
6 Months Ended January 31, 2006:  
Net sales   $ 465,008   $ 331,303    —   $ 796,311  
Earnings before income taxes    56,204    28,151    (2,860 )  81,495  
 
6 Months Ended January 31, 2005:  
Net sales   $ 437,017   $ 324,313    —   $ 761,330  
Earnings before income taxes    58,257    23,602    (7,736 )  74,123  



NET SALES BY PRODUCT
(Thousands of dollars)
(Unaudited)

Three Months Ended
January 31		 Six Months Ended
January 31
2006
2005
2006
2005
Engine Products segment:                    
Off-road products   $ 71,660   $ 69,261   $ 141,826   $ 132,533  
Transportation products    42,528    40,369    88,738    84,275  
Aftermarket products    112,396    109,802    234,444    220,209  
     Total Engine Products Segment   $ 226,584   $ 219,432   $ 465,008   $ 437,017  
 
Industrial Products segment:  
Industrial filtration solutions products   $ 103,755   $ 105,804   $ 209,643   $ 205,434  
Gas turbine products    28,416    29,752    52,779    53,628  
Special applications products    34,160    33,436    68,881    65,251  
     Total Industrial Products segment   $ 166,331   $ 168,992   $ 331,303   $ 324,313  
 
Total Company   $ 392,915   $ 388,424   $ 796,311   $ 761,330  

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February 28, 2006
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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Thousands of dollars)
(Unaudited)

Three Months Ended
January 31		 Six Months Ended
January 31
2006 2005 2006 2005
 
Free cash flow     $ 5,520   $ 8,406   $ 22,930   $ 42,655  
Net capital expenditures    15,268    15,471    28,611    22,521  
Net cash provided by operating activities   $ 20,788   $ 23,877   $ 51,541   $ 65,176  
 
EBITDA   $ 50,957   $ 48,970   $ 108,040   $ 99,142  
Income taxes    (10,688 )  (9,881 )  (22,388 )  (20,013 )
Interest expense (net)    (2,141 )  (1,405 )  (3,884 )  (3,010 )
Depreciation and amortization    (11,219 )  (10,968 )  (22,661 )  (22,009 )
 
            Net earnings   $ 26,909   $ 26,716   $ 59,107   $ 54,110  
 
Net sales, excluding foreign currency translation   $ 408,947   $ 377,130   $ 812,426   $ 739,479  
Foreign currency translation    (16,032 )  11,294    (16,115 )  21,851  
 
            Net sales   $ 392,915   $ 388,424   $ 796,311   $ 761,330  
 
Net earnings, excluding foreign currency translation   $ 27,554   $ 26,442   $ 59,559   $ 52,747  
Foreign currency translation    (645 )  274    (452 )  1,363  
 
            Net earnings   $ 26,909   $ 26,716   $ 59,107   $ 54,110  

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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